Friday, October 3, 2008

China Susnine

Attempted fundamental analysis of China Sunsine (symbol: ChinaSsine).

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:

Global producers:
NameCapacity (tons)
Lanxess (spinnof from Bayer)45,000 (estimated)
Chemturaless than 30,000
China Producers:
Tianjin Organic (SOE)26,000
Zhenjiang No. 2 Chemical (SOE)19,000
(figures from company announcement on SGX: 'Clarification of press article', 11/9/08)

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.
Accelerator chemicals make up only about 1% of the cost of tyre production, so the company believes they can pass on any production-cost increases to their customers. Lets check the gross margins for past quarters to see if they were able to pass on any raw material price changes:

3 Months Ended
Revenue (RMB 000s)
Cost of Sales (excludes export rebate listed in Earnings Stmnt)
Gross Margin
Dec 06
Mar 07

Jun 07
ASP is RMB 19,455 per ton
Sep 07

not available yet

Dec 07
The y-o-y margin decrease is entirely due to raw material prices. The company results include the export rebate, which I stripped out.

Article: "Sunsine had to produce a range of accelerators with varying margins, instead of concentrating on just the high-end, since it wants to meet the needs of clients".

Article: Sunsine experienced a shortage of internally-produced MBT, ... used as an intermediary product for the production...

The shortage was .caused by sales volume increasing, year-on-year, in the past two quarters by an average of 35% each in Q2 and Q3. As a result of the shortage, Sunsine had to buy MBT from external sources at a higher price.

Article: This year (in 2007), China Sunsine dropped average selling prices by 8.4%, a move aimed largely at edging out from the market some of its 100-odd Chinese competitors, especially the smaller ones.
Mar 08
ASP increased 8.1% from Mar 07
June 08
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
(RMB 000s)
Accounts Receivables (trade + other)
Cash Inflow/(Outflow) due to working capital
CFO excluding WC
Dec 06
Mar 07
125.6not given

not given

Jun 07

Sep 07

Dec 07


Mar 08


Jun 08


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:
  1. expand 5000-ton anti oxidant TMQ plant to 10,000 tons. Cost not given.
  2. expand 5000-ton insoluble sulfur plant to 10,000 tons. Cost not given.
  3. Increase capacity for MBT (an intermediate product): new 10,000 tons facility by 3Q08. Cost <= 20m.
Generally, past increases in capacity of 5,000-10,000 tonnes seem to cost 20-30m RMB. Lets assume this for a and b above, for a total cost of 70m.

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.
6) Potential Growth

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.
7) Valuation

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.
8) Chart

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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