China Sunsine Chemicals Holdings

[CityFarmer]

What is this banker's guarantee? How does it work? Can you en-cash a banker's guarantee? Thanks.

In Sunsine’s annual report for 2011, bankers’ guarantees are termed “notes receivables” which are non-interest bearing and have a maturity period from 1 to 180 days.
In its 1Q 2013 results announcement, the company explains that notes receivables provided by trade debtors which are promissory notes issued by the local banks. Consequently, the risks of non-recoverability of these notes receivables by local banks are significantly lower than those amounts owing by trade debtors.
If a note is held to maturity, Sunsine will receive the full amount from the bank. If it is presented earlier, a discount proportional to the unexpired period will apply.
Notes receivables are therefore near-cash as they can be converted into cash readily, and may be taken into account in assessing the financial strength of the company. For example, as end of 1Q 2013, the default risk of the RMB200m bank loans can be considered as low because cash (RMB107m), available-for-sale financial assets (RMB10m) and notes receivables(RMB187m) added up to RMB304m.

Simple and clean balance sheet is one of the "pluses" of the company. I didn't explore further on the "note" mentioned. I assume it was used during the contraction period of the new plants, on its contractors. With the near completion of the new plants, there is no "note" in the latest balance sheet in 3QFY13 report.

The current ratio is about 1.9, which includes the debt, as in 3QFY13 report. It is not impressive, but not alarming too.

[portuser]

I didn't explore further on the "note" mentioned. I assume it was used during the contraction period of the new plants, on its contractors. With the near completion of the new plants, there is no "note" in the latest balance sheet in 3QFY13 report.

Your assumption that “note” is payable to contractors during the construction period is not correct. Advance payments to contractors are shown as “other receivables". Note 4 of the 3Q 13 results announcement states that “other receivables decreased by RMB 2.7 million from RMB 39.3 million to RMB 36.6 million mainly due to lower advance payments to contractors as most of the construction in-progress projects which commenced prior to 2013 had completed.”
In its 1Q 2013 results announcement, Sunsine described “notes receivables” (amounting to RMB187.3m) as “promissory notes issued by the local banks. Consequently, the risks of non-recoverability of these notes receivables by local banks are significantly lower than those amounts owing by trade debtors.” During 3Q results briefing, the company indicated that “notes receivables” at the ends of 3Q and 1Q were not much different.

[Young Investor]

Spending on PPE is for capacity building. Some of the investment money has yet to bear fruit because the projects were sized for future demands. An obvious example is the 30,000-tonne 6PPD factory – it is now producing several thousand tonnes at best and must be running at a loss, while awaiting accreditations of the newly-introduced product. Another example is the 19-hectare new base at Weifang – with an installed capacity of 14,000 tonnes now compared with the 38-hectare Shanxian base that can house 102,500 tonnes.

Hi, I would like to know to what extent will profit grow when productions pick up in the 30,000-tonne 6PPD factory and the new base at Weifang?

Thanks.

[portuser]

When Sunsine set up the base at Weifang, it incurred the administrative expenses at the outset. Profit was depressed initially when the base had little or no revenue. As production lines are added, profit rises at a faster rate than revenue because administrative expenses remain unchanged.
Sunsine’s overall net margin was 6.2% in 3Q 2013. As accelerators accounted for three-fourths of total sales, their net margin should not differ much from 6.2%. The 6.2% net margin was net of administrative expenses, which formed 6.8% of revenue.
The new accelerator line (costing RMB25m) at Weifang started production in Sep 2013.
Going by brisk sales of accelerators in the past, Sunsine should be able to sell all the 4,000 tonnes, for RMB 74m revenue (ASP being RMB 18,500 per tonne).
In the absence of additional administrative expenses, the portion of the RMB 74m revenue flowing to the bottom line will be 11.3% (=6.2% + three-fourths of 6.8% to take account of taxation), boosting profit by RMB 8.3m.
This illustrates how strongly new production lines can contribute to profit.

