Updated: Mar 21
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2H20 results mainly driven by volume growth rather than ASP. We expect ASP growth to materialise in the upcoming prints
Sales volume growth should continue to be supported by high utilisation, ongoing capacity expansion and steady downstream demand
Valuation still remains undemanding at ~5.0x ex-cash P/E
2H20 Financial Highlights
2H20 revenue ticked up 1.0% to Rmb 1.3b as sales volume expanded by 9.6% from 85,400 tons to 93,600 tons. This was partially offset by a 9% dip in ASP from Rmb 14,900 to Rmb 13,600.
Gross profit swelled 22.4% from Rmb 292.8m to Rmb 358.4m mainly due to lower cost of sales, driven by lower aniline prices.
Profit before tax surged 40.0% from Rmb 132.6m to Rmb 185.6m, driven by lower S&D and administrative expenses.
Accordingly, net profit grew by 10.9% from Rmb 123.0m to Rmb 136.4m, slightly hampered by a higher tax rate due to the removal of the "High-tech Enterprise" status of main subsidiary Shandong Sunsine.
Meanwhile, balance sheet remained solid with net cash per share of $0.28, constituting 57.0% of market cap as of writing.
Our view on Sunsine's outlook
1) Rising ASP could show up in the upcoming prints
The slight Rmb 100/ton uptick in average aniline prices seen in 2H20 from 1H20 suggests that aniline prices have been rather stable over the year.
In actuality, this cannot be further from the truth as aniline prices collapsed to a low of Rmb 4,200 in July, driven by the price shocks in the upstream crude derivatives markets. Since the July trough, aniline prices have mounted a strong recovery, with December's prices marking a year-high.
Furthermore, this rally shows no signs of abating, with recent data revealing that spot aniline has broken the Rmb 10,000/ton mark, reaching levels not seen since the 2018 cycle peak. This is driven by a combination of supply-side pressures accompanied by steady downstream demand.
Sunsine has built a strong record of passing on increasing raw material prices to its customers over the years, with ASPs moving along the same trajectory as aniline prices. Given this cost-plus model and rising aniline prices, we could see higher ASPs showing up in future prints which would be constructive for revenue growth. According to research house CGS-CIMB, this is already playing out with average prices of accelerators and anti-oxidants improving by 40% and 38% respectively since Sep '20.
Our bullish views on ASP are further supported by positive commentary provided by Executive Chairman in the recent FY2020 results presentation. Contrasting his comments with that made during the 1H18 rubber accelerator cycle peak, we believe that there is still room for ASP expansion.
2) Volume growth could be supported by capacity expansion
Sunsine's sales volume growth remained strong throughout the aftermath of the COVID-19 pandemic, growing 10% y/y in 2H20 and reaching a record high on a half-yearly basis. This was mainly due to strong downstream demand from the auto markets.
As a result, Sunsine was able to cement its market dominance both domestically in China (34%), as well as on a global scale (22%).
Despite the disruptions from COVID-19, Sunsine's growth ambitions have shown no signs of easing, with capacity expansion plans still ongoing. Two of their expansion projects are expected to start commercial production by 2H21, which would increase their Insoluble Sulphur and Anti-oxidant TMQ capacity by 30,000 tons each.
Sunsine's persistently high utilisation rates are also an encouraging sign that demand for its products have remained strong. We suspect that dampened utilisation seen in accelerator production was partly due to a 20,000 ton increase in capacity in 1H20.
Should utilisation rates remain strong going into 2021, we could see sustained sales volume expansion.
3) Timeline of potentially positive events
Despite a strong recovery in fundamentals, Sunsine still trades at an undemanding 5x ex-cash LTM P/E and 0.86x LTM P/B. This is a far cry from the ~2.0x P/B levels seen during the 1H18 cycle peak. Should ASP reach its previous high and volume growth continue on its upward trajectory, we could see shareholder returns being driven by both earnings growth and multiple expansion.
The street is largely bullish on the stock with 3 Buy ratings. Notably, the stock saw recent TP upgrades from research houses UOBKH ($0.48 > $0.58) and CGS-CIMB ($0.55 > $0.61).
Since our last article on 15 Aug '20, Sunsine has risen from $0.32 to reach $0.495 at the time of writing, marking a 54.7% increase. Despite improving fundamentals in terms of accelerator prices and ongoing capacity expansion plans, we still think the market has not fully priced in the possibility of further ASP expansion and volume growth. With the data points pointing to a strong recovery in revenue growth in the upcoming prints, we remain cautiously optimistic on Sunsine's growth prospects.
Thanks for reading,
PS. If you wish to read our previous articles on China Sunsine, you can find them here:
Disclaimer: We are long China Sunsine at an average price of $0.485. This article is not an investment (buy/hold/sell or otherwise) recommendation, this is only for educational and discussion purposes. This article is not tailored to the specific circumstances of any reader. I/we/The Snowball do/does not purport to be in the business of providing financial advice and the contents of the article should not be regarded as such.
Cover photo source: Andrew Coop on Unsplash
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