China Sunsine Chemicals Holdings

[gongkia]

Maybank Kim Eng Research today released a report valuing Sunsine at $1.10 and included Sunsine in its growth stocks basket that has Best World, AEM and China Aviation Oil in the basket.

The report mentioned that Sunsine is expanding production capacity but will this lead to oversupply?

Money Plant in her Nextinsight article said that new car populations in US and China are falling but KE report did not cover this. Is this a concern?

[gongkia]

Maybank KE Retail Research

China Sunsine is a major producer of rubber chemicals, primarily rubber accelerators, which are used in the curing of unprocessed rubber to make it more durable, mainly for the tyre industry.

With a FY07-16 sales volume CAGR of 17%, China Sunsine has risen to become the top rubber accelerator producer with global market share of 18% (FY08: 7%), and PRC market share of 31%, and serves more than 65% of the Global Top 75 tyre manufacturers, including Bridgestone and Michelin. It is also an excellent proxy to the fast growing tyre market in China.

Taking advantage of China's push towards greater environmental protection, the group's environmentally compliant facilities have benefitted from higher demand as the authorities move to shut down competitors' factories that fail to meet regulatory standards.

Near term catalysts for the stock include 1) its exposure to the huge tyre market in China, 2) capacity expansion and economies of scale, and 3) improved investor awareness.

Proxy to the Chinese tyre market growth
The China tyre market has expanded at 2006-2016 CAGR of 7.9%, which is expected to sustain given the healthy vehicle population growth (2016: +13.7%), further buoyed by tyre replacements. China Sunsine has constantly ploughed back profits to meet this demand as capacity soared 4.8x since IPO in 2007.

Capacity expansion plans
With its FY16 utilization rate reaching 89%, the group will be expanding annual capacity by 13% to 172,000 tones over the next 18 months. This will comprise:
- 30,000 tons of TBBS accelerators: Phase 1 (10,000 tons) is currently undergoing trial run, and should begin commercial production in 2H17.
- 10,000 tons of insoluble sulphur. Trial run is expected to commence in late FY17, with commercial production in FY18.

Environmental edge
China Sunsine's emphasis on environmental protection has paid off as the Chinese government tightens its grip on environmental standards. In several episodes since FY14, government crackdown on non-compliant producers has choked market supply of accelerators. Consequently, the group has been able to charge higher prices and capture market share.

From this perspective, China Sunsine's environmental practices give it a competitive edge as tyre-markers switch to more sustainable/ less risky suppliers. At the same time, competitors require time and capital to retrofit factories/overhaul processes to meet the required standards.

Respectable track record and returns
The group has been profitable throughout its listing history, achieving earnings CAGR of 12.6% over the past 10 years to reach Rmb245.3m in 2016. Average ROE over the decade was a respectable 16%.

As rubber chemicals make up only 6% of the total cost to produce a tyre, the group has generally been able to pass on higher raw material costs to its customers. Over the past three years, it commanded gross margin of ~27%.

Operating cashflow has been positive since IPO, except for FY12. At 31 Mar, the group was sitting on a cash hoard of Rmb337.9m (~$0.14/share).

Sale of treasury shares
The group recently placed out 27.7m of treasury shares (5.6% stake) at $0.646 each to a group of investors, including Asdew Acquisitions (owned by renowned investor Alan Wang).

This aim was to improve the float and liquidity of the shares. Management has earmarked net proceeds of $17.5m for payment of future dividends. Sunsine has paid a total of $0.115/share in dividends over 10 consecutive years since IPO in 2007.

Valuation
China Sunsine is currently trading at 6.6x trailing P/E. By applying a conservative 0.8x PEG ratio on its 10-year earnings CAGR of 12.6%, the stock could be worth $1.10, based on 10x trailing P/E.

In view of its good earnings prospects and attractive valuation, Market Insight is adding the stock to its Growth basket at an entry price of $0.70.

[grandslam]

Sunsine's current TBBS line is running 100% utilisaton (mentioned in AGM), the chance of oversupply should be pretty low

[portuser]

Gongkia

Rising vehicle population creates demand for more replacement tyres and reduces the impact of low new vehicle sale. This is articulated in the following Economist's article:

Supplying [vehicle] manufacturers accounts for only a third of revenues of a typical tyre firm.... The rest comes from replacing tyres on vehicles on the road, which wear out every four years or so. The expansion of the global vehicle fleet, forecast to grow by around 3.5% a year, helps gradually to reduce firms’ dependence on the cyclical market for new cars.

"Puncture repair, Big tyremakers are regaining their grip"  dated 23 March 2017
http://www.economist.com/news/business/21719515-clamour-drive-suvs-good-established-tyre-manufacturers 

China Sunsine has ready cash (RMB 330m as at end-March 2017) and ready infrastructure to expand. Its main rivals (Kemai and Yanggu Huatai) are still looking for money to grow.

