China Sunsine rising with steady tyre demand

An avid tea drinker, chemicals industry veteran Liu Jing Fu usually unwinds at the end of a long day with a steaming, amber-coloured brew. He sips black tea during the long winter months, and green tea in spring or summer.

But even during such quiet moments, work is never far from his thoughts. "I spend a lot of time thinking about business strategy and reading," said the executive director and chief executive officer of SGX-listed China Sunsine Chemical Holdings.

Mr Liu, who took on his current role in November 2013, oversees all of China Sunsine's operations and is responsible for the group's strategic planning. Prior to this appointment, he was the general manager of the group's key subsidiary, Shandong Sunsine Chemical Co.Before joining China Sunsine in 2006, Mr Liu, 65, served as the deputy chairman of both Heze Petroleum Chemical Association and Heze Electrical, Mechanical and Petrochemical Association. He obtained his bachelor's degree in chemical engineering from Shandong Chemical College in 1980, and became a qualified senior engineer in 1993.

Listed on SGX in July 2007, China Sunsine is a key player in the natural rubber industry supply chain. The specialty chemicals company - established in 1977 - started producing rubber accelerators in 1994 in anticipation of rising demand for cars and tyres.

Today, the group is the world's largest manufacturer of rubber accelerators - with a 20 per cent global share - and China's biggest producer of insoluble sulphur. It counts more than 65 per cent of the Global Top 75 tyre manufacturers - including Bridgestone, Michelin, Goodyear and Pirelli - as its customers.Its production facilities are located at Shanxian, Weifang and Dingtao in Shandong province, with a total annual capacity of 152,000 tonnes, comprising 87,000 tonnes of rubber accelerators, 20,000 tonnes of insoluble sulphur and 45,000 tonnes of anti-oxidant. It also has a centralised heating plant at Shanxian that generates steam and electricity.

Rubber chemicals are additives blended with natural or synthetic rubber during the manufacturing process. Rubber accelerators shorten the reaction time between rubber and sulphur, while for high-temperature applications, insoluble sulphur is used in place of ordinary sulphur that melts at lower temperatures. Anti-oxidants offer anti-oxidation and anti-degradation properties to boost the quality and extend the lifespan of the final product.

An estimated 90 per cent of the consumption of rubber chemicals is associated with the automobile industry, and 70 per cent of the output is channelled into the production of car tires.

ESTABLISHED BRAND

China Sunsine has a market capitalisation of over $760 million.

In the 2018 year-to-date, its shares have generated a total return of more than 75 per cent, outperforming the benchmark Straits Times Index and the broader FTSE ST All-Share Index's total returns of -0.9 per cent and -1.6 per cent respectively.

China Sunsine has recorded a profit every year since the management buy-out led by chairman Xu Cheng Qiu in 1998. Prior to 2014, the group chalked up net profits of 100 million yuan or below. But when China stepped up its pollution crackdown in 2014, its earnings surged to around the 200 million yuan (S$42 million) level between 2014 and 2016. Last year, when the central government's enforcement actions resulted in a further reduction of rubber chemical capacity, the group generated a record full-year net profit of 340 million yuan.

Between 2013 and 2017, China Sunsine's earnings and revenues have increased by a compounded annual growth rate (CAGR) of 45.2 per cent and 12.7 per cent respectively.

Its balance sheet is also strong - it had zero debt at the end of 2016 and 2017, while cash and cash equivalents stood at 508.7 million yuan as at 31 March this year , up from 499.6 million yuan as at Dec 31 last year.

"We are focused on serving big-volume tyre makers and investing in automation, intelligent manufacturing techniques, and miniaturisation, as well as green production technologies," Mr Liu said.

Despite grappling with intense competition and volatile raw material prices, China Sunsine continues to play to its key competitive strengths, he added. "We have a wide product range that is reliable, of high quality, and satisfies our customers' needs - in other words, our branding is well-established.

"At the same time, our scale keeps our cost of production low. We've also invested heavily - since the early years - in research and development, safety production, as well as environmental protection measures. All these have helped cement our market leadership."

Barriers to entry are high in this industry, which remains tightly regulated by China's environmental protection laws. The group has benefited from the government's enforcement action against competitors that have failed to meet strict regulatory standards.

While overall average selling prices (ASPs) jumped by 30 per cent in 2017 over the previous year, this uptrend may not be sustained over the longer term.

Global peers in the rubber accelerator segment include Tianjin Kemai, with an annual capacity of 51,000 tonnes, and Yanggu Huatai, with an annual capacity of 30,000 tonnes. This compares with China Sunsine's annual capacity of 87,000 tonnes.

Among insoluble sulphur producers in the country, both Yanggu Huatai and Wuxi Huasheng have an annual capacity of 10,000 tonnes each, versus China Sunsine's 20,000-tonne annual output.

This year, the group is slated to add a 10,000-tonne high-grade TBBS rubber accelerator production line, and a 10,000-tonne insoluble sulphur line. Further capacity expansion is possible with land and ready infrastructure in place, along with a cash hoard of over 500 million yuan.

BURGEONING DEMAND

Looking ahead, given its focus on production technology, innovation, and R&D, China Sunsine remains optimistic about its performance, Mr Liu said.

China's rising automobile demand will also provide an added boost, he noted.

"Being the world's largest auto market, and with the Chinese population's increased purchasing power, we believe China's car sales will remain robust over the next few years," Mr Liu said.

Likewise, the global tyre market is forecast to expand at a robust CAGR of 6.3 per cent in value terms between 2017 and 2027, reaching a value of about US$645 billion (S$877 billion) by the end of that period, according to data from Future Market Insights.

While the industry outlook remains bright, one issue that hovers at the back of Mr Liu's mind is the group's talent pool. "We need to improve the quality of our talent so that we can execute better - that is our greatest challenge."

He added that China Sunsine's partnerships with tertiary research institutions like Beijing's Tsinghua University will help boost R&D efforts, and provide a steady source of human capital. "We want to maintain our focus on our people - they are our key assets and the most important feature of the group...We also pride ourselves on being very customer-focused and service-oriented, and are cognisant of our duty to the community, government and society as a whole."