China Sunsine Chemical (CSSC): A Safe Proxy for China&rsquo s Recovery with Strong Yield

 

UOB Kay Hian (UOBKH) has lowered its earnings expectations for rubber chemicals producer China Sunsine Chemical : QES +1.27% to account for expected price adjustments arising from greater competition ahead.

 

Upon cutting its FY2023 earnings estimates by 34 per cent, 33 per cent for FY2024, and 27 per cent for FY2025, the research house has derived a reduced target price of S$0.46 compared with S$0.575 previously.

 

This comes after tweaking FY2023 to FY2025 gross margin assumptions to a range of 23 to 24 per cent, down from 29 per cent earlier, said UOBKH in a report on Thursday (Dec 14).

 

The brokerage maintains its &ldquo buy&rdquo call on the stock.

 

Its revised price target is based on a price-to-earnings multiple of six times FY2024 estimates, which is in line with the stock&rsquo s long-term average mean. 

 

Commenting on China Sunsine&rsquo s third-quarter financial updates released in November, UOBKH analysts pointed out that lower average selling prices (ASPs) and the group&rsquo s flexible pricing strategy led to lower overall sales despite a record-high quarterly sales volume.

 

&ldquo While domestic vehicle sales continue to improve, in the face of stronger competition, we have lowered earnings expectations for FY2023 to FY2025.&rdquo

 

UOBKH nonetheless believes China Sunsine could potentially benefit from the higher ASPs of rubber accelerators, which are the main earnings driver for the group.

 

Given how ASPs of rubber accelerators have risen by about 36.7 per cent from end-Q2 FY2023 to end-Q3 FY2023, the analysts foresee improved Q4 FY2023 margins for the group.

 

This is because China Sunsine adopts a quarterly pricing model for its major customers, resulting in a pricing time-lag in raw-material price changes by about three months.

 

Higher vehicle sales as reflected in the group&rsquo s latest Q3 financials also point to potential improvement in China Sunsine&rsquo s capacity utilisation rate, they added.

 

&ldquo Together with its flexible pricing strategy and capacity expansion plans, China Sunsine is likely to remain competitive against its peers.&rdquo

 

CGS-CIMB analysts Kenneth Tan and Ong Khang Chuen have upgraded their call on China Sunsine Chemicals from " hold" to " add" , given how the chemicals player is seen to enjoy stronger demand ahead.

 

At a recent visit to the company' s plants, the analysts observed that it has new production lines, including those based on in-house technology. Key machinery has already been installed and is undergoing testing, with commercial production likely in early next year.

 

Citing the management, the analysts note in their Sept 21 report that China Sunsine can reduce annual production costs by RMB30 million when the new mercaptobenzothiazole line is in full ramp-up.

 

Over the last two months, the company has been seeing stronger demand for its products from export markets such as Thailand and Vietnam.

 

" Management reiterated that while competition remains intense, it is not overly concerned given Sunsine&rsquo s dominant market leadership in the global rubber chemical industry," state Tan and Ong.

 

Citing data from sci99, the analysts note that average selling prices of rubber accelerators surged by 21% this month versus what could be fetched in August, due to higher raw material costs that have been passed on to customers, as well as recovery in demand from tyre makers in China replenishing inventory.

 

" We are now more confident in Sunsine&rsquo s cost pass-through ability, and believe it could record hoh improvement in 2H23F gross profit margin to 24.6%, versus 23.8% fetched in the preceding 1HFY2023,"

 

" We believe our FY24 and 25F gross profit margin forecasts of 24.6% and 25.0% are sustainable given Sunsine&rsquo s historical 10-year average gross profit margin of around 27%," they add.

 

Tan and Ong point out that China Sunsine, now trading at 0.56x price to book, is at a valuation near the depths seen during the pandemic.

 

With higher earnings per share assumptions of 9% and 10% for the current FY2023 and coming FY2024, they have come up with a new target price of 47 cents, up from 42 cents previously, is based on 0.6x price to book.

 

Further re-rating catalsyts, according to the analysts, will come from government stimulus promoting big-ticket spending in China.

 

Downside risks, on the other hand, include prolonged competition and a spike in input costs leading to margin erosion.

 

CGS-CIMB upgraded its call on rubber chemicals producer China Sunsine Chemical to &ldquo add&rdquo from &ldquo hold&rdquo , given the recent increase in the average selling prices (ASPs) of rubber accelerators, which the brokerage thinks could point to better H2 financials for the company.

 

In a report on Thursday (Sep 21), its analysts noted how September&rsquo s 21 per cent month-on-month growth in ASPs was largely driven by rising raw material costs, increased utilisation from domestic tyre producers and healthy export volumes in recent months.

 

Therefore, CGS-CIMB is now more confident in the group&rsquo s cost pass-through ability. It projects China Sunsine to achieve half-on-half improvement in H2 gross profit margins (GPM) to 24.6 per cent, up from 23.8 per cent in H1.

 

The recent rise in rubber accelerator prices could bode well for China Sunsine&rsquo s Q4 FY2024 ASPs and profit spreads, said its analysts, as the group typically adjusts its pricing on a quarterly basis for its major customers.

 

CGS-CIMB viewed its FY2024 GPM forecast of 24.6 per cent, and 25 per cent for FY2025 as &ldquo sustainable&rdquo , given the group&rsquo s historical 10-year GPM average of 27 per cent.

 

The research house also raised its FY2023 to FY2024 earnings-per-share estimates by between 9 per cent and 10 per cent on higher ASP and margin assumptions, to result in a higher target price of S$0.47, up from S$0.42 previously.

 

This target remains 60 per cent of the research house&rsquo s book value estimate, which is one standard deviation below the stock&rsquo s five-year historical mean.

 

In CGS-CIMB&rsquo s opinion, China Sunsine&rsquo s current valuations are &ldquo undemanding&rdquo as the stock now trades near its Covid-trough valuation of 56 per cent of book value.

China Sunsine is expecting to report a &ldquo material increase&rdquo in its consolidated net profit for the 1HFY2022 ended June.

 

The expected growth in profit is attributable to the higher average selling price (ASP) on the back of the increase in prices of global commodities.

 

The group was able to pass on the increase to its customers, which led to the higher revenue and net profit.

 

China Sunsine will release its results on Aug 11.