China Sunsine – Recovery in play
On 21 Feb, I have done a writeup on China Sunsine pointing that they may be on the cusp of a recovery http://www.sharesinv.com/articles/2014/02/25/sunshine-michelin-tyres/. Since my writeup (Sunsine closed at $0.255 on 21 Feb), it has surged 36.7% (inclusive of a dividend of $0.01 during the period) to touch an intraday high of $0.335. It closed at $0.310 on last Friday.
Sunsine’s 1HFY14 net profit exceeds the entire net profit earned in FY13
Based on Table 1 below, Sunsine seems to be turning around with 2QFY14 sales and net profit up significantly from the previous few quarters and on a year on year comparison. What is interesting is that 1HFY14 net profit has exceeded the net profit earned in the entire 2013. This good set of results is on the back of the increase in ASP, as well as, sales volume.
Table 1: Sunsine’s results snapshot (Not able to post here due to formatting problems)
Source: Company & Ernest’s compilations *ASP may differ slightly with company’s reports due to rounding
3QFY14F looks bright on several aspects
The upcoming 3QFY14F looks bright on several aspects.
Firstly, according to brokerage 中信建投证券, the supply of MBT, an intermediate product necessary for the production of MBT based accelerators dropped more than 30% as some of the MBT producers were forced to close down or suspend production due to their inability to meet the environment standards set up by the Chinese authorities. As MBT prices rise, so does the MBT based accelerators. Although China Sunsine has their own factory for production of MBT, they have been compliant with the environment standards hence their production is not affected.
Secondly, the accelerators’ inventory levels in China have been reduced due to an increase in export of accelerators to overseas.
The above trend of relatively high prices of accelerators is unlikely to ease in the near term as companies take time to rebuild / improve their production facilities and comply with the environment standards. In addition, China is likely to maintain their resolve in reducing pollution especially with the upcoming APEC meeting in November.
Thirdly, raw material prices continue to be stable hence it is unlikely to have a significant adverse impact on its upcoming 3QFY14F results.
Sunsine has paid $0.01 / share as dividends for seven consecutive years
For seven consecutive years, Sunsine has paid $0.01 / share as dividends. At Friday’s closing price of $0.310, this represents a dividend yield of 3.2%. There may be scope for higher dividends as Sunsine 1HFY14 net profit eclipses that of FY13.
Stark discount to its Chinese peers
Sunsine trades at 0.8x P/BV and annualised 2014F PE of around 4.3x. Net asset value per share is around $0.380. On a historical basis, Sunsine trades at an average P/BV and P/E of around 1.0x and 7.3x respectively.
With reference to Figure 1 below, it is noteworthy that its peer Shandong Yanggu Huatai Chemical (“YGHT”) trades at 35x FY14F PE and 4.6x FY14F P/BV. Furthermore, YGHT’s estimated FY14F revenue and net profit are lower than Sunsine’s 1HFY14 figures.
Figure 1: Analysts’ estimates of YGHT’s financials in the next 3 years
Source: Bloomberg as of 25 Aug 14
As with all investments, there are naturally risks and noteworthy points to be aware of.
Investment risks
Illiquidity
Average 30D and 100D volume amount to 1.3m and 557K shares respectively. Although this is still pretty illiquid, it has improved from my last writeup where the average 30D and 100D volumes amount to 1.19m shares and 422K shares respectively. Based on its annual report 2013, the top twenty shareholders have about 83.7% of Sunsine’s outstanding shares. Thus, there is little free float which results in its illiquidity. This is not a liquid company where investors can enter or exit quickly.
S chip risk
This is a Chinese company helmed by Chinese management hence the usual S chip risk applies.
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 yet. However, there seems to be more interest in this counter as I have started seeing unrated reports on Sunsine and online forums where they talk more about Sunsine than before.
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. For 1H2014, China’s auto sales rose 11% on a year on year comparison to 9.1m. A significant slowdown in the China’s automotive market is likely to have an adverse impact on Sunsine.
Margins dependent on raw material cost
Most of its cost of sales came from direct raw material costs, namely Aniline. According to Sunsine’s AR2013, ceteris paribus, every 10% increase / decrease in the prices for Aniline would have the effect of decreasing / increasing the net profit by RMB30.1m in FY13. As such, raw material costs do play a significant aspect in Sunsine’s profitability. As mentioned above, Aniline prices have remained pretty stable since the start of the year.
Other developments
Sunsine is on track to complete its new heating plant by 3QFY2014. This may incur some additional costs but it is likely to be an interesting cash flow generating investment over the medium term. See my previous writeup for more information on this.
Sunsine’s chart analysis
Since my writeup (Sunsine closed at $0.255 on 21 Feb), it has surged 36.7% (inclusive of a dividend of
$0.01 during the period) to touch an intraday high of $0.335. It closed at $0.310 on last Friday. Based on Chart 1 below, Sunsine has closed the gap around $0.290 – 0.310 as it weakens from $0.335 on 7 Aug. It seems to have just formed an upside break in the flag formation. However, we have to monitor how the price performs in the next few days. A sustainable upside breakout above $0.305 with volume points to a measured eventual technical target of around $0.365.
$0.01 during the period) to touch an intraday high of $0.335. It closed at $0.310 on last Friday. Based on Chart 1 below, Sunsine has closed the gap around $0.290 – 0.310 as it weakens from $0.335 on 7 Aug. It seems to have just formed an upside break in the flag formation. However, we have to monitor how the price performs in the next few days. A sustainable upside breakout above $0.305 with volume points to a measured eventual technical target of around $0.365.
Supports and resistances are as follows
Supports:
$0.300 / 0.290 / 0.275
$0.300 / 0.290 / 0.275
Resistances:
$0.320 / 0.330 – 0.335 / 0.350
$0.320 / 0.330 – 0.335 / 0.350
Chart 1: Seems to have staged a flag breakout
on the upside
on the upside
Source: CIMB chart as of 28 Aug 2014
Conclusion – FY14F likely to be a record year for Sunsine
Sunsine seems to be in a sweet spot at the moment and FY14F may well be a record year for Sunsine. Nevertheless, as there is no rated analyst coverage on this stock, it may take time for the market to appreciate it. Notwithstanding the potential positive points about Sunsine, readers should note that 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 http://www.chinasunsine.com/ and they can email me at crclk@yahoo.com.sg for the unrated reports on Sunsine.
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