Home Stock and Shares China Sunsine – Proxy for the Chinese Automotive Market

China Sunsine – Proxy for the Chinese Automotive Market

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China’s automotive market is among the world's fastest-growing. There is no other Singapore-listed company more closely aligned with the fortunes of the Chinese auto industry than China Sunsine Chemical Holdings (CH8.SI).

Introduction

China Sunsine is a world-leading maker of specialty chemicals, sold under the "Sunsine' brand, used in the production of car tyres. It counts all 10 of the world’s largest tyre manufacturers as its customers. It was listed on the SGX on 5 July 2007 at a price of S$0.39.

China Sunsine’s range of products include:

  • Insoluble sulphur – Vulcanizing agent used to strengthen (or “cure”) rubber (particularly in car tyres)
  • DCBS, MBTS, MBT– Accelerators which speed up the curing of rubber from hours to minutes
  • 6PPD, TMQ - Anti-oxidants which inhibits the degradation of rubber
  • CTP - Anti scorching agent which enhances the physical property of rubber

In 2009, China is China Sunsine’s biggest market, accounting for 61% of sales, with the rest of Asia at 23%. Accelerators are by far its biggest sales contributor, comprising 92.4% of revenue.

Strengths

1) World’s top producer of accelerators

China Sunsine widened its lead in 2009 as the world’s biggest producer of accelerators used in making rubber. With its newly completed 7,000-ton MBTS and 8,000-ton insoluble sulphur plants, China Sunsine can achieve economies of scale which reduce its costs relative to its domestic competitors. This is supported by the fact that China Sunsine boasts the highest gross margins among Singapore-listed chemical companies, albeit serving different industrial sectors.

Its market position as a price setter has also allowed China Sunsine to recover increases in costs of new materials from customers. This probably explains why margins have remained resilient in the past 3 years, despite considerable volatility in average selling prices.

2) Well-positioned in the world’s largest auto market

China overtook the United States as the largest car market in 2009. When demand for motor vehicles retreated in many developed countries, China’s passenger car sales grew nearly 50% last year after the government distributed $15 billion in auto incentives under the “Chinese Automotive Industry Revitalization Plan”.

Even then, the Chinese automotive market is far from saturated. The potential size of the Chinese automobile market can be illustrated by the fact that China has 6 cars per hundred people. On the other hand, the figures for major developing countries range between 10 to 20. The United States, where cars are most ubiquitous, has about 76 cars for every 100 people.

As automobile penetration in China reaches the levels of other developing countries such as Mexico and Brazil, China Sunsine is well-placed to take advantage of opportunities ahead.

Furthermore, unlike vehicles which are often large discretionary purchases, tyres are more akin to consumables to be replaced after regular wear-and-tear. The downstream demand for China Sunsine’s products is therefore likely to be more stable than the demand for new vehicles.

3) Diversification into the pharmaceutical sector

Despite tyres being a lucrative sector, China Sunsine has traditionally been over-dependent on the automotive end-market for the sales of its products. Manufacturers of other goods such as shoes soles and rubber tubes account for an insignificant portion of its customer base.

This is set to change as China Sunsine recently completed the construction of a new MBTS plant in 3Q2010, which can produce 3,000 tons of medical-grade accelerators annually. Medical-grade accelerators are used in the manufacture of medical packaging and devices such as vial stoppers and syringes.

Results of trial tests by customers on the medical-grade MBTS are said to be “favourable”. China Sunsine indicated that it has received a firm annual order from a large antibiotic company, with more orders expected to follow.

It is likely that medical-grade accelerators can command a better margin than regular accelerators. Based on projected production capacities, up to 5% of China Sunsine’s sales could potentially come from the pharmaceutical industry in FY2010.

Weaknesses/Risks Factors

1) Aggressive capex and long gestation period

China Sunsine has been investing heavily in new plant and equipment, pouring RMB200 mil into building a new 15,000-ton 6PPD plant. It is also budgeting an additional RMB100 mil for the first-phase construction of a 15,000-ton MBT facility which will be completed in 1Q2011.

