China Sunsine Chemicals Holdings

[portuser]

The technologies for making rubber accelerators are lower than those for insoluble sulphur and 6PPD.
Sunsine has been growing the accelerator capacity, from 32,000 tonnes in 2006 to 70,500 tonnes now, with little unused capacity. Its main customers are tyre companies. Of the world’s 75 largest tyre companies, the top ten and another 32 use Sunsine’s accelerators.
Sunsine’s venture into 6PPD has been fraught with setbacks. Its present factory was sized for 30,000 tonnes of 6PPD, but with equipment installed for the first 15,000 tonnes only. The original plan was to purchase 4ADPA, the intermediary, to make 6PPD; and in-house production of 4ADPA was to start when sales of 6PPD exceed 15,000 tonnes.
Unfortunately, other 6PPD producers refused to sell their 4ADPA to Sunsine, and Sunsine had to scramble to install the 4ADPA equipment to produce its own 4ADPA, and had it tested by tyre companies.
The delay, the fixed cost of the full-scale 4ADPA facility, as well as renowned tyre companies wanting to thoroughly assess the efficacy of the newly-introduced 6PPD, are hurting Sunsine’s profit, for now.
It will be prudent to see whether the trend of rising sales of 6PPD can be sustained in the next few quarters. Profit will improve when unit cost falls on higher sales volume.

[touzi]

Sunsine’s venture into 6PPD has been fraught with setbacks. Its present factory was sized for 30,000 tonnes of 6PPD, but with equipment installed for the first 15,000 tonnes only. The original plan was to purchase 4ADPA, the intermediary, to make 6PPD; and in-house production of 4ADPA was to start when sales of 6PPD exceed 15,000 tonnes.
Unfortunately, other 6PPD producers refused to sell their 4ADPA to Sunsine, and Sunsine had to scramble to install the 4ADPA equipment to produce its own 4ADPA, and had it tested by tyre companies.

Wow, where did you find these information? 佩服 !

[portuser]

Touzi
Sunsine's annual reports, quarterly results announcements and periodic filings to SGX contain enough information for one to make inference.
Www.sun-sine.com provides useful news too.

[portuser]

The article “China sets targets for curbing air pollution” (Straits Times 9 Jan 2014) states that the ministry of environment protection has required various provinces and regions in China to reduce the amount of PM 2.5 particles, one of the main air pollutants, through reducing of use of coal, eliminating outdated industrial capacity as well as better management and control of heating boilers, vehicles and dust.
The target set for the province of Shandong, where China Sunsine is based, is 20 per cent.
The installation of the central boiler by Sunsine to replace the individual small boilers within the Shanxian Chemical Industrial Zone is likely to be the response by the local government and Sunsine to the ministry’s call.

[Sfsh12]

Why is Sunsine going into the power generation business as well? Why are they selling electricity to the grid?

[portuser]

Why is Sunsine going into the power generation business as well? Why are they selling electricity to the grid?

The unit cost of producing steam falls when larger boiler is used. Moreover, the unit cost of producing high-pressure steam is also lower.
Sunsine’s existing boiler is likely to be capable of producing low-pressure steam. High-pressure steam is fast-moving and heat transfer (from steam to the chemical that is being dried) is not optimal. Another consideration is that stronger, more expensive pipes are needed to convey higher-pressure steam.
If high-pressure steam is passed through turbine to produce electricity, the resulting low-pressure steam can be used for drying without wasting the energy.
Central steam production for supply to all factories in the Shanxian Chemical Industrial Zone enables Sunsine to build larger boilers to benefit from economies of scale. Willingness of the Grid to buy the electricity produced during the pressure step-down enables the use of boilers that produce high-pressure steam at a lower unit cost.

[Curiousparty]

Sunsine has climbed from below 20 cents to 26 cents in recent weeks. A lot of people might have missed this boat ...??

(strongly vested)

[CityFarmer]

Since I have been following the company for a while, I should share more with buddies here.

One key observation is on the cash flow. FYI, the company was in negative FCF for the past years (2009-2012), the 2013 is yet to be concluded, and likely still negative. OCFs were healthy, but the Capex were high. The average FCF is around -50 mil RMB per year during the period. The key reason was capacity expansion, which was legitimate, and convincing, at least to me.

