China Sunsine Chemical Holdings Ltd (CH8.SI) has been one of our favorites since early 2017. Since our first recommendation, the world’s largest producer of rubber chemicals gained more than 90 percent and remains still a bargain.[mepr-active membership=”1734″ ifallowed=”show” unauth=”message” unauth_message=”Please login or purchase a membership to view full text.”]
China Sunsine Chemical has three production facilities located in China with a total capacity of currently 152,000 tons per annum. Next year, the capacity will expand to 172,000 tons. Steam and electricity for its energy-intensive production processes are generated with an own power plant. Rubber accelerators made up 71 percent of China Sunsine Chemical sales and grew by 34 percent, followed by anti-oxidant which contributes 20 percent to the sales and increased by 43 percent over the first nine months of this year. All products that are sold under the brand name ‘Sunsine’ and are indispensable chemicals for the tire manufacturers. The company holds a global market share of 18 percent for rubber additives and accelerators.
China Sunsine Chemical counts over a thousand customers around the world and serves two-thirds of the global top tire makers, such as Bridgestone, Michelin, Goodyear, Pirelli, and Yokohama. The customers base is well diversified with no individual customer contributing more than 10 percent to the revenue. Over the last years, China Sunsine Chemical has been riding on the robust growth of the auto and tire industries in the PRC. Furthermore, the company met the rigorous environmental standards imposed by the China government and gained therefore an edge over competitors who were forced to upgrade or abandon their uncompetitive and underperforming operations.
China Sunsine Chemical was founded in 1994 and is headquartered in Singapore. The shares are listed on the main board of Singapore’s stock exchange since 2007 and can also be traded in Germany. Major shareholder is the company’s executive chairman, Mr. Xu Cheng Qiu, with a direct and indirect ownership of around 60 percent. About 35 percent of the shares are in public hand.
With a workforce of about 1030 employees, China Sunsine Chemical reported revenues of 2.5bn RMB (362m USD) and profits before tax of 569m RMB (82m USD) over the first nine months in 2018. This is an increase of 35 and 102 percent respectively compared to the same period a year ago. In 2017, revenues and profits increased by 34 and 54 percent respectively. Sales volume increased the 9th consecutive year since IPO in 2007. The operating margin of around 16 percent is above the industry average. China Sunsine Chemical’s cash reserves rose by 65 percent to 820m RMB (118m USD) over the three quarters of 2018. The company has no debt and shows a rock solid balance sheet with excellent profitability and financial strength. The equity ratio is at 83 percent and the gearing, defined here as total liabilities to total equity, at 20 percent. Next result announcement is expected for February 2019.
From their highs, in June 2018 China Sunsine Chemical’s shares lost more than a third but shows still a gain of 22 percent this year. The company is currently priced at only four times earnings, 1.2 times book value and at five times cash flow. The latest dividend yielded around 2.3 percent. Only two analysts are covering the company and have ‘buy’ and ‘outperform’ recommendations on the stock.
China’s economy grew by 6.7 percent during the first nine months of this year. Car manufacturers sold 20.5m units in China, representing 1.5 percent growth on a year-to-year base. China Sunsine Chemical’s management expects a slowdown in China’s economy and remains cautiously optimistic for the next twelve months.
Our conclusion: With a focus on production technology and innovation China Sunsine Chemical should be able to further increase its market share and consolidate its position as a leading supplier. The company will benefit from stricter environmental inspections that will gradually phase out uncompetitive and underperforming competitors.
China Sunsine Chemical shows a healthy balance sheet with excellent profitability and financial strength. Revenues, profits and sales volume grew by more than 16 percent annually over the last decade. The valuation is currently very low which limits the downside risks of an investment. Despite a slowing down in the automobile industry worldwide, the demand for tires should remain stable due to regular replacements. Assuming a soon ending trade war with the US, we believe that China Sunsine Chemical’s shares have the potential to increase another 15 to 20 percent over the next six months.
AIS Rating: ★★★★☆
| 2013 | 2014 | 2015 | 2016 | 2017 | 2018 Q1-3 only |
|
|---|---|---|---|---|---|---|
| EPS (RMBcent) | 16.5 | 47.3 | 41.9 | 47.7 | 70.8 | 108.3 |
| Change | 141% | 187% | -11% | 14% | 49% | 148% |
| P/E | P/E SECTOR |
P/B | P/CF | Equity Ratio* |
ROE | LIAB./ Equity** |
Div YLD |
|---|---|---|---|---|---|---|---|
| 4 | 18 | 1.2 | 5 | 83% | 26% | 20% | 2.3% |
* Equity / Total Assets, ** Total Liabilities / Equity
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