China Sunsine Chemicals Holdings

[Bluechipfan]

Sunsine has released their response last night:


UPDATE ON RECTIFICATION ACTIONS CARRIED OUT BY SHANDONG SUNSINE
Unless otherwise defined, all capitalised terms herein shall bear the same meanings as the announcement made by the Company on 29 May 2017.
The Board of Directors (the “Board”) of China Sunsine Chemical Holdings Ltd. (the “Company”, and together with its subsidiaries, collectively the “Group”) refers to the Company's announcement made on 29 May 2017, and wishes to update shareholders on the progress of rectification works carried out to-date by Shandong Sunsine.
The Board is pleased to inform that the on-line monitoring equipment has been installed at the chimney used in the recycling of sulphur at Shandong Sunsine, and has commenced operations as of 31 May 2017. The Group wishes to reassure all stakeholders that it takes environmental protection measures very seriously, and meeting the deadline imposed by the Heze Environmental Protection Agency is a testament to our commitment in ensuring compliance with environmental protection laws and regulations. The Group will continue to improve and strengthen its on-site management work, including taking appropriate measures to avoid exposure of harmful chemicals, stepping up staff training and increasing environmental awareness of its staff, among others.
The Board also wishes to report that all other weaknesses highlighted by the Inspection Team will be mitigated or rectified in due course. The Group has always placed environmental protection as its top priority and will continue to vigilantly monitor its operations, and implement such other environmental protection measures as may be necessary to stay competitive in the rubber chemicals industry.
BY ORDER OF THE BOARD

Just had a quick look at this Sunsine's article "Contrarian - A sunset look at China Sunsine" at:

https://vpmsingapore.wordpress.com/

Quote: "the sharing economy (Uber, AirBnB etc) will more likely taper the demand of vehicles than to increase vehicle sales."

The author's point is not completely valid. Sale of Sunsine's products does not only depend on vehicle sales.

The demand for cars by individuals will be replaced by UBER/DIDI KUAIDI related cars or driverless electric cars but one can expect the usage of the UBER/DIDI and electric cars to be much higher than individual cars leading to faster replacement of tyres. This trend certainly bodes well for the tyre and rubber chemicals industries.

He wants to sell his model. He labelled himself as fundamental investor and flip flop within 2 weeks.  and labelled

[portuser]

Several points of Victor Portfolio Management's article on China Sunsine are misplaced.

Firstly, the article asserts that "[c]ustomers usually sign mid-long term contracts with certain pricing mechanisms in place that reflect spot as well as the maximum customers will pay, especially if the quantities involved are large..... it would not be unreasonable to assume that Sunsine would offer bulk discounts to retain customers, especially those with long-term relationships".
  
VPM's assumption about Sunsine offering bulk discounts does not square with the disclosure in Sunsine's IPO prospectus (page 114) that there are no long term supply contracts with tyre makers:

"As at the Latest Practicable Date, we do not have a substantial order book. We do not have long term contract with our customers. We typically receive some order forecasts from our major customers of up to one year in advance to enable us to plan our production. However, the confirmed orders are only received on a monthly or quarterly basis. Hence, the confirmed order book of our Group is insignificant. The average timeline for the delivery of products ranges from two to eight weeks."

Sunsine has a diversified customer base of over 1,000 tyre makers and the need for bulk discount is unlikely to arise.

As for the point that "[m]uch has been regurgitated about how Sunsine is less pollutive compared to its peers, but the fact is that the industry is pollutive and to be less pollutive, one simply cannot just install a filter at the tip of chimneys. More tangible efforts need to be applied (ie investing in new production equipment) to effect lower pollution in the supply chain."

Page 17 of Susine's sustainability report reveals that only 0.5% of the harmful hydrogen sulphide gas generated during the production process is discharged through chimneys as 99.5% of the sulpher in the gas is recovered.

VPM also laments that "[c]apacity utilisation rate at full capacity, but margins do not seem to have significant improvement. Most of its plants are near full capacity last year, but the company is incompetent in translating the higher ASP into cash profitability."

Sunsine' anti-oxidant segment operated at only 70% capacity in 2016. Accreditation of its newly-introduced 6PPD is still on-going. Tyre makers are rigorous in their testings. 

Sunsine had also built full infrastructures at its bases to facilitate future capacity additions.

Its steam generation system is also being burdened by high fixed cost -- a boiler which is to serve as the standby for all three operating boilers (to ensure uninterrupted steam supply) has already been installed, and the steam delivery pipeline network to serve future needs of all factories in the Shanxian industrial zone has been built.

Despite shouldering high fixed costs, return on average equity was 18% in 2016. The return would have been even higher, 22%, if the average net cash of RMB 230m were excluded.

[gongkia]

Sunsine just announced a dividend policy of at least 20% net profit after tax.

FY2016 net profit after tax was RMB 222 mil.

NRA estmates FY2017 profit at RMB 255 mil. 20% of the profit is RMB 51 mil. There are 491.7 mil shares including treasury shares sold in May 2017.

This works out to about SGD 2 cents per share for FY2017.

[Bluechipfan]

More good news are in the pipeline. New plant with 10,000t TBBS should start production soon. Expand in capacity and ram up production thus generating higher top line. With sound management the increase in top line should translate to higher bottom line too. I am not sure whether or not the company will further surprise us with special dividend to mark 10 years' listing. Actually I think 20% payout ratio is kind of conservative but I do not profess to know better than the management. Perhaps more cash in hand is prudent in case there is a need to tap fund to expand capacity further. All in all, this is another demonstration by the company that they are willing to share the fruits of growth with shareholders, having just up their dividend by 50% in 2014 (1 cent to 1.5 cent) and now the formalisation of dividend policy. Eps of 10 cents will equal to 2 cents dividend. There may be special dividend too if management deems fit.

[gongkia]

NRA valued Sunsine at $1.245 per share.

Can someone please enlighten us on how this number is derived?

[weijian]

NRA valued Sunsine at $1.245 per share.

Can someone please enlighten us on how this number is derived?

hi gongkia,
it is on pg18 of the NRA brokerage report provided by forumer tiongkokgor

[Young Investor]

NRA valued Sunsine at $1.245 per share.

Can someone please enlighten us on how this number is derived?

hi gongkia,
it is on pg18 of the NRA brokerage report provided by forumer tiongkokgor

Weijian

Page 18 states "to value Sunsine, we discounted its free cash flows to equity by 10% per annum, thus yielding a fair value of $1.245 per share or 12.0x FY 17 F earnings".

The working in figure 25 in page 19 seems complex. Grateful if you can enlighten.

Thank you.

[weijian]

hi Young Investor,
I am afraid that anything that requires more than the handheld calculator to make calculations to derive the value, is out of my circle of competence....

[crubs]

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.

[Bluechipfan]

$1.245 seems lofty on first glance. The TP may or may not realised but the fundamentals of the company are strong and sound. If the company continues growing, it shouldn't have problem hitting $1/-. My plan is to keep all my holding for at least the next 2-3 years. By then, the growth path will be clearer and the 'threat' of huagu and Kemal can also be better assessed. With the dividend policy, I can collect dividend while waiting and even add to my holding should the price corrected too steeply occasionally.