Maybank Kim Eng says China Sunsine is scaling up manufacturing capacities of its rubber chemicals plants in China to ride on global soaring tyre demand.
China Sunsine has obtained government approval for the trial run of its new 30k tonne capacity production line to manufacture TBBS rubber chemical and a 10k tonne insoluble sulphur (IS) line at its current Shanxian site.
Vulcanisation is the process of improving the elasticity and strength of rubber by heating it in the presence of sulphur. TBBS is used as a catalyst to speed up the vulcanisation process.
According to Global Market Insights, global rubber-chemical demand is set to grow at a CAGR of 4.9% through 2025. The estimate tallies with global passenger-and-commercial-vehicle population growth of 6.7% CAGR from 2009-2017.
China Sunsine has already entered into an agreement with the government to acquire 534,000 sqm of land in the Shandong Shanxian Chemical Zone to build more lines. Currently, competitors have yet to announce any concrete plans for capacity expansion.
In a Tuesday unrated report, Maybank Kim Eng analyst Kareen Chan says China Sunsine, as a specialty rubber chemicals manufacturer, enjoys better pricing power. This is because rubber chemicals only make up 3% of tyre manufacturers’ production costs, so tyre makers are unlikely switch suppliers as qualification process is long and tedious.With strong technology IP and China Sunsine’s market leadership in TBBS -- 20% share globally & 33% in China -- its economic moat is relatively deep.
In addition, net cash of RMB1.04 billion or 42 cents/share should support further expansion without the need for fund-raising.
While the street is expecting a 28% drop in FY19E net profit, better-than-expected ASP and sales volume may provide upside surprise.Currently, China Sunsine trades at 6.1x FY19E consensus forecasts, below industry average of 13.1x and its historical mean of 6.6x. Ex-cash, valuation drops to 3.9x.
As at 11.56am, shares in China Sunsine are up 1 cent at $1.16.
