"Money Plant" contributed this article to NextInsight. She is a retail investor who says she is still learning from the market everyday.
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China Sunsine recently announced the sale of 27.6m treasury shares through a private placement to institutional investors at S$0.646. This highlights the value that institutional investors see in the company as well as an investment with a good risk-reward ratio. If we assume a price floor of S$0.646, and have a TP of S$0.84-0.975, our risk reward ratio is 2.6-5. |
- Near-term price catalysts include a positive 2QFY17 result and potential dividend hikes.
- In the medium to long term -- further earnings growth as new production capacity comes onstream.
1) Psychological price floor at S$0.646. With the placement at S$0.646, this is now a psychological price floor for the market. Institutional investors see merit in investing at S$0.646 (and given the size of their investment, it is unlikely they will and can settle for just a 20%-30% upside). In addition, if prices fall below S$0.646, it makes sense for China Sunsine to buy the shares from the market, since anything below S$0.646 is a profit to them (and they have the cash now anyway).
2) Another strong quarter in 2QFY17? With the exception of 2010 and 2012, 2Q has typically been stronger than 1Q as the CNY period falls in the Jan-Mar period. With 1Q17 operating income already 20% higher than 2Q16, investors can look forward to a very positive yoy comparison in 2Q17. China Sunsine saw 1Q17 net profit surge 70% yoy on the back of a 29% rise in sales driven by both growth in volume and average selling price (ASP).
- 2Q16 may be a low bar to beat. 1Q17 sales rose 29% yoy (1Q16 sales rose only 3% yoy). Should the momentum continue in 2Q17, we should see very strong growth in 2Q17F as well (2Q16 sales dropped 1% yoy)
The last time China Sunsine raised its dividend was in 2014 from S$0.01 to S$0.015 (S$0.01 ordinary and S$0.005 special) when its profit surged more than 150%. With the strong profitability growth in 1Q17 (+70% yoy) and strong net cash balance, China Sunsine is ready to hike its dividend.
4) TP at S$0.84-S$0.975 based on 3.5-4x EV/EBITDA – based on FY17F EBITDA (we assumed a 15% growth yoy from FY16)- which we think is reasonable:
- If we assume 1Q17 + 9M16 =FY17F EBITDA = 9.7% growth
- If we assume 1Q17 + 1.2x2Q16 (which suggest a flat EBITDA comparison to 1Q17- but typically 2Q has been stronger than 1Q) +2H16= 14% growth
* Assume 15% growth for FY17F EBITDA - which is reasonable - as we have assumed no growth for 3Q and 4Q. We have assumed 2Q to be same as 1Q17, although 2Q has typically been stronger than 1Q (due to 1Q resulted affected by CNY holidays).
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EBITDA variability |
|||||||||
|
0.841 |
-20% |
-15% |
-10% |
-5% |
0% |
5% |
10% |
15% |
20% |
|
0.5 |
0.249 |
0.254 |
0.258 |
0.263 |
0.268 |
0.273 |
0.278 |
0.282 |
0.287 |
|
1 |
0.325 |
0.335 |
0.344 |
0.354 |
0.364 |
0.373 |
0.383 |
0.392 |
0.402 |
|
1.5 |
0.402 |
0.416 |
0.430 |
0.445 |
0.459 |
0.473 |
0.488 |
0.502 |
0.516 |
|
2 |
0.478 |
0.497 |
0.516 |
0.536 |
0.555 |
0.574 |
0.593 |
0.612 |
0.631 |
|
2.5 |
0.555 |
0.579 |
0.602 |
0.626 |
0.650 |
0.674 |
0.698 |
0.722 |
0.746 |
|
3 |
0.631 |
0.660 |
0.688 |
0.717 |
0.746 |
0.774 |
0.803 |
0.832 |
0.860 |
|
3.5 |
0.708 |
0.741 |
0.774 |
0.808 |
0.841 |
0.875 |
0.908 |
0.942 |
0.975 |
|
4 |
0.784 |
0.822 |
0.860 |
0.899 |
0.937 |
0.975 |
1.013 |
1.052 |
1.090 |
|
4.5 |
0.860 |
0.904 |
0.947 |
0.990 |
1.033 |
1.076 |
1.119 |
1.162 |
1.205 |
|
5 |
0.937 |
0.985 |
1.033 |
