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China Sunsine – Small Market Cap… Yet Backed By Top Tier Customers
Corporate Digest | 25 February 2014
By: Ernest Lim
Articles (134) Profile

I have taken a look at China Sunsine (“Sunsine”) around 4Q2012 but decided to give it a miss at that time due to weak operating business conditions. One savvy investor friend of mine recently suggested to me to take another look on Sunsine. Below is my short writeup / introduction on Sunsine.

Description Of Sunsine
According to its annual report 2012 (“AR2012”), Sunsine is the largest producer of rubber accelerators in China and, probably, the world. It serves all the global top 10 tyre manufacturers such as Bridgestone, Michelin etc and top local tire companies such as Hangzhou Zhongce, GITI Tire etc. In fact, out of the top 75 tyre manufacturers in the world, about 55 percent are Sunshine’s customers.

Please refer to Sunsine’s website for an overview of their products.

Investment Merits

1. Likely turnaround play
With reference to Table 1, Sunsine has been reporting improving results for the past three quarters. In fact, 9MFY13 net profit was RMB59.2 million, which was 85 percent higher than the entire FY12 net profit of RMB32 million. In its latest 3QFY13 press release, Mr Xu Cheng Qiu, Executive Chairman said that they are confident of the Group’s growth and outlook for the next 12 months. This is the strongest statement among the past few quarters.

Table 1: Sunsine’s quarterly results since 1QFY12

Source: Company & Ernest’s compilations

2. FY14F results may be better due to
Firstly, Sunsine’s 4,000 ton DPG plant (accelerator) at Weifang has started commercial production in September 2013. Secondly, Phase one of 10,000 ton insoluble sulphur is likely to be completed in end 2013. These should contribute in 2014. Thirdly, any increase in average selling price, or sales volume, or reduction in raw material costs in 2014 is likely to bode well for Sunsine too.

3. Dividend yield of approximate 4%
Company has been giving dividend per share of $0.01 for the past four consecutive years, even in years with poor performance. Hence it is likely to continue this practice. At Friday’s closing price of $0.255, this represents a dividend yield of around 3.9 percent. Sunsine expects to report 4QFY13F results on 26 February 14.

3. Decent valuations
Sunsine trades at 0.7x P/BV and annualised 2013F PE of around 7.5x. Net asset value per share is around $0.350.

Investment risks

1. Illiquidity
With reference to Figure 1 below, the top twenty shareholders have about 83.5 percent of Sunsine’s outstanding shares. Thus, there is little free float which results in its illiquidity. Average 30-day and 100-day volume amount to 1.19 million shares and 422K shares respectively. This is not a liquid company where investors can enter or exit quickly.

Figure 1: Top twenty shareholders hold about 83.5% of company’s shares

Source: Company’s AR2012

2. S chip risk
This is a Chinese company helmed by Chinese management hence the usual S chip risk applies.

3. No analyst coverage
According to Bloomberg, there is currently no rated analyst coverage on this stock. It is reasonable to say that the investment community is not familiar with Sunsine. In addition, its small market capitalization of $119m precludes some funds from taking a position in them.

4. Exposed to the vagaries of the automotive industry cycle
As Sunsine’s products are used mainly by the tyre manufacturers, Sunsine is exposed to the vagaries of the automotive industry cycle in China. China auto sales rose 13.9 percent in 2013 vis-à-vis 4.3 percent in 2012. According to a China Association of Automobile Manufacturers (“CAAM”) estimate released in January, they expect the auto sales to grow at the same pace in 2014. However, it is noteworthy that car sales in China inched up six percent in January 2014 compared to January 2013.

5. Margins dependent on raw material cost
Most of its cost of sales came from direct raw material costs, namely Aniline. According to Sunsine’s AR2012, ceteris paribus, every 10 percent increase in the prices for Aniline would have the effect of decreasing the net profit by RMB24.3 million in FY12. As such, raw material costs do play a significant aspect in Sunsine’s profitability.

Other Developments
There were two announcements in December 2013. Firstly, Sunsine announced on 17 December 2013 that they have formed a new subsidiary called Shanxian Sunsine Hotel Management Co., Ltd to make a strategic long term investment in the hospitality sector in Heze City. Management emphasised that they do not intend to manage the Property on their own and will appoint a suitable hotel management company to manage this investment.

Secondly, Sunsine announced on 30 Dec 2013 that they have formed a new subsidiary called Shanxian Guangshun Heating Co., Ltd to set up a centralised heating company (“CHC”) to produce steam for internal usage and to supply to all the companies in the Shanxian Chemical Industrial Zone (“SCIZ”) at market rate (It is noteworthy that users of steam pay the charges upfront before usage). For the electricity which is the by product from steam generation, the State Grid will purchase it from the CHC.

Sunsine’s decision to set up the CHC arises because the Local Government has indicated to Shandong Sunsine (Shandong Sunsine accounts of more than 50 percent of the total consumption by all companies in the SCIZ) that either it sets up and operates the CHC, or provides financial assistance and/or guarantee to any third party which undertakes the operation of the CHC. Thus, after a feasibility study, management believes that it is in the best interest for the company to set up the CHC on their own. Personally, pending more information from the company, this seems to be an interesting cash flow generating investment over the medium term.

Management will provide more details on the above developments in due course. For more details, please view the above announcements on SGX website.

Sunsine’s Chart Analysis
Sunsine has appreciated about 49 percent from $0.205 on 23 Dec 2013 to an intraday high of $0.305 on 22 January 2014 on the back of an increased in volume. The recent profit taking which saw it drop to a low of $0.225 on 13 February 2014 was accompanied with low volume. It closed last Friday at $0.255.

The trend seems to be up as evidenced from the rising moving averages. In addition, the moving averages have made golden crosses in January 2014 which further support the uptrend observation.

Supports and resistances are as follows

Supports: $0.245 / 0.235 / 0.225 – 0.230

Resistances: $0.265 / 0.275 – 0.285 / 0.305

Chart 1: Seems to be on an uptrend

Source: CIMB chart as of 21 Feb 2014

Conclusion – This Is Just An Introduction
Sunshine seems to be on the cusp of a recovery based on its results from the preceding three quarters, coupled with decent valuations (NAV / share is $0.350) and dividend yields amounting to around four percent. Nevertheless, this is an S chip which is subject to S chip risk, fluctuations in raw material prices and the vagaries of the automotive industry cycle in China. Readers who are interested should take a look at their website and their AR2012 for more information.

China Sunsine reports 4QFY13F results on 26 February. A results briefing will be held on 27 February.

P.S: I have sent a short email to clients to summarise the gist of the above writeup a few days ago.

Ernest Lim is a CFA, CA and has worked at GIC Special Investment. He has a solid feel of the markets and financial world and is now a remisier.

Please click here for more information about this author.

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