However, in the past 2 years, increases in production have been lagging increases in capacity, especially in the anti-oxidant segment. Production of accelerators appears to be capped at about 80% of capacity and well less than 50% for other chemicals. As a result, return on assets has hovered at an unremarkable 11% to 16%.

It typically takes six months for customer acceptance tests at a new plant before commercial production begins. The long gestation period for capital expenditures thus presents a real risk in reading future market demand accurately.

2) Tariffs on Chinese-made tyres

In September 2009, the Obama administration imposed a 35% tariff for the first year on China-made tyres imported into the United States. This adversely impacts the production of the Chinese tyre factories owned by overseas tyre majors, and is likely to indirectly trim demand for China Sunsine’s rubber enhancing chemicals.

3) Poor sentiment for S-chips

As in the case of Changtian Plastic and Chemical, one reason for China Sunsine trading at such a low valuation is the recent spate of corporate governance issues plaguing a number of China-based companies listed in Singapore.

Investors are no doubt further disheartened by allegations of improper disclosures in the prospectus for China-based New Century Shipbuilding, whose IPO was ultimately withdrawn.

The risk of governance issues in China Sunsine itself is probably low, since it did not issue convertible bonds or make cash-calls from shareholders in the past 3 years. Instead, it is one of the few S-chips which have been consistently giving dividends.

Conclusion: Target Price at 32 cents

As a market leader in an industry essential for the production of tyres, China Sunsine is well-poised to grow in tandem with the world’s largest auto market. In an uninspiring year when global automotive giants such as General Motors and Toyota incurred devastating loses, China Sunsine was largely unaffected in its domestic market. Buying into China Sunsine is thus a unique way of partaking in the boom of the Chinese automotive industry, but at a lower risk than investing directly in automobile manufacturers.

The diversification into the pharmaceutical sector is also a positive move by China Sunsine, which would contribute to more stable revenues and lend support to margins, if automobile sales in China are ever to falter.

With FY2010 EPS estimated at 5.3 Singapore cents, China Sunsine shares are trading at a forward P/E of just 4.5 and below NAV. At a conservative P/E target of 6, China Sunsine’s share price can easily reach 32 cents within a year. This represents a 33% upside. BUY.

Price Chart

Key Financial Indicators

Key Recent Announcements

  • Apr 2010: China Sunsine acquires a 187,000 square-metre plot of land in Weifang City, for the construction of its third manufacturing facility, with a first phase capacity of 15,000 tons of accelerators
  • Oct 2009: China Sunsine begins the construction of a RMB200 mil 15,000 ton antioxidant plant
  • Sep 2009: The U.S. announces the imposition of tariffs on tyres made in China
  • Jul 2009: China Sunsine appoints the Malaney Group to market and distribute its chemicals in India
  • Jun 2009: China Sunsine completes construction of a 7,000-ton MBTS plant and commences trial production

Peer Comparison

  Price EPS NAV P/E P/NAV Gross Margin Remarks
China Sunsine 24 3.80 26.3 6.3 0.91 22.3% FY2009
Jiutian Chemical 8 -1.21 7.7 -6.6 1.04 -26.3% FY2009
Sunvic Chemical 17 0.15 27.3 114.5 0.62 8.4% FY2009
Chemical Industries 50 2.76 89 18.1 0.56 16.8% 1H2010 (annualised)

Note: Share price, EPS and NAV are in Singapore cents. Share price as of 7 May 2010.

 

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Last Updated ( Thursday, 29 July 2010 05:01 )  

Comments  

 
0 #3 admin 2010-07-30 03:49
China Sunsine just released its 1H2010 results. 2Q2010 net profit rose 11% to RMB28.3m on 40% increase in revenue to RMB248.3m. On the other hand, gross margins declind by 2.3 percentage points from to 22.2% from 24.5% yoy.
 
 
0 #2 admin 2010-05-09 05:16
Yes, thanks for the feedback. The table has been updated to show "Net Cash" instead of "NA".
 
 
+1 #1 starbugs 2010-05-09 04:30
Under "Net Debt/Equity", does "NA" refer to "Net Cash"?
 
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