1.080 |
1.128 |
1.176 |
1.224 |
1.271 |
1.319 |
|
5.5 |
1.013 |
1.066 |
1.119 |
1.171 |
1.224 |
1.276 |
1.329 |
1.381 |
1.434 |
|
6 |
1.090 |
1.147 |
1.205 |
1.262 |
1.319 |
1.377 |
1.434 |
1.491 |
1.549 |
|
|
2017F |
2016 |
yoy growth |
|
1Q |
109.4 |
71.1 |
53.9% |
|
2Q |
113.04 |
94.2 |
20.0% |
|
3Q |
115.5 |
115.5 |
|
|
4Q |
115 |
115 |
|
|
452.9 |
395.8 |
14.4% |
China Sunsine does not have any close peers to compare with, hence we compare it with listed manufacturing firms on SGX. Despite its size and manufacturing scale, it trades at a discount to its manufacturing peers (probably due to the discount investors place on S-chips).
Thus a TP based on 3.5-4x EV/EBITDA is reasonable – which is about a 20-30% discount to peers of a similar size (Valuetronics and Sunningdale), and still in line with its overall peers average of 4.3x EV/EBITDA.
|
Mkt Cap US$m |
Current Price (lcy) |
Fiscal year end |
PE |
PE |
PE |
PE |
|
|
2015 |
2016 |
2017 |
2018 |
||||
|
Valuetronics |
219.8 |
0.81 |
03/2016 |
11.2 |
14.1 |
12.4 |
11.4 |
|
Sunningdale Tech |
245.6 |
1.84 |
12/2016 |
8.3 |
9.0 |
11.5 |
10.4 |
|
Avi-tech |
52.2 |
0.43 |
06/2016 |
19.7 |
11.8 |
10.8 |
8.6 |
|
Fischer Tech |
99.7 |
2.52 |
03/2016 |
18.4 |
10.6 |
||
|
Fu Yu Corp |
109.6 |
0.21 |
12/2016 |
11.0 |
14.6 |
14.6 |
10.3 |
|
Memtech Int'l |
82.0 |
0.82 |
12/2016 |
9.7 |
12.9 |
9.9 |
8.8 |
|
Average |
13.0 |
12.2 |
11.8 |
9.9 |
|||
|
China Sunsine |
246.1 |
0.71 |
12/2016 |
8.2 |
7.2 |
7.9 |
7.2 |
|
EV/EBITDA |
P/B |
Dividend yield (%) |
Net D/E (%) |
||||
|
2015 |
2016 |
2017 |
2018 |
||||
|
Valuetronics |
5.05 |
5.97 |
5.43 |
4.95 |
1.91 |
4.37 |
(81.64) |
|
Sunningdale Tech |
4.78 |
4.05 |
4.53 |
4.29 |
0.98 |
3.26 |
(3.94) |
|
Avi-tech Electronics |
9.65 |
6.75 |
5.48 |
5.12 |
1.57 |
4.65 |
(55.73) |
|
Fischer Tech |
5.11 |
4.52 |
1.37 |
3.17 |
(31.31) |
||
|
Fu Yu Corp |
2.59 |
3.16 |
3.11 |
2.87 |
0.89 |
9.15 |
(56.07) |
|
Memtech Int'l |
3.65 |
4.24 |
3.11 |
2.68 |
0.73 |
3.05 |
(20.56) |
|
Average |
5.1 |
4.8 |
4.3 |
4.0 |
1.2 |
4.6 |
|
|
China Sunsine |
3.29 |
3.32 |
3.45 |
3.23 |
1.13 |
2.13 |
(20.26) |
The good and the bad, in a nutshell:
|
The good |
The bad |
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A vote of confidence by insti investors with a psychological price floor now at S$0.646 – if the investors did not see growth potential of the company, they would not have purchased the stock. ● If price falls below S$0.646, it makes sense for China Sunsine to buy back the shares from the market, since anything below S$0.646 is a profit to them. (and they have the cash now anyway)
● Insti investors include: Asdew Acquisitions; Island Asset Management; ICH Capital |
EPS dilution to current shareholders
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Near-term pressure on share price ● This was evident on the first day of trading when price dropped to a low of S$0.69 from previous closing of S$0.725. Liquidity does not increase by insti investors getting the share placement and hogging on to the stock. There is now an increase in supply of shares on the market (simple supply and demand dynamics) |
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Potential for higher dividends for shareholders - mentioned in press release the net sales proceeds will be retained for payment of dividends in future
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China Sunsine made a killing in the sale of treasury shares? With its share price at a high since its IPO, the sale of treasury shares will enable it to book a huge “trading profit” – although I am not sure if that can be recognised in accounting.
