China Sunsine Chemicals Holdings

[sunview]

China Sunsine: ($0.42) Positive vibes from China plant visit; expect more follow-up coverage

Earlier this week, China Sunsine organised a site visit to three of its production facilities in Shandong, China.

The tour began at Sunsine’s headquarters in Shanxian in inland Shandong, then to a smaller facility in nearby Dingtao, before concluding at the Weifang facility. The latter is located in northeast Shandong, and mainly produces for export (~40% of group sales) via Qingdao port to the east.

Attendees comprised a mix of private investors, five analysts and two journalists.

Reactions were mostly positive, as management showcased new add-ons to cut costs and boost production, particularly in the antioxidant and insoluble sulphur product categories, which should provide another leg up for the group’s longer term growth.

Key takeaways:
- At Shanxian, Phase 1 of the new Guangshun heating plant will kick off operations next month. Constructed at a cost of ~Rmb115m, the plant will provide steam and electricity mainly for Sunsine’s use, and help the group achieve an estimated Rmb40m of cost savings annually.
- In addition, Sunsine has achieved ~50% utilization for Phase 1 of its 6PPD antioxidant line (15k mt/yr output). Seeing strong product demand, management will bring forward its production target by a year, and is on track to commence Phase 2 production (15k mt) by early 2015 once the current test trials are completed.
- At Weifang, the plant is prepping new lines that would potentially add capacity for DM accelerator (8k mt) and insoluble sulphur (10k mt).

Meanwhile, we observed that Sunsine’s existing lines were mostly running at full capacity, and even the warehouses were low on stocks of finished products, reflective of the tight supply for rubber chemical products.

Recall, a number of Sunsine’s peers were suspended or forced to shut down, in the wake of a government anti-pollution clamp down, particuarly in the Beijing-Tianjin-Hebei (BTH) hub.

Management believes the supply-demand conditions will not normalize soon, as the BTH region supports an increasingly dense urban population and will likely seek to further reduce the presence of heavy industries over the longer term.

Fortunately for Sunsine, its facilities are located in designated industrial zones, and the group is now reaping the rewards of its past investments in environmental protection equipment – representing roughly a third of capex spend.

Such industry developments have caught the attention of the China analysts, resulting in a chorus of bullish calls being made on Sunsine’s closest peer, Shenzhen-listed Shandong Yanggu Huatai (YGHT), which is also viewed as a beneficiary.

Yet, a language barrier has resulted in Sunsine being grossly overlooked by the street and local investors.

Sunsine shares trade at just 3.9x annualized 2Q14 P/E - an undeserved 90% discount to YGHT’s 47x forward P/E.

We do not rule out room for substantial price discovery once investor awareness improves, with analysts and the media likely to pick up coverage on Sunsine soon.

Assuming an upward re-rating to the average 7x P/E for the Singapore-listed chemicals manufacturers, Sunsine would trade at $0.75 (~80% upside from current levels).

(from MB-KE)

[Jacmar]

Of course it is positive vibe. This kind of visits are staged and probably an all expenses paid by them for the visit. I remember in those WS days where Curtis went for a plant visit to UFC(United fools Club) along with other analyst and came back with a very upbeat report too. Look at where UFC is now. I am not saying that this is the same but do take this kind of reports with a pinch of salt. I have personally seen with my eyes how this kind of stage visits are done. Gives me goose bumps.

[CityFarmer]

Of course it is positive vibe. This kind of visits are staged and probably an all expenses paid by them for the visit. I remember in those WS days where Curtis went for a plant visit to UFC(United fools Club) along with other analyst and came back with a very upbeat report too. Look at where UFC is now. I am not saying that this is the same but do take this kind of reports with a pinch of salt. I have personally seen with my eyes how this kind of stage visits are done. Gives me goose bumps.

I agree with Jacmar.

We should focus on the additional information/facts obtained during the factory visit, rather on the views/opinions presented by the participants.

