Mainboard-listed China Sunsine Chemical Holdings (China Sunsine) is a China-based specialty rubber chemicals manufacturer that sells rubber accelerators, insoluble sulphur, anti-oxidant and other vulcanising agent to tire manufacturers.

It also ranks as the largest producer of rubber accelerators in the world and the largest producer of insoluble sulphur in China. China Sunsine serves more than two-thirds of the Global Top 75 tire manufacturers, such as Bridgestone, Michelin, Goodyear as well as China tire giants such as Hangzhou Zhongce, GITI Tire, Shanghai Double Coin Tyre and etc.

Despite the softer demand for automobile in China, China Sunsine delivered another strong quarter in the latest earnings release. We take a closer look to find out if the company could sustain its performances in the coming quarters.

Latest Earnings

In 9M18, revenue expanded 34.5 percent to Rmb2.5 billion due to higher sales volume and higher average selling price (ASP). The sales volume of 9M18 increased 9.7 percent from 101,702 tons to 111,529 tons largely attributed to sales volume for anti-oxidant and insoluble sulphur rose 29.4 percent and 17 percent respectively. Meanwhile, the ASP in 3Q18 grew 11.7 percent to Rmb220,706 per ton, though declined 11.3 percent as compared to 2Q18. The decline in ASP on a quarterly basis was due to the fixing of higher price to the biggest client in the 2Q18 given the short supply of rubber chemicals in China.

In 9M18, gross profit jumped 76.4 percent to Rmb876.4 million while gross profit margin improved 8.2 percentage points to 34.9 percent mainly driven by the higher ASP.

Overall, the net profit surged 154.5 percent to Rmb532.6 million while net profit margin improved from 11.2 percent to 21.2 percent owing to better top line performance.

Tailwinds Ahead

Even though the ASP for the rubber chemicals started to fall since the end of June 2018, management observed that the ASP have stabilised in October 2018 and expressed optimism that gross margin could maintain above 30 percent for 4Q18 as Chinese tyre manufacturers started to increase production utilisation rate again in 4Q18.

On a positive note, the Chinese government is also considering a tax cut to revive its slowing automotive market. Such a move may indirectly increase China Sunsine’s ASP of rubber chemicals as a result of stronger demand from tyre manufacturers.

Furthermore, China Sunsine had received approval for the trial run of its 10,000 tons insoluble sulphur production line at the end of November 2018. Concurrently, the new Phase 1 10,000 tons of TBBS accelerator rubber production line is in the finalisation stage. With the expansion projects, China Sunsine’s annual production capacity is expected to increase 13.2 percent to 172,000 tons in FY19.

chinasunsine1

Source: China Sunsine’s 3Q18 results

Strong Balance Sheet

As at 30 September 2018, China Sunsine held zero debt and had increased its cash hoard from Rmb499.6 million to Rmb822.3 million in just nine months. The rock-solid balance sheet should be able to help the company to weather through the harsh market conditions, if any. Meanwhile, total equity had also increased from Rmb1.7 billion to Rmb2.2 billion.

On top of that, China Sunsine generated Rmb459 million of net cash from its operations and saw a 38.9 percent decrease in capital expenditure to Rmb94.6 million. This translates to a free cash flow of Rmb364.4 million, compared to a free cash flow of Rmb110.4 million considering it spent Rmb154.8 million in capital expenditure in 9M17.

China Sunsine has been dishing out a dividend every year for the past five years, with the FY17 dividend at $0.03 per share. Given its large net cash position and a ballooning free cash flow, we believe China Sunsine will maintain a dividend of $0.03 per share for FY18, implying a yield of 2.3 percent. Not only that, we also could expect management to continue rewarding shareholders with higher dividends, in view of better financial performance.

Valuations

Stock Price ($) EPS (Rmb) P/E NAV (Rmb) Dividend ($) Dividend

Yield (%)

TTM Sep-18

(21 December 2018)

1.29 1.4 4.8 4.5 0.025 1.9
TTM Sep-17

(21 December 2017)

0.88 0.6 7.9 3.3 0.015 1.7

At the time of writing, China Sunsine is trading at $1.29, translating to a rather undemanding price-to-earnings (P/E) ratio of 4.8 times, which is significantly lower than 7.9 times as compared to a year ago.

That said, we believe the new production lines 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 also believe the chemical concoction will continue boding well for the group and hence view it as an attractive investment opportunity for investors.

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