Excerpts from AmFraser Securities report

Renfred-TayAnalyst: Renfred Tay (left)

2Q14 results ahead of our initial estimates. 2Q14 earnings of RMB 60.2m (+194% yoy and +164% qoq), was way ahead of the RMB 46.8m52.6m (+129%159% yoy) range we were expecting in our last note dated, 30 Jul 2014. The key driver powering this growth was, as announced in its profit guidance, due to an increase in 2Q ASP and volume.

Accelerator capacity already at 75k tons p.a. According to management, the additional capacity of 4.5k tons p.a. has already kicked in. This faster than expected 6.4% increase in capacity happened on the backdrop of an 8.4% yoy increase in PRC vehicle sales in 1H14. 

With tight supply and strong demand, the additional sales volume could mean even bigger profits for 2H14.

Expect an even stronger 3Q. During Sunsine’s results briefing, we found out that orders and prices are usually fixed one quarter in advance. With the further spike in spot rubber accelerator prices in 
2Q14, we can expect more ASP appreciation in 3Q14.

Given Sunsine’s high operating leverage, such a spike in ASP should lead to another jump in earnings both qoq and yoy. Based on our estimates, we are now projecting 3Q14 net profit to be in the region of RMB 77m (+185% yoy). On a full year basis, FY14 net profit could reach RMB 224m (+192% yoy).

watertrreatment4.14China Sunsine has spent RMB300 m over the years on treatment facilties to cut the pollutant level in the water it discharges from its factories. But many of its competitors have failed to do so and have recently been suspended from operations by the authorities.
 Photo: Company.
Clamp down on pollution could be permanent. One key fundamental concern for investing in Sunsine was whether the Chinese government’s clamp down on pollution is permanent. On further digging, after our last note, we found out that an amendment to the Environmental Protection law was made in late April. The new law will only come into effect from 1 Jan 2015.

However, this did not stop the prices of rubber accelerators from spiking shortly after the announcement.

Taking cue from the extent of the execution and enforcement of other reforms started since President Xi Jinping came into power, we believe investors can take comfort that there is a good chance that the Chinese clamp down on pollution is here to stay. This also means that industry capacity could continue to remain tight, and support elevated rubber accelerator prices in the foreseeable future. 

It looks even cheaper now. With a higher FY14 net profit estimate of RMB 224m (+192% yoy), Sunsine is now only trading at 3.4x FY14 P/E (even lower than the 4.3x we mentioned in our last note); a stark discount to Shandong Yanggu Huatai (YGHT) (300121 CH) at 34.7x, who is a third the size of Sunsine.   

If Sunsine were to trade at the same valuation as YGHT, its stock price should be trading at S$3.25. While we do not expect Sunsine to be trading at similar valuations to its peer, an 80% “SChip discount” would still imply a stock price of S$0.65 (103% upside), or a reasonable FY14 P/E of 7x.

Recent stories:

AmFraser: "CHINA SUNSINE's trading at insane valuation discount" 

CHINA SUNSINE: Peer issues profit guidance of 100-130% jump for 1H


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#2 boonbibi 2014-08-12 08:32
Is 7 times PE reasonable?

From Morningstar.com : Carlye invested S-chips China Fishery and Blackstone invested China Animal Healthcare forward PE ratios are 4.2 and 68.9 respectively.

YJZ's forward PE is 5.5.
#1 potatolover 2014-08-11 14:35

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