(non vested)

[portuser]

“The company is a right company in management and business model, but in a wrong sector, with depressing ASP of its key product, the accelerator, without a significant increase in market share.

ASP is a key indicator, and has been observed closely. Will the current ASP up-trend sufficient for buy decision? IMO, the up-trend might not be sustainable. The up-trend isn't due to market forces, but a temporary situation due to policy.
In short, the over-capacity issue still around, but temporary depressed, and will come back in near term, thus the decision to hold/monitor is still a valid conclusion.”


Moderator
I do not agree with your points in quote.

Sunsine’s market share in the rubber accelerator sector has increased. 2013 sales volume of 72,710 tonnes was 134% higher than the 31,036 tonnes in 2007. In the first half of 2014, 37,596 tonnes of accelerators were sold, 7% higher than the 35,020 tonnes in the corresponding period the year before.

16% of world’s accelerator output belongs to Sunsine.

Utilisation is very high for the existing 75,000-tonne accelerator capacity.

Based on the Maybank-KE report, Sunsine plans to add another 8,000 tonnes of accelerators, boosting capacity to 83,000 tonnes. By then, Sunsine will be capable of producing 18% of world’s accelerator output.

Indications are that 3Q ASP is higher than 2Q. If 2Q ASP can hold in the future, it is good enough already because in that quarter, profit was at a record high of RMB 60m.

2Q 2014 accelerator ASP of RMB 20,400 was in fact lower than RMB 21,200 in 3Q 2011, when aniline price was lower and enforcement against pollution was lax.

The government is unlikely to back pedal and go easy on pollution control.

Both money and expertise are needed for capacities under suspension to get back to business. Small factories are unlikely to resume. The playing field will be levelled as new entrants have to incur pollution control cost. Being the largest, Sunsine enjoys economies of scale and its unit production cost is set to decrease when it produces its own electricity.

[Damien]

Anyone knows more about the substantial shareholder of China Sunsine? Success More Group. 63.08%

[CityFarmer]

“The company is a right company in management and business model, but in a wrong sector, with depressing ASP of its key product, the accelerator, without a significant increase in market share.

ASP is a key indicator, and has been observed closely. Will the current ASP up-trend sufficient for buy decision? IMO, the up-trend might not be sustainable. The up-trend isn't due to market forces, but a temporary situation due to policy.
In short, the over-capacity issue still around, but temporary depressed, and will come back in near term, thus the decision to hold/monitor is still a valid conclusion.”


Moderator
I do not agree with your points in quote.

Sunsine’s market share in the rubber accelerator sector has increased. 2013 sales volume of 72,710 tonnes was 134% higher than the 31,036 tonnes in 2007. In the first half of 2014, 37,596 tonnes of accelerators were sold, 7% higher than the 35,020 tonnes in the corresponding period the year before.

16% of world’s accelerator output belongs to Sunsine.

Utilisation is very high for the existing 75,000-tonne accelerator capacity.

Based on the Maybank-KE report, Sunsine plans to add another 8,000 tonnes of accelerators, boosting capacity to 83,000 tonnes. By then, Sunsine will be capable of producing 18% of world’s accelerator output.

I like disagreement, and more specifically the debate for the clearer.

Base on info from www.rubberstudy.com, which also referred by the company, the market share captured by lowering ASP during FY2012-13 was pathetic, and market share remained around 15% worldwide, or 21% within AP. Yes, the market share increased to 16.5% worldwide or 23.5% within AP due to the pollution control recently. I do believe the market share will increase further in next quarter, but not so sure beyond then.

Will the market captured or ASP in FY2014 sustainable? May be this is the major difference in our view.

Indications are that 3Q ASP is higher than 2Q. If 2Q ASP can hold in the future, it is good enough already because in that quarter, profit was at a record high of RMB 60m.

