China Sunsine Chemicals Holdings

[Curiousparty]

Is there a way to better qualify the "capital intensiveness" of a company?

chemical industry is generally capital intensive and printing is also capital intensive too. But which of the two are more capital intensive?

What metrics can we used?
e.g. revenue earned per $ of PPP assets?
or net profit per $ of PPP assets?
EBITDA margin?

tks.

Sunsine did well in 1Q 2014 -- RMB 52m cash flow before working capital changes, and RMB 88m operating cash flow. It spent RMB 77m on PPE, presumably on the project to provide steam to all factories in the Shaxian Chemical Industrial Zone.

Cash holdings were RMB 145m as at 31 Mar 2014, up from RMB 101m three months ago.

The numbers are right, but let me elaborate.

OCF was 88m, while capex 77m, thus FCF was 11m. The company need to pay the bank int of 3.5m, so left 7.5m, with equity of 836m. A absolute ROE of <1%, and annualized <4%.

Rubber accelerators provide four-fifths of Sunsine’s revenue, and their ASP rebounded in 1Q 2014 to RMB 19,300, RMB 1,100 higher than the preceding quarter, after two years of being held down to gain market share.

Suspension of some accelerator factories has caused the price increase. Sunsine has stated in its 1Q 2014 results announcement that:

As the China government is placing more emphasis on environmental protection, some medium- and small-sized players in the rubber chemicals industry were forced to suspend their production. Further, due to the China government’s comprehensive measures on environmental protection, a few large-sized players also suspended their production. As such, the supply of accelerators in the market is decreasing. In order to maintain their productions to meet higher demand of tires, the tire makers placed more orders to purchase accelerators. The Group anticipates that the sales volume of accelerator products will continue to increase.

It is a good news. It shows the company process is well-managed (more environmental friendly) among its peers. Next question is how much it helps on sales? We saw only 5% increase in ASP in 1Q. May be we will see more in next few quarters.

The only outstanding capex is the steam generation project. Stronger cash flows in the subsequent quarters (as business in the first quarter is weaker because of lunar new year) may be sufficient for the remaining expenditure and working capitals.

The project is in a capital intensive business. High capex should be expected in due course, IMO.

Anyway, best wish to those vested, I might be wrong.

(not vested)

[portuser]

The numbers are right, but let me elaborate.

OCF was 88m, while capex 77m, thus FCF was 11m. The company need to pay the bank int of 3.5m, so left 7.5m, with equity of 836m. A absolute ROE of <1%, and annualized <4%.


It is a good news. It shows the company process is well-managed (more environmental friendly) among its peers. Next question is how much it helps on sales? We saw only 5% increase in ASP in 1Q. May be we will see more in next few quarters.


The project is in a capital intensive business. High capex should be expected in due course, IMO.

Anyway, best wish to those vested, I might be wrong.

(not vested)

Price revision
The average selling price of accelerators was as follows:
1st 9 months of 2011 (before
Price cut to grow market share)….…..RMB 21,150
4Q 2011……………………………………………..RMB 19,600
2012……………………………………………………RMB 18,610
2013……………………………………………………RMB 18,480
4Q 2013........................................RMB 18,230
1Q 2014………………………………………………RMB 19,330

Sunsine was likely to have observed customs and revised prices after lunar new year (31 Jan 2014). The average revised selling price is therefore likely to be higher than RMB 19,330, which is the weighted average of the old price and revised price.

Profit in 2Q 2014 will be much higher because the revised price will take effect for the whole quarter and 1Q 2014 accelerator sales volume was 2,000 tonnes lower than normal (because of lunar new year).

Suspension of some accelerator factories must have resulted in shortage of supply, enabling Sunsine to revise prices after a two-year spell.

Capex
The new production base in Weifang cost RMB 100m and was built for an ultimate output of 50,000 tonnes of accelerators. The base is now producing 14,000 tonnes only and has room to install more production lines to take advantage of supply shortage now. As common infrastructure such as warehouse, waste treatment facilities had already been paid for earlier, installation a new line does not cost much.

The 6PPD factory was built with a budget of RMB 200m for two phases, and the bulk of the cost had been paid for the first phase. When demand picks up, the cost of implementing the second phase will not be very much.

