SINGAPORE (Oct 22): Volatility appears to be the theme of the day in global stock markets. Investors are noticeably jittery, following a bruising couple of weeks, although a steadier Wall Street has allayed the worst of fears, for now.
The US economy remains in good shape. Recent data showed a record number of jobs available in August. The main worry is rising valuations and a widening valuation gap with the rest of the world.
Thus, the current 3Q2018 results season would be key in whether the recent selloff is just a blip or the beginning of a broader downtrend. Consensus is expecting y-o-y earnings growth in the region of 20% or so. If companies can beat market expectations, then stocks may well resume their record run.
The reporting season has got off to a good start, with upbeat earnings from bellwether companies such as JPMorgan Chase, Morgan Stanley, Goldman Sachs Group, Johnson & Johnson and UnitedHealth Group. Netflix added subscribers at a stronger-than-expected clip while Walmart offered an upbeat forecast for its domestic sales, although IBM did dampen sentiment after a miss on revenue.
Investors may require more convincing when it comes to emerging markets, given near-term risks and concerns. Attempts at rebounds, thus far, appear tentative and most Asian markets remain deep in the red for the year.
An obvious near-term catalyst would be a breakthrough in trade talks between the US and China. Chinese stocks endured another wave of selling and remain the worst-performing market in the world, as investors priced in the potential impact of a full-blown trade war and slowing economy.
So far, exports have held up, likely owing to companies front-loading their purchases before the worst of the tariffs kick in by January 2019. But China has been downshifting on its own volition, with deleveraging measures and focus on slower but more sustainable quality growth. This transformation and adjustment process will continue, affecting short-medium-term growth but should be positive for the country in the long run.
Amid the turmoil, it is worth bearing in mind that many Chinese stocks are trading at attractive valuations based on their underlying fundamentals. It is a matter of time before market sentiment turns.
There is also a longer-term, bright side to prevailing trade conflicts — and a factor to consider in terms of investing decisions. It will hasten the reshuffling of global trade and supply chain, relocation of manufacturing bases from China and spillover investments into Asean. China will be the world’s biggest consumer market in the foreseeable future. It is already a key trading partner for most countries in this region.
The Global Portfolio remained in negative territory despite clawing back some losses this week. Total portfolio returns since inception now stand at -6.6%. This portfolio is still underperforming the MSCI World Return index, which is up 1% over the same period.
Followers of this column would notice that I added China Sunsine Chemical Holdings to the portfolio recently. I have bought the stock before and sold it at a good price and profit back in May. For those who are not familiar with the name, China Sunsine is listed in Singapore but its operations are based in China. The company is the world’s largest producer of rubber accelerators with an estimated 18% global market share and a 31% market share in China.
It supplies to more than 1,000 customers, including to two-thirds of the world’s top 75 tyre makers, including Bridgestone, Michelin and Goodyear. The company caters mostly to the domestic Chinese tyre demand — for new cars and the replacement market.
The company benefited greatly from last year’s Chinese government crackdown on subpar rubber-producing factories, which suppressed supply and resulted in sharply higher selling prices. China Sunsine upholds strict environmental protection standards, with high compliance on wastewater treatment and sulphur recycling standards.
As a result, profits jumped sharply higher in 1HFY2018 — net profit tripled from RMB131.7 million ($26.2 million) to RMB389.2 million — on the back of a 37% y-o-y increase in selling prices and 12% growth in volume sales.
Inevitably, selling prices must normalise as some of the factories that were shut down resume production. And we are beginning to see this in 3Q2018. Selling prices have fallen 20%, on average, from their highs.
As such, earnings in 2H2018 will be lower than that in the first half of the year. So will earnings in 2019, assuming normalised prices for the full-year. I believe this is partly the reason its share price has adjusted downwards — from a high of $1.63 in June. The stock now appears attractively valued again.
China Sunsine’s underlying business and fundamentals remain intact. An additional capacity of 20,000 tonnes (or 13% increase) has been completed and awaiting the green light from the government. This should partially offset lower selling prices. Positively, the cost for aniline, a main raw material, has also come off about 20% from the peak.
Meanwhile, demand for tyres should be fairly resilient in the replacement market (which typically accounts for more than two-thirds of total demand) even if new-car sales decline and more consumers subscribe to mobility as a service.
We estimate China Sunsine’s profits at RMB560 million this year and RMB400 million in 2019. That means the stock is trading at a 2019 forward price-to-earnings ratio of six times. Return on equity was 22% in 2017 and 37% for the trailing 12 months. In addition, the company has a minimum 20% dividend payout policy, which translates into estimated yields of 3% to 4% at current prices.
Tong Kooi Ong is chairman of The Edge Media Group, which owns The Edge Singapore
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor’s particular financial situation, investment objectives, investment horizon, risk profile and/or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
