CHINA SUNSINE: 1Q profit up 108% but below expectation, says KGI Fraser

Excerpts from analyst's report

KGI Fraser analyst: Renfred Tay

tbss9.14 @ China Sunsine: Bags of TBBS, a type of rubber accelerator which commands a high price as few companies have the requisite technology to produce it. NextInsight file photo.BUY despite lower forecast. Despite our forecast reductions, Sunsine is still trading cheaply at only 5.2x FY15F P/E and 0.8x its most recent quarter P/B.

Since IPO in 2007, Sunsine had almost tripled its earnings, saw its book value double, and became the world’s largest Rubber Accelerator producer and the largest Insoluble Sulphur producer in the China.

We believe there is a genuine lack of appreciation on how much this company has achieved in less than ten years.

In view of its deep value, we maintain our BUY rating, but lower our TP to S$0.59, still pegged at 7x FY15F EPS (historical average).

Up yoy; down qoq. Sunsine’s 1Q15 net profit of RMB 47.4m (+108% yoy) made up 20% of our FY15F estimate, while revenue of RMB 432m (+1% yoy) formed 18% of our projections. We expected revenue to be down qoq (due to lower ASP) but were looking for a slightly higher number, as sales volume was lower than we would have liked.

We do note that 1Q should be a slower quarter in terms of sales volume during to the CNY break in China. Sunsine was able to maintain its high gross profit margin during the quarter; a commendable feat, but not easy to sustain, in our view. Sunsine’s net gearing had also fallen to 4.6% vs 13.4% a quarter ago.

Challenges ahead. Sunsine highlighted that receivables may face a higher risk of impairment as some local tire makers may face higher risk of insolvency due to the anti‐dumping and countervailing measures imposed by the U.S. on Chinese tire exports.

The company also sees a tad more downside to RA prices before stabilizing. Hence we are anticipating a slight margin squeeze in the coming quarters (w.r.t. 4Q14 and 1Q15). Given its track record, we believe Sunsine should be able to deal well with these challenges ahead.

Adjusting our forecast. Given the honest outlook provided by management and our previously high sales volume assumptions, we made tweaks to our model and shave our earnings estimates to RMB 190m‐218m for FY15F‐17F.

Some key changes include:
1) Reducing total sales volume to 114.2k tons from 145.6k tons in FY15F;

2) Reducing antioxidant ASP by 15% in FY15F ;
3) Factoring in contributions for the sale of steam from the new heating plant;
4) Raising gross margin assumption to 29% from 25% in FY15F;
5) Factoring in higher SG&A costs to include potential impairment to receivables.

CHINA SUNSINE: 1Q profit up 108% but below expectation, says KGI Fraser

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