Excerpts from CGS-CIMB report
Analyst: Ong Khang Chuen, CFA
■ Sunsine’s 1H21 net profit of Rmb265m (+94% qoq, +222% yoy) was above expectations, mainly due to stronger than expected GPM.
■ Valuation remains cheap at 3x FY22F P/E (ex-cash). We reiterate our Add call with a higher TP of S$0.68.
Strong 1H21 results
China Sunsine (CSSC) reported 2Q21 net profit of Rmb140m (+12% qoq, +186% yoy), riding on continued tailwinds of robust downstream demand.
1H21 net profit came in at Rmb265m (+94% hoh, +222% yoy), above expectations at 73%/75% of our/Bloomberg consensus FY21F forecast.
While sales volume was slightly down on a qoq basis in 2Q21, we understand that ASPs trended higher due to the lag effect of pricing adjustment – this resulted in higher per tonne profitability for CSSC in 2Q21.
Weaker downstream demand for 2H21F
Post a strong 1H21, we turn more cautious on CSSC’s 2H21F outlook.
Downstream demand could trend weaker on
1) lower truck sales post implementation of new China VIa diesel engine standard in Jul 21 (which led to strong pre-buying in 1H21), and
2) continued component shortage impacting vehicle production.
We note that China’s tyre production in Jun 21 has already fallen c.9% from Apr 21’s peak volume, though it remains 6% higher yoy.
Export sales could also be potentially impacted by the spread of Delta variant globally.
Nevertheless, we believe that CSSC can continue to record healthy utilisation rate of c.92% in 2H21F, as it continues to grab market share from smaller players by capitalising on its strong brand reputation and product quality.
Narrower spread for 2H21; FY21 net profit still set to rise 82% yoy
In view of the weaker downstream demand, we expect a lower profit spread for Sunsine, with a forecast of Rmb4.2k gross profit per tonne in 2H21F (1H21: Rmb5.9k/tonne; 2H20: Rmb3.8k/tonne).
Despite this, given the strong performance YTD, CSSC is set to achieve FY21F net profit growth of 81.6% yoy to Rmb397m.
We raise our FY21-23F EPS forecasts by 0.2-8.7% to reflect higher GPM assumptions.
Our TP rises to S$0.68, still based on 1.05x FY21F P/BV (0.5 s.d. above its 10-year historical mean).
Potential re-rating catalyst is stronger-than-expected profit spread.
Key downside risks include worse than expected pricing competition and resurgence of Covid-19 cases, impacting demand.We keep our Add call. Valuation is attractive at 3x FY22F P/E (ex-cash).
Full report here