2Q 2014 accelerator ASP of RMB 20,400 was in fact lower than RMB 21,200 in 3Q 2011, when aniline price was lower and enforcement against pollution was lax.

The government is unlikely to back pedal and go easy on pollution control.

Both money and expertise are needed for capacities under suspension to get back to business. Small factories are unlikely to resume. The playing field will be levelled as new entrants have to incur pollution control cost. Being the largest, Sunsine enjoys economies of scale and its unit production cost is set to decrease when it produces its own electricity.

Firstly, pollution control is important, but employment is also equally important. Next, the pollution control technology isn't monopolized by the company. Lastly, it will take time for other companies to catch-up for survival, but the timeline should be in months, rather than years to catch-up. My guesstimate is around 2 quarters.

That may be the 2nd major difference in our view.

(not vested)

[portuser]

“Base on info from http://www.rubberstudy.com, which also referred by the company, the market share captured by lowering ASP during FY2012-13 was pathetic, and market share remained around 15% worldwide, or 21% within AP. Yes, the market share increased to 16.5% worldwide or 23.5% within AP due to the pollution control recently. I do believe the market share will increase further in next quarter, but no so sure beyond then.
Will the market captured or ASP in FY2014 sustainable?”


Moderator
The price cut in 4Q 2011 had worked and resulted in accelerator sales volume surging from 50,148 tonnes in 2011 to 72,710 tonnes in 2013.

With 1H 2014 sales volume hitting 37,596 tonnes, Sunsine’s 75,000-tonne capacity must be under stress. The company may be adding new capacity, as reported by Maybank-KE.

The ASP trend in post 421 suggests that 2Q 14 ASP was not on the high side. Unit production cost is the key in any competition. There are reasons to believe that Sunsine has cost advantage.

[budgetier]

China Sunsine: ($0.42) Positive vibes from China plant visit; expect more follow-up coverage

Earlier this week, China Sunsine organised a site visit to three of its production facilities in Shandong, China.

The tour began at Sunsine’s headquarters in Shanxian in inland Shandong, then to a smaller facility in nearby Dingtao, before concluding at the Weifang facility. The latter is located in northeast Shandong, and mainly produces for export (~40% of group sales) via Qingdao port to the east.

Attendees comprised a mix of private investors, five analysts and two journalists.

Reactions were mostly positive, as management showcased new add-ons to cut costs and boost production, particularly in the antioxidant and insoluble sulphur product categories, which should provide another leg up for the group’s longer term growth.

Key takeaways:
- At Shanxian, Phase 1 of the new Guangshun heating plant will kick off operations next month. Constructed at a cost of ~Rmb115m, the plant will provide steam and electricity mainly for Sunsine’s use, and help the group achieve an estimated Rmb40m of cost savings annually.
- In addition, Sunsine has achieved ~50% utilization for Phase 1 of its 6PPD antioxidant line (15k mt/yr output). Seeing strong product demand, management will bring forward its production target by a year, and is on track to commence Phase 2 production (15k mt) by early 2015 once the current test trials are completed.
- At Weifang, the plant is prepping new lines that would potentially add capacity for DM accelerator (8k mt) and insoluble sulphur (10k mt).

Meanwhile, we observed that Sunsine’s existing lines were mostly running at full capacity, and even the warehouses were low on stocks of finished products, reflective of the tight supply for rubber chemical products.

Recall, a number of Sunsine’s peers were suspended or forced to shut down, in the wake of a government anti-pollution clamp down, particuarly in the Beijing-Tianjin-Hebei (BTH) hub.

Management believes the supply-demand conditions will not normalize soon, as the BTH region supports an increasingly dense urban population and will likely seek to further reduce the presence of heavy industries over the longer term.

Fortunately for Sunsine, its facilities are located in designated industrial zones, and the group is now reaping the rewards of its past investments in environmental protection equipment – representing roughly a third of capex spend.

