Sunvic Chemical

Do you track the spot prices of AA and proplyene?

The strong 2013 profit of RMB375 m is all the more creditable after hefty interest expenses of RMB 145m.
4Q profit is even stronger, at RMB 135m.

Have you studied the decision to produce MTBE?
http://infopub.sgx.com/FileOpen/Sunvic_M...leID=27642

There is delay in commercial production. Not sure whether MTBE will add cash-flows.

(02-04-2014, 04:59 PM)simpleman Wrote: What do you think of the offer by Arkema to buy over a factory from Sunvic for RMB 3.9 billion.

Can we not conclude that since the French firm is willing to pay such a high price, Sunvic must be real?

The terms for the sale are rather complicated.

This reminds me of the $10bn HP paid for Autonomy, despite multiple red flags pointed out by Jim Chanos. It later led to a $8.8bn writedown. Not saying that because of this the Arkema/Sunvic deal is doomed, but just pointing out that big companies can make mistakes (and really big ones too).

Caveat Emptor.

I don't actively track prices of proplyene, AA and AE. I will never be able to know what the prices will be going forward. I can only verify that AA and AE is the basic materials for lots of modern necessities. I just cannot foresee any possibility of AA and AE being made redundant anytime soon.

I could also safely say that as long as production is inline with consumption, price should be relatively stable. The only significant production capacity coming on stream in China is Sunvic Taixing plant. With the previous price war still fresh in every competitor minds, I do not believe that there will be a price war anytime soon. Coupled with a supply disruption, higher environmental concern in China (no more large chemical plants), more long term supply contract and a catalyst in the Arkema acquisition, Sunvic looks like a bet worth upping...

When I buy a public listed company, I am buying into a partnership with the management. I just want to ensure that the company is real and that it is bought at a substantial discount.

I only got interested in Sunvic when I found out that it is the leading producer of an industrial product in China. Got more interested when the Sun Xiao the son of the founder was appointed CEO.

I took a small position during that time on
1. assuming that all the industry report I have read indicate that Sunvic is a real company (it is hard to fake industrial chemical sales as what is sold is used for production).
2. A father will never ask a son to take up his position if it is a fraud.
3. It is selling at a substantial discount to NAV.

There is multiple production advantages as well as barrier to entry a.k.a moat in being the largest producer of a certain chemical product. Long term contract with customers basically shut out any potential competitors. This story has been replayed in other large chemical producer such as BASF, Dow Chemical.

I have not studied the MBTE market. The press release have been quite transparent. But this should be a small position so it should not affect their cashflow substantially.

The difference between Arkema/Sunvic and HP/Autonomy is that Arkema has been a customer of Sunvic. This is basically an acquisition to ensure the supply of AA and AE for their downstream production. It is structured with an additional two options which could be exercised at a later date. This reduces risk for Arkema. I believe that the acquisition is structured in a fair manner for both companies (I admire companies which treat each other fairly). This is a bolt on acquisition, technically less risky for Arkema.

HP is trying to change their business model through that acquisition. That is usually a bad reason to acquire a company.

Rgds

Price tracking is not projecting future AA price. It is gathering of recent historical price of AA for indications of supply/demand position.

I have been told before that proplyene price has an effect on AA price. A weaker AA price resulting from lower proplyene price does not necessarily spell doom. Hence the need to track the price of proplyene too.

The cracking plant cost RMB 1,000 m to build. Sunvic spent another RMB 100 m to modify it to produce to produce MTBE.

If a purpose-built MTBE plant costs less than RMB 1,100 m, then Sunvic will be at a disadvantage. It is also not clear whether the modified MTBE plant will be less efficient.

MTBE is priced at round US$ 1,000 per tonne.The 240,000-tonne modified MTBE plant is therefore capable of generating an annual revenue of RMB 1,440 m.

If the decision to modify the cracking plant was not to avoid impairment of the original RMB 1,000 m investment, then the MTBE business segment may provide reasonable yield as well as cash flows.

On a valuation basis, it is best not to include the cashflow from the possible MTBE plant. The problem with most plants is that it takes time to scale up production after initial phase. And things may not work out to what they plan again (cost overrun, production hiccup). It is also prudent to take an impairment on the original RMB 1,000 m investment as the original cracking plant was never build to be a MTBE plant as the original investment should be regarded as a sunk cost when making the second decision.

How long is the long term contract? I don't think it is anywhere above one year. The contract secures the volume but pricing is likely to be based on spot.

An impairment amounting to RMB 1,000 m will take a heavy toll of the RMB 2,247 m equity.
My bringing up the cracking plant is to see whether other investors have considered this aspect.
Do cracking plants and MTBE plants have common processes that render impairment unnecessary? Or revenue from the modified plant will be sufficient to preclude a write-down?
My bringing up the MTBE plant, modified from a craking plant, is to elecit views from investors on whether it can be a liability, if there is inherent inefficiency.
Lastly, since its 22 Nov 2011 announcement on the AA supply contracts for 334,000 tonnes between end of 2011 and end of 2014, Sunvic has no other statements on new supply contracts. For its sales vol of 512,000 tonnes of AA in 2013, the annual supply under the said contract of around 110,000 tonnes is not significant.

(annoucement dated 22 Nov 2011)
http://infopub.sgx.com/FileOpen/Sunvic_S...eID=108752

From what I have been gathered so far, the supply contract in China for AA and AE do have a price component included. The China market is migrating to the way Chemical company conduct their business in Europe and the US.

Did some research on MTBE today. It seems that MTBE production has been falling in the developed world since the ban of MTBE in the United States and European region. But consumption in China has been growing at around 5.8% for the past few years. Majority of the world consumption of MTBE reside in the Asia Pacific with China being the largest consumer.

This research brought out a concern if MTBE would be ban in China? If that is the case, that RMB100 m is down the drain. It also brought up product liability concern if Sunvic would be liable if any water source in China is contaminated by MTBE. A risk that cannot be ignored.

Rgds

(08-04-2014, 10:47 PM)ongweehiang Wrote: Did some research on MTBE today. It seems that MTBE production has been falling in the developed world since the ban of MTBE in the United States and European region. But consumption in China has been growing at around 5.8% for the past few years. Majority of the world consumption of MTBE reside in the Asia Pacific with China being the largest consumer.

This research brought out a concern if MTBE would be ban in China? If that is the case, that RMB100 m is down the drain. It also brought up product liability concern if Sunvic would be liable if any water source in China is contaminated by MTBE. A risk that cannot be ignored.

Rgds

It is difficult to assess the risk of MTBE being banned in this part of the world.

Sunvic should do well with AA alone. It is not clear whether MTBE will destroy or add value.

Are you attending the AGM?

will definitely be there if my schedule allows.