Excerpts from UOB KH report
Analyst: Clement Ho
|China Sunsine Chemical (CSSC SP)
2H21: Results Beat On Higher-than-expected ASPs
Sunsine recorded 2H21 net profit of Rmb241.1m (+77% yoy), taking 2021 net profit to Rmb506.3m (+131%), 14% above our estimate.
While we have raised earnings expectations for 2022-23, our valuation peg has been reduced due to the rising interest rate environment.
Maintain BUY with a target price of S$0.695.
• 2H21 beat on higher-than-expected ASPs. China Sunsine Chemical’s (Sunsine) 2H21 net profit jumped 77% yoy to Rmb241.1m, on the back of increased revenue of Rmb1,967.7m (+52% yoy) due to both a rise in sales volume to 102,243 tonnes (+9.3%) and a 40% yoy increase in ASPs of rubber accelerators to Rmb18,983/tonne.
The better-than-expected ASP was from the higher price of aniline, the major feedstock for rubber accelerators, stemming from rising oil prices in 4Q21.
• Benefitted from operating leverage; special dividend proposed. As the price increase in raw materials outpaced the increase in ASPs due to a time lag to pass on higher costs to customers, 2H21 gross margin contracted 2.6ppt yoy to 25.1%, (2H20: 27.8%, 1H21: 31.4%).
Nevertheless, net profit margin expanded 1.7ppt yoy to 12.3% mainly due to positive operating leverage as a result of the larger revenue base. Management has
proposed to pay out S$0.02, consisting a final DPS of S$0.01 and a special DPS of S$0.01 (2020: S$0.01).
• New capacity to bolster forward earnings as ASPs stay elevated. In Dec 21, Sunsine commenced commercial production of an additional 30,000 tonnes/year (+15.6%) from the Phase 1 expansion at the insoluble sulphur facility, bringing total annual capacity to 222,000 tonnes/year.
Pending government approval for the trial run, an additional 30,000 tonnes/year (+13.5%) capacity is anticipated to commence commercial production in 2H22 from the antioxidant project. The capacity expansion is expected to lift sales volume going forward, amid the elevated utilisation rate across its factories currently.
• Strong balance sheet and healthy cash flow. As of end-21, total cash and bank balances stood at Rmb1,377.3m with no debt outstanding, which equates to Rmb1.42/share (S$0.28/share).
Additionally, free cash flow generated in 2021 remained positive at Rmb163m (2020: Rmb208m) despite capacity expansion efforts, and is estimated to improve to Rmb353.9m and Rmb484.6m in 2022 and 2023 respectively. Correspondingly, net cash per share is estimated to increase to Rmb1.68/share (S$0.33/share) and Rmb2.08/share (S$0.41/share) in 2022 and 2023 respectively.
• Due to higher expectations for crude oil price according to US Energy Information Administration and Sunsine’s ability to pass on the cost increase as reflected in 2021, we have tweaked our 2022 and 2023 gross margin assumptions from 27.5% to 28.3% and 24.3% to 27.0% respectively.
• Accordingly, earnings estimates for 2022 and 2023 have risen 30% to Rmb529.7m and 41% to Rmb573.6m respectively.
• Maintain BUY with a target price of S$0.695. We have lowered our valuation peg from 8.4x (+1 SD above average) to 6.4x 2022F PE, in line with its historical 3-year average, on the back of the rising interest rate environment.
At the current price, Sunsine is attractively valued at 4.2x 2022F PE relative to its closest peer Shandong Yanggu Huatai (Not Rated, 300121 CH), which trades at 12.0x forward PE.
SHARE PRICE CATALYST
• ASPs for rubber accelerators remaining elevated.
Full report here.