The construction of the new insoluble sulphur factory was completed by the end of 2013, and fully paid for.

The bulk of the construction cost of the central steam supply system has also been paid for.

Return on equity
FCF/equity has the drawback of not acknowledging the future benefits of PPE.

In any case, higher profit and lower capex in each of the remaining three quarters will see higher FCF.

Profit/equity, a common profitability measure, at 2.7% was not low in 1Q 2014. It is likely to be much higher than 10.8% (4 times 2.7%) for the whole year, as 1Q is the weakest quarter of the four.

Profit/total assets, which you prefer, at 1.73% in 1Q 2014, is also not low. It is likely to be much higher than 6.9% (4 times 1.72%) for the whole year for same reason just mentioned.

[CityFarmer]

Price revision
The average selling price of accelerators was as follows:
1st 9 months of 2011 (before
Price cut to grow market share)….…..RMB 21,150
4Q 2011……………………………………………..RMB 19,600
2012……………………………………………………RMB 18,610
2013……………………………………………………RMB 18,480
4Q 2013........................................RMB 18,230
1Q 2014………………………………………………RMB 19,330

Sunsine was likely to have observed customs and revised prices after lunar new year (31 Jan 2014). The average revised selling price is therefore likely to be higher than RMB 19,330, which is the weighted average of the old price and revised price.

Profit in 2Q 2014 will be much higher because the revised price will take effect for the whole quarter and 1Q 2014 accelerator sales volume was 2,000 tonnes lower than normal (because of lunar new year).

Suspension of some accelerator factories must have resulted in shortage of supply, enabling Sunsine to revise prices after a two-year spell.

I agree with your analysis. The key is on the amount of increment to make a difference. FYI, the ASP of accelerator was more than 26,000 RMB in 2008.

Capex
The new production base in Weifang cost RMB 100m and was built for an ultimate output of 50,000 tonnes of accelerators. The base is now producing 14,000 tonnes only and has room to install more production lines to take advantage of supply shortage now. As common infrastructure such as warehouse, waste treatment facilities had already been paid for earlier, installation a new line does not cost much.

The 6PPD factory was built with a budget of RMB 200m for two phases, and the bulk of the cost had been paid for the first phase. When demand picks up, the cost of implementing the second phase will not be very much.

The construction of the new insoluble sulphur factory was completed by the end of 2013, and fully paid for.

The bulk of the construction cost of the central steam supply system has also been paid for.

Base on indicators, especially the asset turnover, there is no excess cap in asset utilization. I reckon the production line is the major capex for cap expansion, rather the fixed capex of lands/factories.

Don't forget the maintainance capex, which is usually high for chemical production factories.

(not vested)

[portuser]

I agree with your analysis. The key is on the amount of increment to make a difference. FYI, the ASP of accelerator was more than 26,000 RMB in 2008.

Base on indicators, especially the asset turnover, there is no excess cap in asset utilization. I reckon the production line is the major capex for cap expansion, rather the fixed capex of lands/factories.

Don't forget the maintainance capex, which is usually high for chemical production factories.

(not vested)

During the summer Olympic in Aug 2008, industrial productions near Beijing were halted or scaled down to keep the air clean. Accelerator prices surged beyond RMB 30,000 as a result. The RMB 26,000 average price recorded in 2008 was therefore unusual.

It will be good enough if ASP recovers to where it was before the drastic price cut in 4Q 2011.

Last year, Sunsine sold 72,700 tonnes of accelerators at ASP of RMB 18,480 per tonne, to achieve a pre-tax profit of RMB 118m.

If ASP were RMB 21,150 (the 9-monh ASP before the price cut in 4Q 2011), pre-tax profit would have been a staggering RMB 312m.

The 6PPD factory is already fitted with equipment to produce 20,000 tonnes but 2013 output was several thousand tonnes only.

Installation of equipment to produce 10,000 tonnes of IS was completed by the end of 2013 at the new factory, and commercial production is scheduled to start in 2Q 2014.

Proper waste treatment facilities (tall chimney and waste water treatment works) sized for an ultimate output of 50,000 tonnes of accelerators at Weifang are costly. Many accelerator factories therefore skip proper waste treatment to hold down their production costs. Recent intervention by Government has levelled the playing field.