[Young Investor]

When Sunsine set up the base at Weifang, it incurred the administrative expenses at the outset. Profit was depressed initially when the base had little or no revenue. As production lines are added, profit rises at a faster rate than revenue because administrative expenses remain unchanged.
Sunsine’s overall net margin was 6.2% in 3Q 2013. As accelerators accounted for three-fourths of total sales, their net margin should not differ much from 6.2%. The 6.2% net margin was net of administrative expenses, which formed 6.8% of revenue.
The new accelerator line (costing RMB25m) at Weifang started production in Sep 2013.
Going by brisk sales of accelerators in the past, Sunsine should be able to sell all the 4,000 tonnes, for RMB 74m revenue (ASP being RMB 18,500 per tonne).
In the absence of additional administrative expenses, the portion of the RMB 74m revenue flowing to the bottom line will be 11.3% (=6.2% + three-fourths of 6.8% to take account of taxation), boosting profit by RMB 8.3m.
This illustrates how strongly new production lines can contribute to profit.

With the addiitional profit of RMB8.3 m, the company will only need 3 years plus to recover the capital investment of RMB25 million!!!

How about 6PPD and it's intermediate product 4ADPA? Are the company selling the 4ADPA currently and what is the current utilisation rate? Or how much can 6PPD help to boost the profit. Thanks.

[CityFarmer]

When Sunsine set up the base at Weifang, it incurred the administrative expenses at the outset. Profit was depressed initially when the base had little or no revenue. As production lines are added, profit rises at a faster rate than revenue because administrative expenses remain unchanged.
Sunsine’s overall net margin was 6.2% in 3Q 2013. As accelerators accounted for three-fourths of total sales, their net margin should not differ much from 6.2%. The 6.2% net margin was net of administrative expenses, which formed 6.8% of revenue.
The new accelerator line (costing RMB25m) at Weifang started production in Sep 2013.
Going by brisk sales of accelerators in the past, Sunsine should be able to sell all the 4,000 tonnes, for RMB 74m revenue (ASP being RMB 18,500 per tonne).
In the absence of additional administrative expenses, the portion of the RMB 74m revenue flowing to the bottom line will be 11.3% (=6.2% + three-fourths of 6.8% to take account of taxation), boosting profit by RMB 8.3m.
This illustrates how strongly new production lines can contribute to profit.

Let's me continue to be the devil's advocate.

First of all, there are typically two major types of the expenses, one fixed, and one variable. Fixed are the one highlighted, which doesn't change with production volume, but the variable part does.

Secondly, one key part of the admin expense, is the staff expenses. FYI, the expense has been increasing at the rate of 20% in the past few years, which is consistent with the labour market in China. Will it increase with the same rate in FY13. I don't know yet, but it is unlikely a zero increment.

Last and not least, we shouldn't forget the debts for the expansion, which interest expense alone was RMB 12.5m in FY12. The amount will increase in FY13, with much higher debt level.

[portuser]

With the addiitional profit of RMB8.3 m, the company will only need 3 years plus to recover the capital investment of RMB25 million!!!

How about 6PPD and it's intermediate product 4ADPA? Are the company selling the 4ADPA currently and what is the current utilisation rate? Or how much can 6PPD help to boost the profit. Thanks.

The 6PPD factory, sized for production of 30,000 tonnes, is now equipped for 15,000 tonnes. Also installed is the 4ADPA equipment large enough to supply the feedstock for the production of 30,000 tonnes of 6PPD.
The combined capacity of the two types of anti-oxidants (TMQ and 6PPD) is 25,000 tonnes. Aggregate sales figures below suggest low, though rising, sales volumes of 6PPD:
2011…………………..……………..2,061 tonnes (TMQ only)
2012………………………………....5,183 tonnes (TMQ & 6PPD)
9 months of 2013……..….....8,461 tonnes (3,340 tonnes in the corresponding period of 2012)
3Q of 2013………………………...3,489 tonnes (2,070 tonnes in the corresponding period of 2012)
Having recognised the depreciations of these facilities in full, the low production volume results in high unit cost of 6PPD. When more 6PPD is sold, hopefully, lower unit cost will boost the bottom line.

