China Sunsine Chemicals Holdings

(03-03-2014, 10:33 AM)CityFarmer Wrote: In a nutshell, base on FY13 report, the company invested $1 ,and able to generate a revenue of $1.3, and net profit of 5.9 cents (4.5% net profit margin), so the unleveraged return on on investment was 5.9%.

The company has borrowed for its expansion. Cost of capital is more than 6% (slightly above benchmark rate of 6%).

The company is running a losing business, even revenue growth was 20% on average in the last 3 years.

Will the company turnaround? Unless it gains pricing power, and ASP increases...

(not vested)

The assertion that Sunsine is running a losing business is based on the comparison of 5.9% ROA against benchmark borrowing cost of 6%.
If this were valid, then DBS is worse.
In 2013, DBS’s ROA was a mere 0.91%, not surprising as customer deposits are a big chunk of its total assets.
A more meaningful measure is ROE, which was 10.8% for DBS.
For Sunsine, ROE was 9.4%.

Sunsine’s 2013 performance:
Profit……………RMB 76.7 m
Total assets…RMB 1,287 m
Equity………….RMB 813m

(03-03-2014, 05:56 PM)portuser Wrote:

(03-03-2014, 10:33 AM)CityFarmer Wrote: In a nutshell, base on FY13 report, the company invested $1 ,and able to generate a revenue of $1.3, and net profit of 5.9 cents (4.5% net profit margin), so the unleveraged return on on investment was 5.9%.

The company has borrowed for its expansion. Cost of capital is more than 6% (slightly above benchmark rate of 6%).

The company is running a losing business, even revenue growth was 20% on average in the last 3 years.

Will the company turnaround? Unless it gains pricing power, and ASP increases...

(not vested)

The assertion that Sunsine is running a losing business is based on the comparison of 5.9% ROA against benchmark borrowing cost of 6%.
If this were valid, then DBS is worse.
In 2013, DBS’s ROA was a mere 0.91%, not surprising as customer deposits are a big chunk of its total assets.
A more meaningful measure is ROE, which was 10.8% for DBS.
For Sunsine, ROE was 9.4%.

Sunsine’s 2013 performance:
Profit……………RMB 76.7 m
Total assets…RMB 1,287 m
Equity………….RMB 813m

Unleveraged return (or ROA) is the best measure of profitability, for a business models, IMO.

Company can leverage up with debts and/or liabilities, to increase the return i.e. the ROE, but it can be deceptive.

(03-03-2014, 07:48 PM)CityFarmer Wrote: Unleveraged return (or ROA) is the best measure of profitability, for a business models, IMO.

Company can leverage up with debts and/or liabilities, to increase the return i.e. the ROE, but it can be deceptive.

I am not sure whether ROA has been deemed to be the best measure of profitability.

Nevertheless, ROA must be calculated in accordance with established formula. According to http://pages.uoregon.edu/rking/Statement.html:

Return on Assets (ROA) = [Net income + (1- tax rate)*interest expense]/average total assets

The need for adding back net interest expense is obvious.

This definition gives rise to a ROA of 7.3% in 2013 for Sunsine against the 5.9% ROA you arrived at using the following formula:
Net income in 2013 /total assets as at 31 Dec 2013.

The relevant financial data of Sunsine for 2013 are:

Net profit in 2013…………..…..RMB 76.7m
Interest expense…………...…..RMB 14.6m
Tax rate………………………..…………………25%
Total assets 1 Jan 2013……RMB 1,126 m
Total assets 31 Dec 2013…RMB 1,287 m

(03-03-2014, 08:52 PM)portuser Wrote:

(03-03-2014, 07:48 PM)CityFarmer Wrote: Unleveraged return (or ROA) is the best measure of profitability, for a business models, IMO.

Company can leverage up with debts and/or liabilities, to increase the return i.e. the ROE, but it can be deceptive.

I am not sure whether ROA has been deemed to be the best measure of profitability.

Nevertheless, ROA must be calculated in accordance with established formula. According to http://pages.uoregon.edu/rking/Statement.html:

Return on Assets (ROA) = [Net income + (1- tax rate)*interest expense]/average total assets

The need for adding back net interest expense is obvious.

This definition gives rise to a ROA of 7.3% in 2013 for Sunsine against the 5.9% ROA you arrived at using the following formula:
Net income in 2013 /total assets as at 31 Dec 2013.

The relevant financial data of Sunsine for 2013 are:

Net profit in 2013…………..…..RMB 76.7m
Interest expense…………...…..RMB 14.6m
Tax rate………………………..…………………25%
Total assets 1 Jan 2013……RMB 1,126 m
Total assets 31 Dec 2013…RMB 1,287 m

I am not so sure on your formula, but let's assume the numbers are right.

Will you happy with the "ROA" of 7.3%, with cost of capital is more than 6%? FYI, the liquidity in China is tightening, and the cost of capital might hike anytime from now, IMO.

If you are happy with that. I wish you all the best, sincerely.

(03-03-2014, 09:40 PM)CityFarmer Wrote: I am not so sure on your formula, but let's assume the numbers are right.

Will you happy with the "ROA" of 7.3%, with cost of capital is more than 6%? FYI, the liquidity in China is tightening, and the cost of capital might hike anytime from now, IMO.