Then why the company still holding net cash? My answer is due to increasing debt. The debt has increased from 50mil RMB (2009) to 200mil RMB (2012), and will increase further in 2013, base on the info available now. The negative FCF was funded by debt so far.

By right, the company should enjoy the ROI now, after years of investment, which I am yet to observe it, instead I saw more Capex coming due to "diversification" of business. Those businesses e.g. property and energy are capex intensive businesses.

Comments are welcome. I will serve as devil advocate for the sake of the discussion. I might be wrong.

(not vested)

[portuser]

If its profit growth had continued, Sunsine's 2013 profit would be RMB90m in 2013 with a RMB30m profit in the fourth quarter:
1Q..................RMB11.7m
2Q..................RMB20.5m
3Q..................RMB27.1m
First 9 m..….…..RMB59.2m.
ROI would then have been a respectable 11% on the average equity (of RMB800m) for 2013, despite the low profit in the first half of the year. ROI should be much higher in the current year.
The only capex that has high unused capacity is the 6PPD. Indications so far are that sales are picking up. Despite high capex spending, Sinsine has been paying a one cent dividend consistently for many years.
Steam generation by more efficient boilers will result in cost saving and provide an additional profit stream from sales of steam to other factories. Bank loans taken to fund this project can be pared down rapidly with good cash flows.
The resort facilities are distractions indeed. Judging from the small paid-up capital of RMB20m, the facilities are likely to be of a modest scale and may not cause much of a dent to profit.

[CityFarmer]

The company is worth a serious look, but not yet for my money. The management is pro-investor IMO, with its consistent dividends, even during negative FCF for the past 4 years. Other pro-investor initiative is share-buy-back. The company has more than 26 mil treasury shares. All the money is drawn from reserve, rather than profit. The capacity expansion is also well-executed. BUT I have yet to see sufficient return on the investment.

Let's discuss on your points.

If its profit growth had continued, Sunsine's 2013 profit would be RMB90m in 2013 with a RMB30m profit in the fourth quarter:
1Q..................RMB11.7m
2Q..................RMB20.5m
3Q..................RMB27.1m
First 9 m..….…..RMB59.2m.
ROI would then have been a respectable 11% on the average equity (of RMB800m) for 2013, despite the low profit in the first half of the year. ROI should be much higher in the current year.

A forecast of full year earning as RMB90m seems reasonable. A ROE of 11% is also correct, and ROA is less than 8% (with total asset of RMB1.2b) But is this the return we should be looking at? Let's look at the numbers, including those forecasted ones

NAV is approx RMB780m
Forecasted FY Profit is RMB90m
Debt is RMB205m (base on Q3FY13 report), with interest of 6-7%.

The cost of capital is close to 7%. Should ROA of 7-8% is the seeking ROI? I will say not enough. May be at least ROI of 2x of cost of capital i.e. around 12-13% base on asset, and leverage up few % with debt, should be reasonable, IMO.

We shouldn't ignore the on-going capex requirement, which is RMB57m (base on 9 month in Q3FY13 report).

Can the company achieve it? May be.

The only capex that has high unused capacity is the 6PPD. Indications so far are that sales are picking up. Despite high capex spending, Sinsine has been paying a one cent dividend consistently for many years.
Steam generation by more efficient boilers will result in cost saving and provide an additional profit stream from sales of steam to other factories. Bank loans taken to fund this project can be pared down rapidly with good cash flows.
The resort facilities are distractions indeed. Judging from the small paid-up capital of RMB20m, the facilities are likely to be of a modest scale and may not cause much of a dent to profit.

6PPD is a good product, another good initiative from the management. But relying on it in near term is too far a shot. Rubber accelerator business should be the key in near term.

I will not bet on your steam generation story, since energy business is always long ROI in general. This case might be an exception, but I will rather stick to common sense.

I will also not bet on story of RMB20m is sufficient for the resort business, and no further capital needed. Anyway, the company is just having surplus FCF this FY, the only feasible way to get money is more debt, IMO.

(not vested)