CHINA SUNSINE: Rival applies for IPO, how its business compares

@ China Sunsine's plant in Weifang, which produces rubber accelerators. NextInsight file photo. Singapore-listed China Sunsine is the No.1 producer of rubber accelerators in China (and the world) followed by Tianjin Kemai. The latter is headed for an IPO in Shanghai, selling shares at 18 times earnings for a market cap of RMB 2,628m or (S$560m). In comparison, Sunsine's current market cap is $149m at 32c per share, or a PE of just 3X. This article gives a background on the industry, Sunsine's progress through the years and compares it with Tianjin Kemai.


Background: Rubber chemicals (comprising vulcanising agents, rubber accelerators and anti-oxidants) are essential in the manufacture of rubber products.

The different types of chemicals work as follows:

» Vulcanising agents improve the physical properties of rubber. Sulfur, a common vulcanising agent, is replaced by insoluble sulfur in high-temperature applications.

» Rubber accelerators shorten the time vulcanising agents react with rubber. 

» Anti-oxidants reduce the adverse effects of heat and ozone on rubber products.

Rubber products are used in everyday life. More rubber chemicals are needed as rubber consumption is on the rise. 

Production of accelerators generates waste water

Accelerators are easier to produce but the manufacturing process generates large amounts of waste water, which pollute watercourses if untreated.

In the past, local governments in China were lax on enforcement, and it was profitable to produce accelerators without incurring treatment cost. As water quality deteriorated, enforcement was stepped up and the supply of accelerators started to tighten in 2014 as some accelerator producers either suspended operations or closed down altogether.

Consolidation in rubber accelerator industry 

In an interview with Tireworld, the GM of an accelerator company, 河南濮阳蔚林化工, took the view that tight pollution control requirements  would benefit larger accelerator companies that have strong brands. He  foresaw consolidation in the industry, and the  surviving players that possess technology and capital  would gain markets share.

The GM also pointed out capital alone is not enough. Proper treatment of waste water depends on experience gained over many years.

Sunsine's journey to become world's number one 

Xu Chengqiu, chairman of China Sunsine. NextInsight file photo.Mr Xu Cheng Chiu, founder of China Sunsine Chemical, has set his mind on production technology that does the least harm to the environment, to win orders from blue-chip tyre companies which source raw materials produced from green processes. 

In 2007, Sunsine issued new shares at 39c apiece to raise RMB 260m in an IPO on SGX. Since then, its 24,000-tonne accelerator capacity has been expanded to 87,000 tonnes. Sunsine is now the world's largest accelerators producer, with 18% market share. The tyre industry, which consumes two-thirds of rubber produced, is very dependent on Sunsine. 

Sunsine has been successful in growing its market share by out-pricing its competitors. 

Its results announcement for the last quarter of 2011 stated that "[d]espite a slowing domestic economy, the Group had successfully increased domestic sales volume by 24% to 11,516 tons as compared to 9,317 tons in 4QFY2010 with deliberate price reductions".

The price cut was deep, from RMB 21,200 per tonne in the third quarter to RMB 19,600 in the fourth.

Average accelerator price stayed subdued, at around RMB 18,500 for 2012 and 2013, but China Sunsine’s sales volume surged to 71,700 tonnes in 2013 from 50,100 tonnes in 2011.

Stricter environmental enforcement in 2014 resulted in a supply crunch which saw average accelerator prices peak at RMB 22,800 in 3Q 14, and sales volume rise further to 76,100 tonnes. In that year, Sunsine's profit was a record RMB 220m, thrice the previous year's RMB 77m.

But in 2015, accelerator price tumbled to RMB18,900  in 1Q and RMB 18,000 in 2Q, prompting fears among investors that an oversupply is rearing its ugly head again.

However, the price slump was more likely the result of a price plunge of aniline, the main raw material. In its analysis of Sunsine 2Q results, broking firm KGI "suspect[s]  Sunsine had undercut competitors’ pricing in a bid to gain an even greater market share for its products."

Comparison between Sunsine and Kemai

Sunsine's current accelerator capacity of 87,000 tonnes (61,000 tonnes in Shanxian and 26,000 tonnes in Weifang) is much bigger than Kemai's 50,000 tonnes in Tianjin.