[portuser]

Let's me continue to be the devil's advocate.

First of all, there are typically two major types of the expenses, one fixed, and one variable. Fixed are the one highlighted, which doesn't change with production volume, but the variable part does.

Secondly, one key part of the admin expense, is the staff expenses. FYI, the expense has been increasing at the rate of 20% in the past few years, which is consistent with the labour market in China. Will it increase with the same rate in FY13. I don't know yet, but it is unlikely a zero increment.

Last and not least, we shouldn't forget the debts for the expansion, which interest expense alone was RMB 12.5m in FY12. The amount will increase in FY13, with much higher debt level.

Costs rise but companies do not sit still. To some extent, they can try improving productivity. Those on expansion trails or ramping up productions may extract better prices from suppliers for larger-quantity purchases.
Becoming the sole steam supplier in the Shanxian Chemical Industrial Zone should help too. The lower unit cost of producing steam from larger, high-pressure boilers will result in cost saving for its own steam consumption as well as profit from selling steam (at market price) to other factories who are now incurring more operating smaller boilers.
There is also scope to adjust product prices to stay viable, as Lanxess has announced recently:
http://lanxess.com/en/corporate/media/pr...13-00142e/
Sunsine’s accelerator prices stayed around RMB 18,600 per tonne throughout 2012 and the first nine months of 2013. In 2011, the price averaged RMB 20,700. A RMB 600 price rise (corresponding to the lowest increase of US10c per kg announced by Lanxess) amounts to a 3% hike only, but can rake in RMB 42m in revenue.
The 6.8% admin expenses ratio is the company-wide figure, and is taken for ease of presentation. The ratio for the newly-established base at Weifang is likely to be higher.
The old base at Shanxian (designed for 106,500 tonnes of rubber chemicals) is almost fully built with equipment for 91,500 tonnes installed.
On the other hand, the new base at Weifang (designed for around 56,000 tonnes of accelerators) is equipped for 14,000 tonnes only. Admin expenses at this base are likely to eat up a bigger chunk of revenue.

[Young Investor]

[quote='CityFarmer' pid='72285' dateline='1390465118']

There is also scope to adjust product prices to stay viable, as Lanxess has announced recently:
http://lanxess.com/en/corporate/media/pr...13-00142e/
Sunsine’s accelerator prices stayed around RMB 18,600 per tonne throughout 2012 and the first nine months of 2013. In 2011, the price averaged RMB 20,700. A RMB 600 price rise (corresponding to the lowest increase of US10c per kg announced by Lanxess) amounts to a 3% hike only, but can rake in RMB 42m in revenue.

Portuser, your assumption of accelerator prices increase in Lanxess may not apply and benefit Sunsine. Both companies may be servicing different clients in different countries. Thus, the increase of RMB42m in revenue could be much lower.

[portuser]

[quote='CityFarmer' pid='72285' dateline='1390465118']

There is also scope to adjust product prices to stay viable, as Lanxess has announced recently:
http://lanxess.com/en/corporate/media/pr...13-00142e/
Sunsine’s accelerator prices stayed around RMB 18,600 per tonne throughout 2012 and the first nine months of 2013. In 2011, the price averaged RMB 20,700. A RMB 600 price rise (corresponding to the lowest increase of US10c per kg announced by Lanxess) amounts to a 3% hike only, but can rake in RMB 42m in revenue.

Portuser, your assumption of accelerator prices increase in Lanxess may not apply and benefit Sunsine. Both companies may be servicing different clients in different countries. Thus, the increase of RMB42m in revenue could be much lower.

Sunsine’s export of accelerators is significant. 2012 annual report shows the following:
…………………..Sales volume (tonnes)……Sales revenue (RMB million)
Domestic…………….38,914..(60.6%)………………681.2..(57.0%)
International……….25,338..(39.4%)………………514.8..(43.0%)
Export price (RMB 20,300) was much higher than domestic price (RMB 17,500).
It is likely that the markets of Sunsine and Lanxess overlap outside China, and Sinsine may raise its product prices in tandem with Lanxess.