CHINA SUNSINE: Demand recovers, worst is over

Excerpts from CGS-CIMB report

Analyst: ONG Khang Chuen, CFA

Downstream demand upturn to drive volume growth
We forecast Sunsine’s sales volume to improve to 87.9kt (+15% hoh, +3% yoy) in 2HFY20F, driven by downstream demand recovery.

Domestically, industrial production for the tyre manufacturing industry (Aug: +3% mom, +9% yoy) is riding on an upturn in the automobile industry, as China has launched various government stimulus and policies to promote domestic consumption.

Meanwhile, export volume of China’s rubber accelerators (Aug: +34% mom, -3% yoy) have also picked up in recent months, as overseas economies gradually emerge from lockdowns.

We estimate that Sunsine is currently able to achieve a healthy utilisation rate of c.90%, even with the 20kt capacity expansion in Jun.

ASP showing signs of recovery
Rubber accelerators at China Sunsine plant.
NextInsight file photoPost a two-year downtrend, we are seeing signs of a recovery for Sunsine’s ASP.

Rubber accelerator and anti-oxidant prices rose 1% and 17%, respectively, in Sep (on a mom basis), and we see further recovery in coming months, driven by

1) continued downstream demand recovery and

2) rise in raw material costs.

Aniline, a key raw material, saw a price uptick in Sep (+8% mom) as producers’ inventory levels return to a more normalised level.

We expect Sunsine to achieve a sequential earnings recovery in 2H20F, and forecast net profit of Rmb109m (+32% hoh, -12% yoy).

Maintain Add with a higher TP of S$0.42 We raise our FY20-22F EPS forecasts by 5.1-7.3% to reflect higher volume growth assumptions. "Valuation is attractive as Sunsine is currently trading at 6.7x CY21F P/E, and downside risk is cushioned by its net cash of S$0.27/share. Potential re-rating catalyst is a recovery of Sunsine’s margin spreads." -- ONG Khang Chuen, CFA Our TP is lifted to S$0.42 as we roll forward our valuation, now based on 0.72x FY21F P/BV (-0.75 s.d. of historical mean since public listing). Maintain Add, as we think the worst is over for China Sunsine, and recommend investors to accumulate at this level. Key risks include worse-than-expected pricing competition or resurgence of Covid-19 impacting demand.

Full report here.