[Curiousparty]

If pre-tax profit turns out to be $300mil RMB, the current market price of sunsine is highly unjustified!

Shouldn't share price be doubled at least?

I agree with your analysis. The key is on the amount of increment to make a difference. FYI, the ASP of accelerator was more than 26,000 RMB in 2008.

Base on indicators, especially the asset turnover, there is no excess cap in asset utilization. I reckon the production line is the major capex for cap expansion, rather the fixed capex of lands/factories.

Don't forget the maintainance capex, which is usually high for chemical production factories.

(not vested)

During the summer Olympic in Aug 2008, industrial productions near Beijing were halted or scaled down to keep the air clean. Accelerator prices surged beyond RMB 30,000 as a result. The RMB 26,000 average price recorded in 2008 was therefore unusual.

It will be good enough if ASP recovers to where it was before the drastic price cut in 4Q 2011.

Last year, Sunsine sold 72,700 tonnes of accelerators at ASP of RMB 18,480 per tonne, to achieve a pre-tax profit of RMB 118m.

If ASP were RMB 21,150 (the 9-monh ASP before the price cut in 4Q 2011), pre-tax profit would have been a staggering RMB 312m.

The 6PPD factory is already fitted with equipment to produce 20,000 tonnes but 2013 output was several thousand tonnes only.

Installation of equipment to produce 10,000 tonnes of IS was completed by the end of 2013 at the new factory, and commercial production is scheduled to start in 2Q 2014.

Proper waste treatment facilities (tall chimney and waste water treatment works) sized for an ultimate output of 50,000 tonnes of accelerators at Weifang are costly. Many accelerator factories therefore skip proper waste treatment to hold down their production costs. Recent intervention by Government has levelled the playing field.

[SLC81]

Interesting. Does not seem like the rest of S-Chip. Any reasons why the company names as well as main product is named Sunsine and not SunShine ? the letter "S" is missing for a reason ?

[portuser]

Interesting. Does not seem like the rest of S-Chip. Any reasons why the company names as well as main product is named Sunsine and not SunShine ? the letter "S" is missing for a reason ?

"Sunsine Chemical" is "尚舜化工" in English.

[donmihaihai]

GPM on the following periods.

The average selling price of accelerators was as follows:
1st 9 months of 2011 (before
Price cut to grow market share)….…..RMB 21,150 - 25.2%
4Q 2011……………………………………………..RMB 19,600 - 20.54%
2012……………………………………………………RMB 18,610 - 17.2%
2013……………………………………………………RMB 18,480 - 18.16%
4Q 2013........................................RMB 18,230 - 19.83%
1Q 2014………………………………………………RMB 19,330 - 19.19%

For a price taker company in the chemical industry, ASP is just half of the story. GPM depends on input raw materials and utilisation as well.

[Curiousparty]

Mr Market does not seem to buy the idea that sunsine's profits for upcoming quarters will spike. There are already so many sellers rushing to sell at current prices...haha

[Sfsh12]

Based on the 1Q2014 announcement by Sunsine, that some competitor had suspended their operations due to Government action on environmental protection, resulting in a decrease in supply of rubber accelerators, Sunsine may not be a price taker in the current situation. The ability to raise ASP of accelerator in 1Q also indicates that Sunsine has some pricing power.

Are these competitors able to make a come back? Is it a simple matter of installing new environmentally friendly equipment and reconfiguring their existing production lines? At what cost and is re-accreditation by tyre manufacturers required?

GPM on the following periods.

The average selling price of accelerators was as follows:
1st 9 months of 2011 (before
Price cut to grow market share)….…..RMB 21,150 - 25.2%
4Q 2011……………………………………………..RMB 19,600 - 20.54%
2012……………………………………………………RMB 18,610 - 17.2%
2013……………………………………………………RMB 18,480 - 18.16%
4Q 2013........................................RMB 18,230 - 19.83%
1Q 2014………………………………………………RMB 19,330 - 19.19%

For a price taker company in the chemical industry, ASP is just half of the story. GPM depends on input raw materials and utilisation as well.