Excerpts from analyst's report

KGI Fraser analyst: Renfred Tay

♦ At a different level from before
Results broadly in line. Sunsine clocked in its second highest level of profit in its history despite going through a much tougher FY15 than FY14. FY15 core net profit of RMB 172m (‐20% yoy) and revenue of RMB 1,859m (‐11% yoy) formed 94% and 98% of our FY15F forecasts, respectively. This came on the back of record sales volumes.

tanks9.14Treating wastewater is land- and capex-intensive. Seen in China Sunsine's plant in Shanxian are large tanks for treating waste solids which have been separated from liquid wastewater. NextInsight file photo.Sales volumes across segments were in line with our assumptions, but Insoluble Sulphur (IS) and Anti‐Oxidant (AO) ASPs were lower than expected. Lower than expected gross margin was the key deviating factor between the actual and our projected core net profits. An unchanged dividend of 1.5 Scts (4.5% yield) was declared as expected.

Cash flows remains strong as debt levels continue to get pared down. Operating cash flow generation remained strong (RMB 440.5m), with Sunsine making net debt repayments of RMB 120m. Net cash at the company now stands at RMB 196m, putting Sunsine in an enviable position compared to many other Chinese companies facing problems of overleveraging.  

Outlook/expansion plan. Sunsine continued to highlight problems regarding overcapacity and under utilization issues in China’s  tire industry, which should, in turn, impact the rubber chemicals industry. However, the government’s increasingly stringent environmental protection measures have also benefited Sunsine at the expense of small  timers, resulting in sales volume gains. Sunsine also has plans to build a new plant (capex: ~ RMB 90m) that focuses on TBBS (a rubber accelerator that sells at a higher and more resilient price point). The plant is expected to be ready by end 2016.  

renfred sunsine"It is also worth noting that Sunsine has deleveraged its balance sheet significantly over FY15 and looks set to achieve zero debt this year. We also continue to see Sunsine as a potential takeover/privatization candidate given its persistently low valuation and strong fundamentals. Our TP of S$0.54 is now pegged at 8x FY16F P/E."

-- Renfred Tay (photo)

New level of earnings despite downward forecast revision. Based on our new forecasts, Sunsine is currently trading at only 5x FY16F P/E and 0.6x P/ B. However, we believe, Sunsine has transited into a new phase of earnings level (with new cyclical peaks and troughs), with its much larger output volumes and market leadership, compared to the  times before 2014.

The market seems to still be pricing the stock as if its forward profits were similar to that seen in the old days. 

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