Its 18-hectare Weifang base has space to produce another 24,000 tonnes of accelerators. As the production infrastructure was built at the outset, installing a production line gong forward would entail minimal cost. (It cost a mere RMB 3.5m to install 4,000-tonne MBTS production line in late 2014. MBTS is a type of accelerator.)

Another example of low incremental capital cost is the RMB 9m spent on installing 8,000-tonne DCBS production in Shanxian. (DCBS, a high-grade accelerator, fetches high prices but its production generates waste water that is very difficult and costly to treat. Sunsine resumed production of it in late 2014 after finding a cost-efficient treatment method.)

And it is planning to construct a new 30,000-tonne accelerator factory in a new 16-hectare base costing RMB 97m. (Source: here) 

TBBS is yet another high-grade accelerator commonly used by tyre factories. Sunsine's current TBBS capacity is 25,000 tonnes.

Unlike Kemai which has to raise funds from an IPO, Sunsine has cash, spare land and ready infrastructure. As at 30 June 2015, it had RMB 223m in cash and RMB 233m in promissory notes that can be redeemed for cash at the issuing banks.

Sunsine is therefore much ahead of Kemai in grabbing market share and lowering unit cost, while Kemai is awaiting the nod from the Shanghai Stock Exchange.

@ China Sunsine's plant in Weifang. NextInsight file photo.

Bank of CCTV cameras monitor operations at China Sunsine's plants. NextInsight file photo. Financial health of Sunsine

Besides increasing accelerator capacity from 24,000 tonnes to 87,000 tonnes, Sunsine also ventured into the production of insoluble sulfur (IS) and anti-oxidants.

The first 10,000-tonne IS production line was installed in Shanxian. When demand picked up, a new 18-hectare base was set up in Dingtao with an initial capacity of 10,000 tonnes, making Sunsine China's number one IS producer. There is space for another 20,000 tonnes.

Sunsine produces three types of anti-oxidants (TMQ, 5PPD and 6PPD). The combined capacity is 45,000 tonnes comprising 10,000 tonnes for TMQ, 5,000 tonnes for 5PPD, 30,000 tonnes for 6PPD. 

The cost of capacity building for all chemicals amounted to RMB 550m. 

Sunsine has also invested RMB 150m in a fuel-efficient steam supply system in Shanxian.

Besides RMB 700m on capital expenditure, higher working capital amounting to RMB 600m was required to support inventories and trade receivables as sales rose from RMB 475m before IPO to RMB 2,077m in 2014.

Moreover, RMB 200m was paid out as dividends in the recent past seven years and another RMB 26m was spent on share buyback.

All in, RMB 1,528m was spent after the IPO in 2007 that raised only RMB 260m.  

Yet, it had RMB 456m in cash and near-cash as at 30 June this year against bank loans of RMB 212m. And throughout its expansion trail, Sunsine has lowered its risk of loan default by staying highly liquid.   

This was possible because of Sunsine's dominance in the rubber accelerator sector. Expansion moves  were carefully timed to keep spare capacity low to generate enough cash.

Among the top three rubber chemical producers in China, Sunsine is the only one that makes all three rubber chemicals (accelerators, IS and 6PPD). 

Jiangsu Sinorgchem specialises in 6PPD. Kemai's focus is on accelerators as TMQ is a low-grade anti-oxidant with thin margin.

On the world stage, Flexsys produces only IS after giving up on accelerators.

Sunsine's entry into the 6PPD market may take some time to bear fruit. Tyre companies want to be assured of the efficacy of this newly-introduced product. Sunsine does not reveal sales revenues of each type of anti-oxidants. But there is reason to believe that 6PPD is becoming more popular judging by the rising combined sales (see table).

6PPD will be less of a drag on profit margins when the 30,000-tonne capacity is better utilised.

IS may turn out to be a big winner. Sunsine has revealed that with persistent R&D, its IS is not much inferior to that produced by Flexsys, world's top IS producer.

The high unit fixed cost of the Dingtao IS base (designed for 30,000 tonnes but is producing less than 10,000 now) will drop as sales expand.