CHINA SUNSINE: Maintain BUY, with a possible privatization/takeover end game in mind

Excerpts from analyst's report

KGI Fraser analyst: Renfred Tay

♦ When it is this cheap, results just really do not matter

Sunsine is the world's largest producer of rubber accelerators, and its customers who are tyre manufacturers include Bridgestone, Michelin, Goodyear, Continental, Pirelli and Sumitomo. NextInsight file photo.Sunsine reported results that were better than expected. Its 9M15 net profit of RMB 150m (-10% yoy) and revenue of RMB 1,405m (-10% yoy) formed 79% and 74% of our FY15F forecasts, respectively. This came on the back of its 3rd highest sales volume record (2Q15 and 2Q14 volumes were higher), on higher qoq ASPs and some FX gains. 3Q15 gross margin grew qoq to 26.8% from 24.3%, which is very commendable given the tough economic conditions seen in 3Q15 (investors should really ignore the abnormal 31% gross margin last year).  With this encouraging set of results, Sunsine looks on course to book its second highest annual profit on record. FY15F has been a much more challenging year for Sunsine, with the trickling back of supplies back into the market, and the economic slowdown in China during 2/3Q15, as compared to its windfall year in FY14. In spite of this, Sunsine still managed to sell more accelerators than ever over 9M15; implying market share expansion. Net cash stands at RMB 136m as debt continued to decline as cash rises.

♦ Maintain BUY, with a possible privatization/takeover end game in mind

"Sunsine has come a long way since its listing in Singapore and at current valuations of only 3.7x FY16F P/E and 0.6x FY16F P/B, we think Sunsine looks attractive as a potential privatization/takeover candidate." -- Renfred Tay (photo)

Second largest player looking to IPO at 18x P/E. Kemai, currently the second largest rubber accelerator (RA) producer (the former no. 2 and 3 players were eliminated post the anti-pollution clamp-down last year) after Sunsine, had in June 2015, applied for an IPO to list at a valuation of 18x P/E (vs. Sunsine’s 3.6x!) to raise RMB 890m to develop a 80k-ton RA facility in Inner Mongolia (with approx. 3-yr building period).

Kemai currently has an annual RA capacity of only 50k tons vs. Sunsine’s 87k tons (excl. another 30k tons, which could be added in mid-FY16).

This makes it quite clear that Sunsine is severely undervalued by local investors. With Sunsine continuing to increase market share, the long building time for Kemai and its IPO delay, we believe Sunsine should continue to further cement its dominant leadership position in RAs.

We make no changes to our earnings forecasts, but roll over our earnings base to FY16F EPS to derive a higher target price of S$0.68, pegged at an unchanged 7x P/E, which we believe, still does not really do justice for a gem like this.