2H22: Results In Line With Expectations; Stronger Performance Forecast 

Sunsine recorded 2H22 net profit of Rmb214.9m (-10.9% yoy), taking 2022 core profit to Rmb606.3m (+11.8% yoy), largely in line with our forecast. The lower 2H22 revenue was driven by a decline in sales volume and ASPs. While we have raised earnings expectations for 2023-24 due to capacity expansion projects, we also accounted for an expected decline in crude oil price by the US EIA. Maintain BUY with a 28% higher target price of S$0.575. 

RESULTS 

• Results in line with expectations. China Sunsine Chemical’s (Sunsine) 2H22 net profit fell by 11% yoy to Rmb214.9m, bringing 2022 core profit to 95% of our full-year estimates. 2H22 performance came on the back of lower revenue of Rmb1,802.5m (-8.4% yoy) due to both a decline in sales volume to 95,731 tonnes (-6.4% yoy) and a 2% yoy decrease in ASPs of rubber accelerators to Rmb18,532/tonne. For 2022, overall ASP increased by 8% yoy to Rmb20,237/tonne, as Sunsine was able to pass on the increase in raw material prices to customers. This drove the 2.7% yoy rise in 2022 revenue, offset by the 5% lower sales volume. 2022 core profit of Rmb606.3m (+11.8% yoy) excludes an Rmb36.1m tax refund received in 1H22 for the overpayment of 2021 tax expenses. 

• Higher margins recorded; special dividend proposed. Due to lower recorded revenue, gross profit fell by 4.9% yoy to Rmb469.9m in 2H22. However, 2H22 gross margin expanded 1.0ppt yoy to 26.1% (2H21: 25.1%, 1H22: 34.3%), with a more favourable sales mix comprising a higher proportion of antioxidant products. Full-year gross and core profit margins also improved by 2.3ppt yoy to 30.4% and by 1.3ppt yoy to 15.9% respectively. Management has proposed to pay out S$0.025/share, consisting of a final DPS of S$0.01/share and a special DPS of S$0.015/share (2021: S$0.01/share).

• Continuous expansion projects undertaken. In Oct 22, Sunsine commenced the construction of a project with a 20,000 tonnes/year capacity for an intermediate material used to produce many kinds of accelerators. Construction of Phase 2 of an insoluble sulphur project will also increase insoluble sulphur capacity by 50% to 90,000 tonnes/year. These projects are expected to be completed by end-23, and are likely to lift sales volume when operational. 

STOCK IMPACT 

• Strong balance sheet and healthy cash flow. As of end-22, total cash and bank balances stood at Rmb1,364.9m with no debt outstanding, which equates to Rmb1.41/share (S$0.27/share). Additionally, free cash flow generated in 2022 remained positive at Rmb122m (2021: Rmb163m) despite capacity expansion efforts. Correspondingly, net cash per share is estimated to increase from Rmb0.86/share (S$0.16/share) to Rmb1.06/share (S$0.20/share) and Rmb1.21/share (S$0.23/share) in 2023 and 2024 respectively. 

EARNINGS REVISION/RISK 

• Due to lower expectations for crude oil price according to US Energy Information Administration (EIA), we have tweaked our 2023 and 2024 gross margin assumptions from 30.0% to 29.0% and 30.0% to 29.1% respectively. 

• We have also raised earnings estimates for 2023/24 by 6%/7% to Rmb491m/Rmb575m respectively, on account of improved outlook for automotive sales in China, which is expected to grow at 4% yoy in 2023. 

VALUATION/RECOMMENDATION 

• Maintain BUY with a 28% higher target price of S$0.575 (from S$0.45), pegged to a multiple of 5.9x 2023F PE, its long-term average mean. Previously, we valued Sunsine based on 4.9x (-0.5SD below mean) 2023F PE, in line with its historical five-year average. We have raised our valuation multiple due to a less challenging outlook with China’s reopening. 

SHARE PRICE CATALYST 

• China’s reopening leading to higher consumption. 

• Production commencement for new capacities. 

COMPANY DESCRIPTION 

Sunsine produces rubber chemicals, primarily rubber accelerators and other related rubber chemicals such as anti-scorching agents.

BUY by UOB Kay Hian Research.  Share price closed at S$0.465