CGS-CIMB Research analyst Ong Khang Chuen has kept an “add” rating on China Sunsine Chemical Holdings with a lowered target price of 67 cents from 78 cents.

China Sunsine reported a 1QFY2022 ended March net profit of RMB157 million up 26% y-o-y, above Ong’s expectations at 35% of his FY2022 forecast.

Although sales volumes were down 11% y-o-y due to the Winter Olympics and China’s Covid-19 control measures, China Sunsine achieved 11% y-o-y revenue growth on the back of higher average selling prices (ASPs) up 25% y-o-y in 1QFY2022.

Gross profit margins (GPM) came in at 34% up 2.4 percentage points y-o-y, as China Sunsine benefitted from stronger ASPs especially for antioxidant products while input costs remained stable.

According to sci99.com, a Chinese commodity market information service provider, rubber accelerator prices remained relatively stable on a m-o-m basis in March and April, while aniline prices eased slightly.

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As China Sunsine typically locks in quarterly pricing for its rubber accelerator products with major customers (while taking spot prices for raw materials), Ong believes near-term gross profit spread is likely to remain favourable in 2QFY2022.

With its production base and key domestic customers mainly based in Shandong Province, China Sunsine’s operations are not directly impacted by the multiple outbreaks of Covid-19 cases in China at present .

However, with China’s economy facing increasing pressure relating to shrinking demand and supply disruptions, China Sunsine’s volume weakness could persist in the coming quarters, says Ong.

“Weaker consumer sentiment domestically may impact automobile sales and hurt tyre demand, though management noted that export sales have remained relatively resilient YTD,” the analyst writes.

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“While China Sunsine’s profit spread should remain healthy in the near-term, we think China’s Covid-19 woes may pose downside risk to its sales volumes,” he says.

Some downside risks Ong considers include lockdowns in Shandong and intensifying price competition which may negatively impact China Sunsine’s profit spread.

As at 11.44am, shares in China Sunsine are trading flat at 44 cents at a FY2022 P/B ratio of 0.61x and dividend yield of 4.19%.

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