China Sunsine Chemicals Holdings

[portuser]

Took a closer look at the NRA report. Apart from the mathematical calculations ... I think the assumptions used to derive the fair value should be noted.

1) On page 18, NRA forecasted accelerator capacity to grow by 10k tons in 2017, 2018, and 2020 each. However, the company has indicated that once 10k tons in constructed in 2017, they will proceed to built 20k tons at one go. NRA's assumption on capacity growth is slower than Sunsine's publicly announced capex growth plans.

2) On page 18, NRA also forecasted FLAT accelerator sales for 2017 compared to 2016, this is extremely conservative given that it is industry knowledge that there is a current tightness in supply and Sunsine wouldn't have expanded if they weren't sure of being able to sell the added capacity

3) NRA based their full year accelerator ASP on Q1's ASP. Based on industry data, Q2 ASP is already higher than Q1 and Q3 is likely to be higher too because Q3 results are based on Q2 prices. Granted that prices fluctuate, I still be believe NRA's estimate is very conservative.

4) Also on page 18, the analyst estimated a capex of RMB 200m per year for tighter environmental controls without justifying how he arrived at that number. At RMB200m per year, no competitor will be able to sustain that level of capex anyway.

Figure 24 of NRA report gives 30,311 tonnes as the yearly steam sale volume starting 2017. 

The amount is the quantity of steam bought by Sunsine's sole customer in 2016. In that year, steam output was 709,561 tonnes, of which 679,450 tonnes (or 96%) were consumed internally for dessication of rubber chemical products. The amount sold, with RMB 4.8m being recognised, was only 4% of the output.

Sunsine entered steam business (in late 2014) on the premise that factories in the Shanxian Chemical Industrial Zone, in which Sunsine also operates, will give up their small boilers and rely on Sunsine for steam supply. This arrangement will improve air quality as Sunsine's large boilers are fitted with pollution control devices and are more efficient in coal use.

The pace of phasing out small boilers seems to have picked up lately. A new customer was added in 1Q 17, resulting in the following:

.............Sales vol (tonnes)....Revenue (RMB m)
1Q 16..........6,840........................1.1
1Q 17........15,999........................2.6

Moreover, in late 2016, Sunsine announced expansion of the steam business. 

Future steam revenue should be much higher than the constant RMB 4.8m projected by NRA. 

Sunsine's steam business incurred a small loss of RMB 1.6m in 2016. Actual performance was much better for two reasons:

(a) RMB 106 was charged for every tonne of steam consumed internally, whereas customer paid RMB 158. Pre-tax profit would have been RMB 33m had the market rate been applied.

(b) A standby boiler was installed at the outset for uninterrupted steam supply. Steam delivery system has also been set up although utilisation is still low now.

The steam business will have three operating boilers ultimately. It now has one and the second one is being installed. 

Besides the four instance of NRA being conservative identified by Crubs, not factoring the earnings potential (as well as the cash flow) of the steam business will lower the fair value of Sunsine.   

[Young Investor]

NRA report page 19, figure 25 "Discounted Cash flow valuation" has an item known as "Terminal value". Can someone explain what is this? Is there an easy way to calculate the estimate revenue and profit for this year. Thanks.

[BTinvest]

NRA report page 19, figure 25 "Discounted Cash flow valuation" has an item known as "Terminal value". Can someone explain what is this? Is there an easy way to calculate the estimate revenue and profit for this year. Thanks.

Terminal value means the value of total future free cash flow that is growing at the same growth rate (terminal growth rate, in this case 2%) indefinitely. 
The calculation of terminal value = FCF of the final year forecasted / (discount rate - terminal growth rate).
Applying to this case, 251.0/(10%-2%) = 3200.7 (some rounding difference)
And discounted to the present, which is discount by 10% by 5 times to get PV of terminal value 1987.37

[crubs]

How did the analyst decide that the growth rate is 2% forever ? Even inflation is already 2%, is he suggesting that the company will only grow as fast as inflation forever ?

[portuser]

BTinvest wrote:
"The calculation of terminal value = FCF of the final year forecasted / (discount rate - terminal growth rate).
Applying to this case, 251.0/(10%-2%) = 3200.7 (some rounding difference)"


The terminal value determined by the above formula is RMB 3,137.5m. 

The correct formula for terminal value is: 

Terminal value = FCF of the final year forecasted x (1 + terminal growth rate ) / (discount rate - terminal growth rate).

http://www.investopedia.com/university/dcf/dcf4.asp

The terminal value determined by this is RMB 3,200.25m.  

[PkNanas]

interested to learn more after knowing its products are needed for tyre production.

This stock has been listed for almost 10 years.
Just wonder how does it come to current comfortable position, knowing its closest competitors (yanggui Huatai and Tianjin Kemai) are struggling in funding their expansion.

Reading somewhere, I understand during its IPO 10 years, its immediate competitors are not Huatai or Kemai.