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Now getting away from all the corporate action and focusing on the fundamentals…
Expect another strong quarter in 2QFY17. With the exception of years 2010 and 2012, 2Q has typically been stronger than 1Q due to the CNY period in Jan-Mar. With 1Q17 operating income already 20% higher than 2Q16, investors can look forward to a very positive yoy comparison in 2Q17. China Sunsine saw 1Q17 net profit surge 70% yoy on the back of a 29% rise in sales driven by both growth in volume and average selling price (ASP).
|
Operating |
2011 |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
|
1Q |
45.2 |
25.7 |
19.9 |
34.4 |
67.4 |
47.0 |
84.9 |
|
2Q |
50.9 |
22.2 |
38.5 |
89.3 |
71.2 |
70.4 |
|
|
3Q |
46.4 |
16.0 |
43.9 |
115.8 |
74.6 |
91.3 |
|
|
4Q |
33.3 |
6.5 |
34.5 |
79.9 |
74.5 |
90.2 |
|
|
|
|||||||
|
2Q-1Q |
5.7 |
-3.5 |
18.6 |
54.9 |
3.8 |
23.4 |
|
|
3Q-2Q |
-4.5 |
-6.2 |
5.4 |
26.5 |
3.4 |
20.9 |
|
|
4Q-3Q |
-13.1 |
-9.5 |
-9.4 |
-35.9 |
-0.1 |
-1.1 |
|
Source: Bloomberg
Still seeing growth ahead – as group increases capacity. Since its capacity increase in FY14, Sunsine has held its total production capacity constant for the last 3 years, as it ramped up utilisation, maintained profitability through increased sales volume despite the fall in ASP. By end-FY17, Sunsine will add new production capacity for its accelerators and insoluble sulphur – suggesting it has outgrown its current capacity and the company’s vision of more demand and growth ahead?
|
Tons |
FY2012 |
FY2013 |
FY2014 |
FY2015 |
FY2016 |
FY2017e |
|
Accelerators |
66,500 |
70,500 |
87,000 |
87,000 |
87,000 |
97,000 |
|
Insoluble Sulphur |
10,000 |
20,000 |
20,000 |
20,000 |
20,000 |
30,000 |
|
Anti-Oxidant |
25,000 |
25,000 |
45,000 |
45,000 |
45,000 |
45,000 |
|
Total |
101,500 |
115,500 |
152,000 |
152,000 |
152,000 |
172,000 |
Risks - potential further weakening in auto sales in the US and China may affect demand and sentiment of the stock.
- Vehicle sales in China fell 2.2% to 2.1m in Apr 17, compared to a 4% rise in Mar 17. Auto sales growth in 4M17 is now at 4%, slower than the 5% growth forecast by CAAM for 2017. Nonetheless, China had targeted sales of 35m vehicles/year by 2025 with new energy vehicles making up at least 1/5 of that total (2016 China auto sales-28m).
- US auto sales also slumped in April as it saw a 4.7% drop to 1.43m units.
