China Susnine is a small specialty chemical company producing chemicals for the tire industry.
1) Competitive position
Their aim is to expand capacity to grow market share to 25% by 2010. From an Aug 07 article: "We are now China's largest maker of rubber accelerators. A market share of 25% [will] gives us pricing power... ".
In June 08, management believed they have a 19% China market market share (8% global) as China's largest rubber (2nd largest global), based on global rubber usage figures.
In an 2Q08, China Sunsine's annual production capacity for accelerators was 49,000 tons. This compares to:
| Name | Capacity (tons) |
| Lanxess (spinnof from Bayer) | 45,000 (estimated) |
| Chemtura | less than 30,000 |
| China Producers: | |
| Tianjin Organic (SOE) | 26,000 |
| Zhenjiang No. 2 Chemical (SOE) | 19,000 |
Based on these figures (from the company), they seem to be one of the strongest players in their niche, with only 2 or 3 other competitors being able to produce 1/2 as much as them. However the market is still fragmented, with many players.
2) Business Model
From their 1H08 results (at 92% utilization rate): raw materials are by far the largest proportion of costs (75-80% of revenue). Administrative (3.8%) and selling expenses (2.5) are next biggest. Their business model is similar to Pfood, in the sense that they add a small amount of value to their raw materials before selling as a consumable product.
Depreciation is small (2%) so it is not a capital intensive industry. Hypothetically, even if utilization was to halve with all other costs being fixed (with only raw materials being halved), they would still be profitable (profit would be reduced from 42m to 8m).
The biggest factor is raw materials costs. SIAS research, in their Dec 07 'Initiation of coverage' reports that raw materials contributed 80-83% to their costs of sales in 04, 05 and 06. Aniline contributed 35-40% of the above raw materials cost (they did not give the numbers to show how it was derived), meaning it contributed 28-33% of the total cost. How has the aniline price fluctuated recently?
- Benzene, the main raw material of aniline, spiked in May 08, before
- From this chart (from Netresearch free 'Initiation of Coverage' report on Sp Chemicals), we see that Aniline prices rose 18% in 1H08.
| 3 Months Ended | Revenue (RMB 000s) | Cost of Sales (excludes export rebate listed in Earnings Stmnt) | Gross Margin | Comments | |
| Dec 06 | 126700 | 88100 | 30.5% | ||
| Mar 07 | 125600 | 91100 | 27.5% | ||
| Jun 07 | 159632 | 122021 | 23.6% | ASP is RMB 19,455 per ton | |
| Sep 07 | not available yet | ||||
| Dec 07 | 179600 | 143200 | 20.2% |
| |
| Mar 08 | 167200 | 130600 | 21.9% | ASP increased 8.1% from Mar 07 | |
| June 08 | 234900 | 171500 | 26.9% | ASP increased to RMB24,764 per ton (up 27% y-o-y for the quarter). Group passed its cost increases on to customers. | |
| Sep 08 | not available yet |
Even though Aniline increased substantially in 2Q08 (approx 18% y-o-y), ASP increased 27%, which means that it was able to increase its prices by more than the raw materials increases.
3) Quality of Earnings
Next I check for any problems with inventories or accounts receivables:
| 3 Months ended | Revenue (RMB 000s) | Accounts Receivables (trade + other) | Revenue/AC | Inventory | Revenue/ Inventory | Cash Inflow/(Outflow) due to working capital | CFO excluding WC |
| Dec 06 | 126.7 | 130.5 | 27.7 | (4.9) | 24.1 | ||
| Mar 07 | 125.6 | not given | not given | 42.0 | 23.7 | ||
| Jun 07 | 159.6 | 164.6 | 19.3 | (42.8) | 28.3 | ||
| Sep 07 | |||||||
| Dec 07 | 179.6 | 20.6 | 30.2 | 40.1 | 20.2 | ||
| Mar 08 | 167.2 | 224.7 | 31.7 | (31.9) | 21.7 | ||
| Jun 08 | 234.9 | 245.6 | 60.0 | (25.2) | 45.3 | ||
| Sep 08 | |||||||
Working capital is very volatile on a quarter-to-quarter basis. But they generally seem to make money from operations (the sum of the last two columns is positive, overall).
The increased inventory in 2Q08 (up 90%) probably makes sense due to increased production (up 40%) and rising costs (e.g.: aniline, up 18%). Monitor this in 3Q08 results.
From 1Q08, the depreciation policy has changed to increase the useful life of new machinery from 4 to 7 years. This can be ignored, firstly because depreciation is such a small cost, and secondly, because it only applies to new (and future) capex, not for previously bought equipment. This change only decreased the deperciation expense by 0.1M RMB.
The company stated (somewhere) they have (or had) a policy of only allowing a maximum of 5% revenue from single client - but I cannot find this in their 07 AR.
4) Debt
China Susnine had no long term debt in 1H08 results. They report that they have finished using their IPO proceeds with a surplus of 32.1 RMB mill (out of 100 mill).
Future plans for 2008 are:
- expand 5000-ton anti oxidant TMQ plant to 10,000 tons. Cost not given.
- expand 5000-ton insoluble sulfur plant to 10,000 tons. Cost not given.
- Increase capacity for MBT (an intermediate product): new 10,000 tons facility by 3Q08. Cost <= 20m.
No plans are given for beyond 2008. Here, they mention plans to produce aniline in-house, this must be later on.
Conclusion: FY08 capex can be covered by cash flow from operations based (50m in FY06, 59m in FY07).
5) Cyclical Factors
- Raw materials, as mentioned above. The article above about benzene prices mentions that China is building a new benzene plant which is expected to depress prices.
- Will follow the fortunes of the China tyre/automative undustry. See below.
Entirely dependent on China's tire industry.
- Expected to grow, as China's GDP and car ownership grows. Seems to be experiencing a cyclical downturn now (along with the rest of China).
- Note on history of US type industry .... grew fast in the 1920s, then declined as the inductry consilidated...this is not a problem now but may be something to watch out for in years to come. Michael Porter may have written abt tires.
At a share price of 20c:
- In 1Q08, the company declared a dividend of SGD 1c, giving a yield of 5% (assuming share price of 20c).
- FY-7 earnings were approx SGD 3.8c (18.22 RMB cents), giving a PE of 5.3.
Doesn't show anything.
9) Misc
Several misc. risks with this company:
1) All the information we have comes from company itself.
2) Family controlled and run: "Mr Xu’s two sons help him run the business. Eldest son Xu Jun, 37, is an executive director. The family has a deemed interest of 53% in the company". From article.
3) Very Illiquid. Only 5m shares were issued to retail investors. This means that funds cannot buy on the open market.
Because of these risks, especially number 3, I would limit any purchase to half of normal.
10) Conclusion
May be a good opportunity to buy a leader in (a small specialised segment of) China's automotive industry.
For now, wait. Market is still bad. The PE is low, but may stay low in such a bad market. I believe the PE will not go lower unless earnings drop.
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