Sunsine’s 1H15 net profit of RMB 94.5m (+14% yoy) formed 50% of our FY15F earnings estimate. Its revenue of RMB 929.4m (-4% yoy), which made up 49% of our full year revenue forecast, came on the back of record sales volumes (yes, even higher than the last 5 quarters) but lower ASPs. We suspect Sunsine had undercut competitors’ pricing in a bid to gain an even greater market share for its products. 2Q15 gross margin, was squeezed as a result. While FY15F is a much more challenging year for Sunsine, compared to its windfall year in FY14, we believe it is still on track to achieve about RMB 190m in net profit for the year. The maximum full year profit Sunsine ever made before FY14 (RMB 220m) was only RMB 115m.
Now a net cash company
China Sunsine turned net cash this quarter after paying down RMB 70m of debt. Despite also paying off (RMB 31.5m) higher dividends during the quarter, Sunsine’s cash balance remained at a very healthy level of RMB 223.4m, just off its high of RMB 234.2m in 1Q15.
Better positioned than competitors in the challenging industry ahead
The U.S. Department of Commerce has officially began the imposition of punitive duties on certain Chinese tire makers in July amid a slow down in Chinese automobile sales in 1H15. This adds on to the long-term problem of overcapacity in the Chinese tire-making industry. While this may have adverse effects for many rubber chemical suppliers, we think Sunsine will emerge as a key long-term beneficiary. With already a dominant market share, further flexing of Sunsine’s muscles through price reductions should suffocate weak players that are already gasping for air in this tough industry (not forgetting tougher environmental regulations as well). We will not be surprised if Sunsine’s already dominant market share in RAs increases even more going forward, without sacrificing too much in terms of profits.
Sunsine is trading cheaply at only 4x FY15F P/E and 0.6x FY15F P/B. Yet since IPO in 2007, Sunsine had almost tripled its earnings, doubled its book value, became the world’s largest RA producer and the largest Insoluble Sulphur producer in the China, with a still growing market share. In view of its deep value, we maintain our BUY rating with an unchanged TP of S$0.59, still pegged at 7x FY15F EPS (historical average). (Read Report)
Source : KGI Fraser Research