Demand for rubber production has always been strongly dependent on the performance of the automobile industry. According to China Association of Automobile Manufacturers, China topped global automobile sales with a record high of 28.9 million units in 2017, three percent higher than the previous year. Adding to that, China’s gross domestic product grew by 6.8 percent. Meanwhile, China’s automobile sales posted a 2.8 percent growth in the first quarter of 2018 as China’s automobile manufacturers registered total sales of 7.2 million units in the same period.

The China-based producer of rubber accelerators China Sunsine Chemical Holdings’ (China Sunsine) share price performance has been nothing but spectacular after registering an 83.7 percent gain to $0.90 for the year of 2017. Surprisingly, the bullish run has not slowed down in 2018: In a matter of just four months, China Sunsine’s share price surged by 66.7 percent to $1.50 as at 26 April 2018.

The Business

China Sunsine was listed on the Mainboard of the Singapore Exchange on 5 July 2007 and is presently the world’s largest producer of rubber accelerators as well as the largest producer of insoluble sulphur in China. As a leading specialty chemical producer, the group produces over 87,000 tons of rubber accelerators, 20,000 tons of insoluble sulphur, 45,000 tons of anti-oxidant, adding up to a total production capacity of 152,000 tons per annum.

CDG Pic 1.1

In simple terms, rubber accelerators, insoluble sulphur and anti-oxidants are essential chemicals required for the vulcanisation curing process to create consumer end rubber products, especially for the tire manufacturing industry. As of now, China Sunsine serves over 1,000 customers globally and more than two-third of Global Top 75 tire manufacturers namely Bridgestone, Michelin and Goodyear.

Following that, China Sunsine’s wholly-owned Shandong Sunsine Chemical (Shandong Sunsine) is one of the pioneer batches to be awarded Champion Manufacturing Enterprise by the Ministry of Industry and Information Technology of China. It also managed to clinch several certificates, meeting the requirements of global industry standards.

Pipeline

In the pipeline, the newly completed Phase one 10,000-ton TBBS (a high grade rubber accelerator) production line and another 10,000-ton insoluble sulphur production line in Ding Tao facility are currently awaiting government approval for trial-runs. The addition of these new production lines will increase total production capacity by 13.2 percent to 172,000 tons per annum in 2018, further elevating the top-line.

Aside from that, Guangshun Heating Plant – a centralised heating facility constructed mainly for the group’s Shanxian’s plant use – has recently added one boiler and one generator, which are estimated to help the group save between Rmb25 million to Rmb30 million in electricity expenses per annum previously. The management has also intimated that they are certain the trial-runs for expansion of Guangshun Heating Plant will begin by the end of 1H18 and we may possibly see positive material impact from FY19 onwards.

Shandong Sunsine was recently granted “High-tech Enterprise” status which entitles China Sunsine to enjoy preferred tax rate of 15 percent for next three years, compared to the average rate of 25 percent. However, according to CIMB Research, the criteria to maintain as a high-tech enterprise means that China Sunsine has to invest at least Rmb20 million per annum on research and development (R&D), which translates to roughly three of revenue.

Financial Performance

China Sunsine’s financial performance for 1Q18 is off the charts, revenue expanded by 49 percent to Rmb856.9 million from higher sales volume and a 34 percent increase in Average Selling Price (ASP) to Rmb23,168 per ton. Gross profit jumped 113 percent to Rmb298.8 million while gross profit margin improved by 10.5 percentage points to 34.9 percent mainly driven by the higher ASP.

Administrative expenses soared by 116 percent to Rmb83.5 million primarily due to higher staff costs and higher R&D expenses incurred to meet the criteria for the status of high-tech enterprise. Selling and distribution expenses rose by 26 percent to Rmb22.4 million from higher freight costs, in line with the increase in sales. Other losses grew exponentially to Rmb11.3 million mainly attributable to foreign exchange losses. Overall, net profit rocketed by an impressive 161 percent to Rmb149.5 million breaking expectations.

Valuations

As at 26 April 2018, China Sunsine is trading at $1.50, translating to a price-to-earnings (P/E) ratio of 8.1 times that is significantly below its regional peers average of 17 times, indicating that the stock is severely undervalued for investors that heavily rely on P/E metric. In respect to price-to-book (P/B) ratio, China Sunsine is trading at 1.9 times, also slightly lower than its regional peers’ average of 2.2 times and can be considered as fairly valued for investors that prefer to use P/B metric in their investment approach.

That said, we believe that the new production lines coupled with the expansion of Guangshun Heating Plant, will help uplift China Sunsine’s bottom-line to the next level through further cost savings and higher revenue contributions from increased total production capacity. We believe that the chemical concoction will continue brewing well for the group and hence could be an attractive investment opportunity for investors.

CDG Pic 1.2