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Re:Rokko-An Explosiv... by MOSBY29th, Jul. 11:49 PM http://www.remisiers.org/research//dailyex2307.pdf
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CHINA SUNSINE: More revenue & profit growth ahead?
Written by Leong Chan Teik
Monday, 03 March 2008
Chairman Xu: Sunsine adjusts selling prices monthly and quarterly. Photo by Sim Kih.
CHINA SUNSINE, which has just reported record net profits for FY ’07, is poised to enjoy the fruits of a big jump in its production capacity.
From an effective capacity of 33,700 tonnes last year, Sunsine - China’s No. 1 player in its industry and the world’s No. 2 - is forecasting a 49% jump to 50,300 tonnes this year.
That will not necessarily translate into a 49% rise in revenue because the utilization rate will not be 100%, of course. It was 91% last year. In addition, the average selling prices of new products that Sunsine is introducing will vary among themselves.
The effective expanded capacity for Sunsine’s chemicals, which are necessary for the manufacture of tyres, comprises:
* 44,000 tonnes of “accelerators”. * 3,800 tonnes of insoluble sulphur (new product from Sunsine). * 2,500 tonnes of anti-oxidants (new product, too).
At a briefing attended by a dozen analysts and fund managers last Thursday (Feb 28), China Sunsine’s CFO, Mr Koh Choon Kong, said that in the past, revenue growth and profit growth have tracked capacity growth. Overall, if Sunsine can maintain the 20% gross margin achieved last year, and it is setting itself that target, then net profit could grow at nearly the same clip as revenue this year.
”Our growth is expected to be consistent, even if the US goes into recession,” said CK, as he is better known.
He is confident of demand for Sunsine's expanded production capacity, citing the example of its largest customer, Bridgestone, which buys Sunsine’s “accelerators” for its five plants in China and two in the Asia-Pacific. However, Sunsine has not been able to service Bridgestone’s 13 other plants in Asia Pacific and 30-plus plants in Europe and North and South America because it does not have the supply capacity, said CK.
”Bridgestone’s requirements are huge and it is just one client. What about Pirelli, Michelin, Continental and others? So you can see, there are lots of opportunities for us,” CK said at the briefing held to discuss
Effective capacity will jump 49% this year.
Sunsine’s FY ’07 results.
Sunsine counts all the top 10 global tyre manufacturers as its clients.
”We have a strong customer base which will give us quality growth and differentiate us from our competitors,” said CK.
In line with Sunsine’s growth strategy of broadening product offerings to existing customers, it has completed building a 5,000-ton insoluble sulphur plant.
There is strong demand in China, which is a net importer of the higher-margin product.
Sunsine aims to maintain gross margins at 20% this year.
Sunsine - whose shares recently traded at 25 cents, or 6.8X last year's earnings - began commercial production of insoluble sulphur in February 2008, and plans to double the capacity to 10,000 tons by the end of this year.
In addition, it is currently building a 5,000-tonne-a-year plant to produce anti-oxidant TMQ for launch in the first half of this year. Anti-oxidants are used also by tyre manufacturers.
The market for anti-oxidants is even bigger than for accelerators, while profit margins are similar, said CK.
Record earnings in FY '07
RMB ‘million
2007
2006
Change
Revenue
619.5
474.7
30.5%
Gross Profit
125.2
118.2
5.9%
Gross Profit Margin
20.2%
24.9%
(4.7%)
Operating Margin
13.4%
15.5%
(2.1%)
One-off IPO expenses
7.8
Profit After Tax (PAT)
76.0
63.3
20.1%
PAT Margin
12.3%
13.3%
(1.0%)
Earnings Per Share (RMB cents)
18.22*
18.10**
0.7%
* Based on weighted average number of shares -- 417,525,000 ** Based on weighted average number of shares – 350,000,000
Koh Choon Kong: Sunsine will derive quality growth from its strong customer base of the world's top 10 tyre manufacturers. Photo by Sim Kih
Excluding IPO expenses of RMB 7.8 million, FY ‘07 net profit would have been RMB 83.8 million, or 32.4% higher than in FY ’06.
CK highlighted that Sunsine generated strong operating cashflow of RMB 57.7 million (up 57%) and chalked up RMB 213.2 million in cash and short-term notes (up 233%) as at Dec 31 ’07.
He explained some unusually low operating expenses:
* Selling and distribution costs dipped 1.4% to RMB 20.4 million in 2007 even though revenue grew 30.5%.
The company reined in costs by, for example, selling new products to existing customers. * Research costs tumbled from RMB 8.3 million to RMB 0.6 million in 2007. That didn’t mean there was no R&D done. In fact, R&D cost RMB 3.6 million in 2007 but there was a writeback of RMB 3.0 million. Sunsine will continue to spend on R&D on new products this year.
Why did gross margin drop from 24.9% in 2006 to 20.2% in 2007?
Bags of accelerators ready for shipment. Photo by Victor Ng/Financial PR.
Sunsine executive chairmanXu Chengqiu explained that, among other things, the company enjoyed a lower export tax rebate (which dropped from 13% to 5% from July 2007).
Secondly, the company had to buy more of an intermediary product from external sources – and incurred higher costs - to use as raw material for its expanded production of “accelerators”.
Thirdly, Sunsine had to produce a range of accelerators with varying margins, instead of concentrating on just the high-end, since it wants to meet the needs of clients. ”Shareholders should note that our net profit grew 32%, excluding IPO expenses. The business fundamentals are very strong,” he said.
Asked how Sunsine was coping with rising raw material prices, Mr Xu said the company adjusts its selling prices every month when it receives orders from local buyers. Orders from overseas are received quarterly.
Since the rubber chemicals make up around 1% only of the total costs of tyre manufacturing, Sunsine’s clients would not baulk at price adjustments.
Said CK: ”Locally, our prices are among the highest, yet our sales have increased strongly. There were cases of customers who went over to our competitors and then came back to us because our competitors could not supply. Scale is important to the big boys.”
*****
To watch China Sunsine's corporate video, click here.
For Powerpoint slides presented at the analysts' briefing, click here.
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