If you are happy with that. I wish you all the best, sincerely.

The formula on ROA can be found in other texts too -- it is not mine.

I share your view that rising interest rate is a valid concern for companies that borrow.

There are reasons to believe that Sunsine is in a good position to weather a storm.

First, the RMB 230m loans are not excessive relative to the RMB 813m equity.

Second, besides cash holdings of RMB 107m, there were notes receivables amounting to RMB 158m (note 2 to statements of financial position). These were issued by financial institutions as security for payables of some customers. As the note issuers are obliged to pay Sunsine cash any time before maturities, there was ready cash of RMB 265m (RMB 107m cash + RMB 158m notes receivables) had lenders demanded repayments of the RMB 230m outstanding loans in full -- loan default is therefore unlikely.

Stringent credit management has resulted in negligible impairment of trade receivables. In 2012, RMB 0.05m was impaired for revenue of RMB 1,417m. The year before, it was RMB 0.5m on sales of RMB 1,175m. (We need to await 2013 annual report to know the amount impaired last year.)

Sunsine has not issued any new shares after raising RMB 264m from the IPO in 2007. It has relied on retained earnings and RMB 230m bank loans to fund the following costing RMB 1,233 m in total:

capacity additions (RMB 655m) (raising capacity from 26,000 tonnes to 115,500 tonnes);
share buyback (RMB 28m);
dividend payment (RMB 160m); and
trade receivables (an increase of RMB 390m).

Stringent credit management has not resulted in unused accelerator capacity. The only weak spot so far is the newly-introduced 6PPD, as it takes time for accreditation. The rising quarterly sales volume of anti-oxidants (comprising 6PPD and TMQ) suggests gradual acceptance of 6PPD, however:

2011……………………..2,061 tonnes of TMQ
2012……………………..5,183 tonnes of TMQ & 6PPD
2013..................12,281 tonnes of TMQ & 6PPD

1Q 2013...............2,072 tonnes of TMQ & 6PPD
2Q 2013...............2,900 tonnes of TMQ & 6PPD
3Q 2013...............3,489 tonnes of TMQ & 6PPD
4Q 2013………………..3,820 tonnes of TMQ & 6PPD

Part of Sunsine assets are investments (such as the new bases in Weifang and Dingtao) for future growths. The fixed cost of Weifang is high as only 14,000 tonnes of accelerators are being produced now against a possible 40,000 tones. The same goes for 6PPD. As productions step up, ROE as well as ROA (if it is the best measure of profitability) should be higher than now. Demand for rubber chemicals, which are basic materials for the rubber industry, should rise. Sunsine’s strategy for gaining market share seems to have worked so far.

Just to add my 2cents worth:

ROA is an approximate measure on how much cashflow an asset/business is able to produce ie ROIC. Higher of course means better productive assets and is also a good measure across peers in same industry to guesstimate management value

Leveraging distorts managment's operational value by hiding behind financial engineering. But OTOH banks are not going to lend you indefinite amount of leverage so leverage is also a guesstimate on credit worthiness and some leverage is inherent in certain industries with high working capital or capex including banks, REITS and trading firms that has low ROA. Without leverage these industries cannot exist. That was why I had argued that OLAM is viable in OLAM thread.

So in general we have to read across how ROA and ROE interacts with ROA being the basis. Obviously with a lower ROA your cost control and margin of error is much more critical.

No matter what is being said here, Sunsine's share price had dropped 25% from the recent peak of 30.5 cents.
basically, boom and busted!

I noticed that a user has used multi-account to post, on the same thread. It might create a false impression that the posts are contributed by different users. So I decided to keep only one for her, and ban the rest. It will allow the user to continue her posting, but only with a user account.

Please take note.

Regards
Moderator

I chose to post the news here.

China auto population will increase in double digits for years to come. This has created a very favorable business prospect for the company. Once the overcapacity is consumed by the increasing demand and/or sector consolidation, I do hope the company is able to command pricing power, and increases its ASP in near future

(not vested)

Honda says Feb China auto sales up 27.6 % y/y
04 Mar 2014 14:14
[SHANGHAI] Honda Motor Co Ltd and its two local joint ventures sold about 40,858 automobiles in China in February, up 27.6 per cent from a year earlier, the Japanese automaker said on Tuesday.

That follows a 33.6 per cent year-on-year jump in January and a 60.4 per cent rise in December, reflecting a gradual recovery in sales which took a heavy beating from a surge anti-Japan sentiment following a territorial dispute between Beijing and Tokyo in late 2012.

The company's sales in the first two months of the year came to about 104,095 cars, up 31.3 per cent from the same period a year earlier.

Honda, which operates car ventures in China with Dongfeng Motor Group Co Ltd and Guangzhou Automobile Group Co Ltd , aims to sell 900,000 cars in the country this year, up 18.9 percent from a year earlier. -Reuters
Ref: Business Times Breaking News

More update on car sales in China, from various vendors...

GM says February China auto sales up 19.9% year on year
05 Mar 2014 12:50
[CHINA] General Motors and its Chinese joint ventures sold 257,770 vehicles in China in February, up 19.9% from a year earlier, the US automaker said on Wednesday.

That follows a 12 per cent year-on-year jump in January and an 11.8 per cent rise in December.
...
Ref: Business Times Breaking News