Such industry developments have caught the attention of the China analysts, resulting in a chorus of bullish calls being made on Sunsine’s closest peer, Shenzhen-listed Shandong Yanggu Huatai (YGHT), which is also viewed as a beneficiary.

Yet, a language barrier has resulted in Sunsine being grossly overlooked by the street and local investors.

Sunsine shares trade at just 3.9x annualized 2Q14 P/E - an undeserved 90% discount to YGHT’s 47x forward P/E.

We do not rule out room for substantial price discovery once investor awareness improves, with analysts and the media likely to pick up coverage on Sunsine soon.

Assuming an upward re-rating to the average 7x P/E for the Singapore-listed chemicals manufacturers, Sunsine would trade at $0.75 (~80% upside from current levels).

(from MB-KE)

Hi, thank you for sharing your observations of the field trip. Feeling assured by the overall positive findings.

Just one minor clarification. Under key takeaways, it was stated that "at Weifang, the plant is prepping new lines that would potentially add capacity for DM accelerator and insoluble sulphur." I recall somewhere in past Sunsine's reports that the company's current facility for insoluble sulphur is at Dingtao. Am I right? Or, is the sentence referring to a new capacity at Weifang, additional to Dingtao?

[specuvestor]

Hi Portuser

Just a suggestion: CityFarmer is voicing his views as an investor not Moderator. Would be better to address him as CityFarmer or just CF

Else it might give a mistaken perception that the Moderator is meddling for those who are not familiar with this forum's dynamics.

My 2cts

[sunview]

.....

- At Weifang, the plant is prepping new lines that would potentially add capacity for DM accelerator (8k mt) and insoluble sulphur (10k mt).

.....

Hi, thank you for sharing your observations of the field trip. Feeling assured by the overall positive findings.

Just one minor clarification. Under key takeaways, it was stated that "at Weifang, the plant is prepping new lines that would potentially add capacity for DM accelerator and insoluble sulphur." I recall somewhere in past Sunsine's reports that the company's current facility for insoluble sulphur is at Dingtao. Am I right? Or, is the sentence referring to a new capacity at Weifang, additional to Dingtao?

Haha, the article is from May Bank-KE, not from me.

Also read this from CIMB report today:

"1.6 Key takeaways from plant visit on 15-18 Sep 2014
We visited China Sunsine’s 3 key production facilities in Shan County, Dingtao County and Weifang City in the Shandong province as well as the recently-completed Guangshun heating plant in Shan County.

Production facilities are currently running at full capacity - We understand that, as of 2Q14 and 3Q14, China Sunsine’s production facilities are running at full capacity due to the recent supply shortage of rubber additives.

We take comfort in the fact that China Sunsine has proper wastewater treatment in place - The Shan County production facility has in-house wastewater treatment capabilities that reduce COD (Chemical Oxygen Demand, a total measure of all chemicals in the water) to <60mg/L (Grade 1B standard) before it is discharged into rivers. The Weifang facility pre-treats wastewater to <2000mg/L and has commissioned a third-party company, to further treat the wastewater to the required standard. The Dingtao facility does not generate wastewater during its production of insoluble sulphur.

The newly-completed Guangshun heating plant is in trial production - The group has invested c.Rmb150m in the Guangshun heating plant. The investment is expected to have a payback period of 7 years and Sunsine will benefit from the reduction of electricity cost. We estimate that, once in full operation, the Guangshun heating plant will save the group Rmb25m-30m in electricity expenses per annum.

The group still has land space reserved for future expansion - For its Shan County plant, the group has a long-term target to increase its production capacity of 6PPD (anti-oxidant) from the current 30k tonnes p.a. to 60k tonnes p.a. The Dingtao plant could potentially increase its production capacity of insoluble sulphur from the current 10k tonnes p.a. to 60k tonnes p.a. The Weifang plant also has spare land space that could accommodate an additional 20k production capacity of rubber additives. Management estimates that Sunsine comprises 15-16% of the total global production capacity for rubber accelerators."