China Sunsine Chemicals Holdings

[portuser]

Both ROA and ROE measure efficiency of capital employment.
Sunsine's ROA of around 8% does not tell the whole story just as its 11% ROE. Low profit in the first half of 2103 as well as low capacity utilisation of 6PPD production facilities cause distortion.
I agree with your point that "relying on [6PPD] in near term is too far a shot". My own assessment is that the 6PPD business segment is in the red. But incremental 6PPD sales will contribute to group profit since the fixed cost has already been paid for.
Friends in the engineering profession do not think steam generation is a complex undertaking more so as Sunsine has been doing it all this while. They express the view that the deteriorating air quality in China must have led the Government to make concerted effort to cut down the amounts of coal used in steam production. National Grid's agreement to buy in the electricity from Sunsine clears the way for the installation of high-pressure boilers. De-commissioning of all individual boilers in the industrial zone and requiring the factories to buy steam from Sunsine enables the use of larger boilers. (To produce a given amount of steam, a large high-pressure boiler uses up less coal than a smaller low-pressure boiler.) Factories also have to prepay for steam usage.
Their assessments are that the steam generation business should be earnings accretive.

[CityFarmer]

Both ROA and ROE measure efficiency of capital employment.
Sunsine's ROA of around 8% does not tell the whole story just as its 11% ROE. Low profit in the first half of 2103 as well as low capacity utilisation of 6PPD production facilities cause distortion.
I agree with your point that "relying on [6PPD] in near term is too far a shot". My own assessment is that the 6PPD business segment is in the red. But incremental 6PPD sales will contribute to group profit since the fixed cost has already been paid for.
Friends in the engineering profession do not think steam generation is a complex undertaking more so as Sunsine has been doing it all this while. They express the view that the deteriorating air quality in China must have led the Government to make concerted effort to cut down the amounts of coal used in steam production. National Grid's agreement to buy in the electricity from Sunsine clears the way for the installation of high-pressure boilers. De-commissioning of all individual boilers in the industrial zone and requiring the factories to buy steam from Sunsine enables the use of larger boilers. (To produce a given amount of steam, a large high-pressure boiler uses up less coal than a smaller low-pressure boiler.) Factories also have to prepay for steam usage.
Their assessments are that the steam generation business should be earnings accretive.

We do have similar view that, the current PnL is still not "satisfactory". You are optimistic on the prospect, while I remain caution and waiting for more certainty.

We do have similar view on resort investment too, but you have chose to ignore it while I have taken it as an alert.

We have different views on the steam generation business. Let's hope that the company debt will not shot up in near term due to the two new ventures, instead of paying down as my original expectation.

Well, wish you all the best.

(not vested)

[portuser]

The steam generation project costs money, for sure.
If Sunsine chooses not to extend a shareholder loan to the central heating company, more bank loans will be required.
If Sunsine earns RMB120m in 2014 (based on RMB30m in 4Q 2013), its internally-generated funds should amount to RMB195m (based on RMB18.7m depreciation & amortisation in 3Q 2103), and the additional loans required may not be large. In any case, its existing gearing ratio of around 25% is not excessive.
While the financial numbers and operating data exhibit positive trends, I share your view that one ought to be cautious.

[CityFarmer]

The steam generation project costs money, for sure.
If Sunsine chooses not to extend a shareholder loan to the central heating company, more bank loans will be required.
If Sunsine earns RMB120m in 2014 (based on RMB30m in 4Q 2013), its internally-generated funds should amount to RMB195m (based on RMB18.7m depreciation & amortisation in 3Q 2103), and the additional loans required may not be large. In any case, its existing gearing ratio of around 25% is not excessive.
While the financial numbers and operating data exhibit positive trends, I share your view that one ought to be cautious.

One comment. The "spare" cash for the steam generation should be FCF (free cash flow).

FCF = Operating Cash Flow (OCF) - Capital Exp (Capex)

Let's take 9 months FY2013, base on Q3 report.

FCF (9 months) = RMB 107m (9 months OCF) - RMB 57m (9 months Capex) = RMB 50m

Estimation of 12 months FCF as RMB 195m, base on 9 months FCF of only RMB 50m, is overly optimistic.

[portuser]

Just to clarify.
RMB195m is not the FCF in 2014.
It is the sum of RMB120m profit (based on estimated Q4 2013 profit of RMB30m) and non-cash expense of RMB75m (based on RMB18.8m for Q3 2013).
RMB195m is an approximate amount of cash available for capex, working capitals and dividend in 2014.
No assumption has been made on the amount of cash generated from the new steam generation business.

[simpleman]

If its 4Q profit was RMB30m (slightly higher than the RMB27m in 3Q), and this is sustained, Sunsine's 2014 profit will be RMB120m.
This works out to an EPS of S5.3c, and the PE will be 5 only.
Even though this is a S-chip, the facts that it is serving tyre majors and has been paying a S1c dividend regularly should provide a great deal of comfort.


Simpleman

[potatolover]

With such a high EPS, shouldn't the dividend payment be adjusted upwards ? If I'm not wrong, sunsine has paid out 1.5 cents previously . Could someone confirm pls . Tks.

[CityFarmer]

Just to clarify.
RMB195m is not the FCF in 2014.
It is the sum of RMB120m profit (based on estimated Q4 2013 profit of RMB30m) and non-cash expense of RMB75m (based on RMB18.8m for Q3 2013).
RMB195m is an approximate amount of cash available for capex, working capitals and dividend in 2014.
No assumption has been made on the amount of cash generated from the new steam generation business.

Noted and understood. OCF and FCF seem are good terminologies used in the context of our discussion. What do you think?

[CityFarmer]

If its 4Q profit was RMB30m (slightly higher than the RMB27m in 3Q), and this is sustained, Sunsine's 2014 profit will be RMB120m.
This works out to an EPS of S5.3c, and the PE will be 5 only.
Even though this is a S-chip, the facts that it is serving tyre majors and has been paying a S1c dividend regularly should provide a great deal of comfort.


Simpleman

What if the dividend payouts in the last four years were from retained earning, rather than from its profit?

The cash reserve has been reduced from the peak of RMB 184m in 2008, to RMB 72m in the last FY2012. Each year the dividend payout was approx RMB 20m-25m, except on 2009 which was close to RMB 45m.

(not vested)

[touzi]

With such a high EPS, shouldn't the dividend payment be adjusted upwards ? If I'm not wrong, sunsine has paid out 1.5 cents previously . Could someone confirm pls . Tks.

1.0 cents since company listed.