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CGS-CIMB lowers China Sunsine's TP to 60 cents due to potentially weaker FY2023

Felicia Tan
Felicia Tan11/29/2022 12:10 PM GMT+08  • 3 min read
CGS-CIMB lowers China Sunsine's TP to 60 cents due to potentially weaker FY2023
On Nov 11, China Sunsine reported 3QFY2022 core net profit of RMB128 million ($24.5 million) for 3QFY2022, which was 28% higher y-o-y but 45% lower q-o-q.
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CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan are keeping their “add” call on China Sunsine Chemical Holdings after the company’s results for the 3QFY2022 ended Sept 30 came in above expectations.

The positive recommendation also comes as the company’s valuations are deemed as “attractive” to the analysts, at an FY2023 P/E ratio (ex-cash) of 1.9x. China Sunsine’s strong free cash flow generation track record is also seen as a plus.

On Nov 11, China Sunsine reported a core net profit of RMB128 million ($24.5 million) for 3QFY2022, which was 28% higher y-o-y but 45% lower q-o-q. The quarterly net profit brought China Sunsine’s 9MFY2022 net profit to about 88% of the analysts’ FY2022 forecast despite the challenging macro environment.

“The beat was due to stronger-than-expected sales volumes (-6% y-o-y), as we had projected a steeper decline in view of a slowdown in China’s economy,” Ong and Tan write.

“3QFY2022 gross profit margin (GPM) saw some contraction on a q-o-q basis to 27.2%, but was stronger on a y-o-y basis. Stronger y-o-y profits were also helped by a lower effective tax rate as China Sunsine was awarded the ‘High-Tech Enterprise’ status in May, which entitles it to a concessionary tax rate of 15% for three years,” they add.

Despite the “resilient sales volumes”, the analysts are anticipating the company to report a “narrower profit spread” in the 4QFY2022 due to m-o-m increases in rubber accelerator and aniline prices and given that China Sunsine typically locks in quarterly pricing for its rubber accelerator products with major customers while taking spot prices for raw materials.

See also: UOB Kay Hian upgrades Frencken to 'buy' due to 'positive outlook' for its key customer and improving cost pressures

On this, the analysts are forecasting the company’s GPM to decline further q-o-q to 25%.

As global macro conditions seem to be declining further, the analysts believe sales volumes for rubber accelerators will be negatively impacted as consumers dial back discretionary spending such as automobiles.

“While the potential reopening of China could help spur domestic demand recovery, we still expect FY2023-FY2024 sales volumes to be lower than FY2022 levels on export weakness,” say Ong and Tan. “We hence lower our FY2023-FY2024 earnings per share (EPS) [estimates] by 4.1%-4.5%.”

See also: Citi maintains 'buy' rating on Genting Singapore off the back of MBS results beat

In their report on Nov 15, Ong and Tan lowered their target price estimate to 60 cents from 70 cents previously. The lower target price is now pegged to a lower FY2023 P/BV of 0.7x, from 0.9x previously, as the analysts account for a potentially weaker FY2023. The new ratio is 0.5 standard deviations (s.d.) below China Sunsine’s 10-year historical mean.

As at 12.09pm, shares in China Sunsine are trading flat at 41 cents.

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