Continue reading this on our app for a better experience

Open in App
Floating Button
Home Capital Broker's Calls

CGS International positive on China Sunsine’s undemanding valuation

Douglas Toh
Douglas Toh • 3 min read
CGS International positive on China Sunsine’s undemanding valuation
The company see more intese competiion in the coming years.
Font Resizer
Share to Whatsapp
Share to Facebook
Share to LinkedIn
Scroll to top
Follow us on Facebook and join our Telegram channel for the latest updates.

CGS International is keeping its “add” call and target price of 47 cents unchanged on China Sunsine Chemical Holdings QES

as the company’s 1QFY2024 net profit of RMB85 million ($15.9 million) has formed 23% of analysts’ forecasts.

Analysts Kenneth Tan and Ong Khang Chuen write in their May 7 note: “We deem the results in-line with our expectations, given that 1QFY2024 is typically a weak quarter due to the Chinese New Year holidays.”

China Sunsine Chemical’s gross profit margin also remained healthy at 23.4%, 1.0 percentage points (ppts) higher y-o-y, which is a tad above management’s FY2024 guidance of 20% to 23%. 

“Sales volume growth was strong at 2% lower q-o-q and 8% higher y-o-y, which we believe was attributed to improved tyre manufacturer utilisation and ramp-up in newer production lines,” adds Tan and Ong.

Meanwhile, data from chemical data provider, Sci99, indicates that the volume of the rubber accelerator product, additional sidewall protection (ASP), as at end-March was up around 3% versus end-December 2023 prices, while the average price for the rubber substance, aniline, was 12% higher in April versus the average 1QFY2024 price. 

To this, Tan and Ong write: “Given that Sunsine typically locks in rubber accelerator prices with major customers at the start of 2QFY2024 and taking spot prices for aniline, we expect 2QFY2024 profit spreads to narrow slightly q-o-q. However, we expect volume growth to stay healthy in FY2024, backed by improved domestic tyre manufacturer utilisation rates and continued recovery in replacement tyre demand.”

See also: Brokers’ Digest: CDL, PropNex, PLife REIT, KIT, SingPost, Grand Banks Yachts, Nio, Frencken, ST Engineering, UOB

Notably, management expects competitive pressures to stay intense due to incoming new industry supply of rubber accelerators, which the analysts believe could come online in the second half, resulting in heightened price competition. 

They write: “Sunsine intends to continue with its flexible pricing strategy to proactively defend and grow its market share. Sunsine’s dominant market leadership and strong balance sheet should allow it to compete effectively in the coming quarters, in our view. We maintain our FY2024F gross profit margin assumption at around 22%.”

Overall, although the company's net profit growth “could be choppy” in FY2024, Tan and Ong “still like” Sunsine for its increasing focus on lifting shareholders’ returns, decent yield of around 6%, and undemanding valuation of 1.0 times 2024 ex-cash price-to-earning ratio (P/E).

See also: RHB still upbeat on ST Engineering but trims target price by 2.3%

Re-rating catalysts noted by them include favourable government stimulus in China and improved domestic competitive dynamics, while downside risks include prolonged competition putting pressure on ASPs and spikes in input costs that Sunsine will be unable to pass on.

As at 1.00 pm, shares in China Sunsine Chemical Holdings are trading flat at 39.5 cents.

×
The Edge Singapore
Download The Edge Singapore App
Google playApple store play
Keep updated
Follow our social media
© 2024 The Edge Publishing Pte Ltd. All rights reserved.