Keen to understand the industry dynamic, what has China Sunsine has done right and what its competitors has not done right. Perhaps, history will provide some insight on the strength of its management.

[portuser]

Good timing and prudent financial management are the keys to Sunsine's current comfortable position. 

Sunsine’s rubber chemical capacity grew from 76,500 tonnes in 2010 to 152,000 tonne in 2014.
 
The expansion was timely. Stricter enforcement against industrial pollution starting 2014 has resulted in tighter supply of rubber chemicals, and Sunsine was able to increase sales to earn good profits:    

 
......................................2011.........2012.........2013.........2014.........2015.........2016
Sales vol (tonnes)......60,907......81,371......98,345....108,973....114,572....135,791
Revenue (RMB)...........1,175........1,417........1,696........2,077........1,859........2,037
Price (RMB / tonne)...19,292......17,414......17,245......19,060......16,226......15,001
Profit (RMB m)..................99.............32.............77...........220...........195...........222
 
With prudent financial management, Sunsine was debt-free and had RMB 276m in cash by the end of 2016, despite spending a total of RMB 676m between 2011 and 2016 on projects and setting aside RMB 775m for working capitals:

 ...............................................................................RMB m
..............................................2011.......2012......2013......2014......2015......2016
Cash at end of........................119..........105........108........123........341.......276
Bank loans at end of...............140.........200........230........259........149...........0
Capital spending in.................142...........44........147.........230..........30........83
Working capitals at end of......467.........585.........593........777........638.......775
 
It should be noted that in 4Q 2011, Sunsine resorted to drastic cuts of rubber accelerator prices to gain market share, resulting in a low profit of $32m (first table) in 2012. Fortunately the pain was short-lived as stronger sales volume in subsequent years lifted profit.  

The infrastructures that were built earlier will enable Sunsine to add another 74,000 tonnes expeditiously to its present 152,000-tonne capacity.

[PkNanas]

Good timing and prudent financial management are the keys to Sunsine's current comfortable position. 

Sunsine’s rubber chemical capacity grew from 76,500 tonnes in 2010 to 152,000 tonne in 2014.
 
The expansion was timely. Stricter enforcement against industrial pollution starting 2014 has resulted in tighter supply of rubber chemicals, and Sunsine was able to increase sales to earn good profits:    

 
......................................2011.........2012.........2013.........2014.........2015.........2016
Sales vol (tonnes)......60,907......81,371......98,345....108,973....114,572....135,791
Revenue (RMB)...........1,175........1,417........1,696........2,077........1,859........2,037
Price (RMB / tonne)...19,292......17,414......17,245......19,060......16,226......15,001
Profit (RMB m)..................99.............32.............77...........220...........195...........222
 
With prudent financial management, Sunsine was debt-free and had RMB 276m in cash by the end of 2016, despite spending a total of RMB 676m between 2011 and 2016 on projects and setting aside RMB 775m for working capitals:

 ...............................................................................RMB m
..............................................2011.......2012......2013......2014......2015......2016
Cash at end of........................119..........105........108........123........341.......276
Bank loans at end of...............140.........200........230........259........149...........0
Capital spending in.................142...........44........147.........230..........30........83
Working capitals at end of......467.........585.........593........777........638.......775
 
It should be noted that in 4Q 2011, Sunsine resorted to drastic cuts of rubber accelerator prices to gain market share, resulting in a low profit of $32m (first table) in 2012. Fortunately the pain was short-lived as stronger sales volume in subsequent years lifted profit.  

The infrastructures that were built earlier will enable Sunsine to add another 74,000 tonnes expeditiously to its present 152,000-tonne capacity.

Portuser,
thanks. Accordingly, China Sunsine gained market share over the past years partly due to stricter environmental enforcement and happened that Sunsine has invested a lots in preparing and meeting stricter environmental requirement.

This leads to next question, with assumption more investment are needed for environmental requirement, is current margin can be maintained.

According to NRA report: 
"estimated capex to RMB200m per annum over our forecast horizon. This is to factor in more aggressive capex spending following tighter environmental restrictions."

Is the forecast realistic? If so, is it likely will lead to lower margin?

[crubs]

For an idea of whether gross margins are sustainable, take a look at Lanxess and BASF's gross margins over the years. Both are around the mid 20%-30% range.

[BTinvest]

BTinvest wrote:
"The calculation of terminal value = FCF of the final year forecasted / (discount rate - terminal growth rate).
Applying to this case, 251.0/(10%-2%) = 3200.7 (some rounding difference)"


The terminal value determined by the above formula is RMB 3,137.5m. 

The correct formula for terminal value is: 

Terminal value = FCF of the final year forecasted x (1 + terminal growth rate ) / (discount rate - terminal growth rate).

http://www.investopedia.com/university/dcf/dcf4.asp

The terminal value determined by this is RMB 3,200.25m.  

Ah yes my bad, thanks for pointing out.