China Sunsine showing 'signs of a recovery': CGS-CIMB

CGS-CIMB has maintained its “add” call on China Sunsine with a raised target price of 42 cents, up from its previous price of 38 cents due to an expected earnings recovery in 2H20. 

Analyst Ong Khang Chuen said they expect recovery in 2H20, with sales volume forecast to improve to 87.9 kilotonnes (kt), which is up 3% y-o-y in 2HFY20, driven by downstream demand recovery. 

He noted that domestically, industrial production for the tyre manufacturing industry is “riding on an upturn” in the automobile industry, as China has launched various government stimulus and policies to promote domestic consumption. 

Meanwhile, the export volume of China’s rubber accelerators has also picked up in recent months, jumping 34% m-o-m in August, as overseas economies gradually emerge from lockdowns. 

He also estimates Sunsine is currently able to achieve a healthy utilisation rate of about 90%, even with the 20 kt capacity expansion in June.

In addition, he sees signs of a recovery for Sunsine’s average selling price (ASP). Rubber accelerator and anti-oxidant prices rose 1% and 17%, respectively, in September on an m-o-m basis. 

Ong also sees further recovery in the coming months, driven by” continued downstream demand recovery” and a rise in raw material costs. 

Aniline, a key raw material, also saw an m-o-m price uptick of 8% in September, as producers’ inventory levels return to a more normalised level. 

As such, he expects Sunsine to achieve a sequential earnings recovery in 2H20F, and forecast net profit of RMB109 million ($21.7 million), which is 32% higher compared to 1H20, but still 12% lower than 2H19.

Ong thinks “the worst is over” for China Sunsine, and recommends investors to accumulate at this level. He also said the share’s “valuation is attractive” as Sunsine is currently trading at 6.7x CY21F P/E, and downside risk is cushioned by its net cash of 27 cents per share. 

As at 2.10 pm, shares of China Sunsine are trading at 35 cents, with a price to book ratio of 0.62 and dividend yield of 3.31%.