Kemai has recently reapplied for listing on the Shanghai Stock Exchange after failing in 2015. If the current application goes through and RMB 890m is raised, it will still take three years to put up new facilities in Inner Mongolia. The following link reports that the Securities Regulatory Commission has cancelled the meeting with Kemai scheduled on 16 May 17 pending further investigations: 
http://stock.cnstock.com/xg/sx_xgcl/201705/4077259.htm

Yanggu Huatai, which is listed on the Shenzhen Stock Exchange, earlier wanted to issue placement shares to raise RMB 1,200m to build new facilities in three years. According to the following link, it has given up the plan and opted for a rights issue to raise a smaller sum of RMB 750m: 

http://stock.qq.com/a/20170505/051099.htm?stockcode=sz300121&version=2

Back in 2007 when China Sunsine filed for listing in Singapore, Kemai and Yanggu Huatai were not the rivals. The rivals then were Tianjin No. 1 Organic Chemical Plant and Zhenjiang Zhenbang Chemical Industry. Both are no longer forces to be reckoned with, based on Kemai's draft IPO prospectus. 

The Chinese government stepped up enforcement in 2014 against industrial pollution. Earlier, in 2013, 东北助剂, a mid-sized rubber accelerator producer in Hebei province, was closed down for causing severe harm to the environment.  

http://info.21cp.com/industry/News/201309/764590.htm

Casualties are high in the rubber accelerator industry. 

[gongkia]

There are Chinese companies that are not as far-sighted, diligent, responsible and careful in environmental pollution control as China Sunsine.

China Star Food is an example (recent announcement below). Its production continues when centralised waste water treatment is not ready.

http://infopub.sgx.com/FileOpen/CSF_Halt...eID=453112

[budgetier]

Good Morning,

China Sunsine reported a 0.2 percentage point growth in GPM for 1Q2017 because of higher ASP due to increase in raw material costs which the company could pass on to its customers.  Another company, Dutech, reported a 9.4 percentage point decrease in GPM of its High Security Segment for 1Q2017 due to increase in steel price.  When is a company able to pass on raw material cost increases to its customers or specifically, why is China Sunsine able to do so while Dutech is not?     
  

[BTinvest]

Good Morning,

China Sunsine reported a 0.2 percentage point growth in GPM for 1Q2017 because of higher ASP due to increase in raw material costs which the company could pass on to its customers.  Another company, Dutech, reported a 9.4 percentage point decrease in GPM of its High Security Segment for 1Q2017 due to increase in steel price.  When is a company able to pass on raw material cost increases to its customers or specifically, why is China Sunsine able to do so while Dutech is not?     
  

Just my 2 cents

I can think of two reasons:
1. China Sunsine is the market leader of rubber accelerators. Therefore it could offer a very competitive price as compared to its competitors. Even when it increases its selling price, its products are still one of the cheapest among the competitors. Also, its long-term established relationship with the customers could also explain the difference. As long as it consistently delivers good quality of products to the customers, they will continue to purchase from it because the cost of switching to a lower quality supplier may be much higher than the cost benefits from the difference between the selling price.
2. As mentioned by a contributor in the post earlier, the cost of rubber accelerator forms only a small portion of total cost of manufacturing tires, hence the increase in selling price will not cause the overall cost for the tires manufactures to surge, i.e. their profit margin won't be affected significantly.

I guess these 2 competitive advantages are the main differences between the 2 companies. (Though IMO Dutech is a good company too.)

[ricklim1]

If I remember correctly, a similar question was asked at a briefing for analysts and shareholders previously. The answer given is that Sunsine produces chemicals used in the manufacture of tyres. The cost of the chemicals is only a small fraction of the total material costs of the tyres.

[Sfsh12]

http://infopub.sgx.com/FileOpen/CS.Clari...eID=455636

Sunsine has posted on SGX a clarification announcement on an internet news article, presenting full facts point by point.

One interesting fact to note is that environmental standards are indeed becoming more and more stringent as illustrated by point 2a in the announcement. Companies, including Sunsine, are required to install monitoring equipment on chimneys by 31 May 2017 as directed by an urgent notice by Heze Environmental Protection Agency on 24 Feb 2017.

[Young Investor]

If I remember correctly, a similar question was asked at a briefing for analysts and shareholders previously. The answer given is that Sunsine produces chemicals used in the manufacture of tyres. The cost of the chemicals is only a small fraction of the total material costs of the tyres.

How small is the fraction of the cost of the chemical to the total material costs of the tyres? Do you have the figure? Thanks.