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CGS-CIMB upgrades China Sunsine Chemicals to 'add'

The higher target price of 47 cents is pegged to 0.6x book value

CGS-CIMB analysts Kenneth Tan and Ong Khang Chuen have upgraded their call on China Sunsine Chemicals from "hold" to "add", given how the chemicals player is seen to enjoy stronger demand ahead.

At a recent visit to the company's plants, the analysts observed that it has new production lines, including those based on in-house technology. Key machinery has already been installed and is undergoing testing, with commercial production likely in early next year.

Citing the management, the analysts note in their Sept 21 report that China Sunsine can reduce annual production costs by RMB30 million when the new mercaptobenzothiazole line is in full ramp-up.

Over the last two months, the company has been seeing stronger demand for its products from export markets such as Thailand and Vietnam.

"Management reiterated that while competition remains intense, it is not overly concerned given Sunsine’s dominant market leadership in the global rubber chemical industry," state Tan and Ong.

Citing data from sci99, the analysts note that average selling prices of rubber accelerators surged by 21% this month versus what could be fetched in August, due to higher raw material costs that have been passed on to customers, as well as recovery in demand from tyre makers in China replenishing inventory.

"We are now more confident in Sunsine’s cost pass-through ability, and believe it could record hoh improvement in 2H23F gross profit margin to 24.6%, versus 23.8% fetched in the preceding 1HFY2023,"

"We believe our FY24 and 25F gross profit margin forecasts of 24.6% and 25.0% are sustainable given Sunsine’s historical 10-year average gross profit margin of around 27%," they add.

Tan and Ong point out that China Sunsine, now trading at 0.56x price to book, is at a valuation near the depths seen during the pandemic.

With higher earnings per share assumptions of 9% and 10% for the current FY2023 and coming FY2024, they have come up with a new target price of 47 cents, up from 42 cents previously, is based on 0.6x price to book.

Further re-rating catalsyts, according to the analysts, will come from government stimulus promoting big-ticket spending in China.

Downside risks, on the other hand, include prolonged competition and a spike in input costs leading to margin erosion.

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