Excerpts from analyst's report

AmFraser Research analyst: Renfred Tay

ck_tbss9.14China Sunsine independent director Koh Choon Kong (right) with Maybank Kim Eng analyst Benjamin Oh at the company's factory. NextInsight file photo.We initiate coverage on China Sunsine with a BUY rating at a target price of S$0.69 based on 7x FY15F P/E.

One of the largest in the world in terms of capacity, this Chinese rubber chemical additives maker is now benefiting big time from its courage to treat environmental protection seriously during a time when enforcement was lax. 
 
Quality S-Chip. Our faith in this counter is not guided by blind bravado. We drew our conclusion after making observations on its: 1) customers; 2) receivables; 3) reported sales, volume, ASPs and market prices; 4) PPE trend; 5) global market share; 6) mentions in other reports; 7) dividend track record and cash level. 

weifang_plant9.14@ China Sunsine's plant in Weifang. NextInsight file photo. 
 
Elevated rubber accelerator (RA) prices. The tight RA supply in 2014 was caused by the shutting down of a number of factories as their waste discharge have failed to meet environmental standards.

Strict enforcement is likely to remain under the current regime in Beijing, with even stricter environment standards and laws set to kick-in come FY15. The booming automotive market will also continue to drive demand for tires and therefore, rubber chemicals. 
 
Expect FY14 earnings to almost triple. Net profit for FY14F is expected to hit RMB216m from RMB77m in 2013, fuelled by a combination of higher ASPs, operating leverage and lower raw material costs. We also expect FY15F earnings to grow 8% to RMB234m, with the assumptions of 1) 7% fall in overall ASP, being offset by 2) higher capacity and sales volume, and 3) expected cost savings of RMB30m from its newly built heating plant but higher raw materials costs. 

Still undervalued despite recent run; potential dividend hike. Sunsine is currently trading at 4.3x FY15F P/E at a forward CAGR of 8% between FY14F - FY16F. Given its unprecedentedly strong prospects, we argue that Sunsine should at the very least be trading at the top of its historical trading P/E of 6-7x. We therefore ascribe a target price of S$0.69 to Sunsine, which is pegged at 7x FY15F P/E.

Capital appreciation aside, we also believe a dividend hike to c.1.4 Scts from 1 Sct is on the cards and we believe such a move will greatly boost investor confidence in this counter. 

meeting9.14@ China Sunsine's HQ in Shanxian in Sept 2014: Singapore analysts, media and investors meet with CEO Liu Jing Fu and senior management. NextInsight file photo.


Quality S-chip

We believe Sunsine is a quality S-chip that stands out against the rest. Our faith in this counter is premised upon a number of positive indications. Hence, we believe investors should not miss out on this gem just because of the “S-chip stigma”. The following are some of the positive observations that help strengthen our belief in this company.

Sales numbers matches up with volume and external market prices

Through our findings on the average market selling price of RAs and OAs in the Shandong region (from oilchem.net), our back-testing found that Sunsine’s reported sales numbers actually held up very well against our own estimated sales numbers. Our estimated back tested sales numbers were calculated using the average market selling price multiplied by Sunisne’s reported sales volume.

Reliable market share data

We also did a further cross-check on Sunsine’s announced global market share figures against our own approximate market share findings. We approximated Sunsine’s international RA sales volume (not disclosed) by assuming that it was sold at the same proportion as its total international sales volume (disclosed). By comparing this approximated international RA sales volume against UN Comtrade’s global RA exports, we were able to derive our own approximate calculation of Sunsine’s global RA market share. 

We found that Amfraser’s derivation of Sunsine’s market share to be largely consistent with Sunsine’s reported RA global market share. Some deviations between the two numbers are expected as 1) Our RA sales volume is only an approximated figure, and 2) the base global export figures used could vary depending on data source (Sunsine used data from tirebusiness.com).

Dividend track record / cash levels

When investing in an S-chip, one of the key things to check out would be the company’s dividend track record and its cash levels. We believe it would be a red flag, if a S-chip company has high levels of cash but does not pay dividends (a red flag that the cash might not actually be there). Since its IPO, Sunsine has been constantly paying dividends of 1 Sct per share. We also did not detect any unusually high cash levels.

More dividends on the cards

We believe a dividend hike is on the cards given Sunsine’s expected impressive earnings. For FY14, we expect dividends to increase 40% to 1.4 Scts from 1 Scts in FY13, on an assumed dividend pay out ratio of 15%. While this 40% expected rise in dividends may not seem to match the 181% expected increase in FY14F earnings, we believe it is not unfair.   

Over the last seven years of Sunsine’s listed history, it has been paying out dividends of 1 Sct per share, on negative free cash flows every year, except in FY08 and FY13. We therefore think that it will be more prudent for management to still reward shareholders with some increase in dividends but also start to conserve some cash at the same time. Given the turn in tide in Sunsine’s business, we are expecting free cash flow to remain positive in the foreseeable future and dividends to continue to increase. 


Recent stories:

CHINA SUNSINE: Prospects getting more robust, in capacity expansion mode

CIMB Pegs CHINA SUNSINE's Value At 43.5 - 65 Cents
 

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