A record half despite a challenging backdrop
- 1H22 core net profit of Rmb391m (+48% yoy) a record high, driven by higher ASPs, favourable gross profit spread and concessionary tax rates.
- While Sunsine’s profit spread should remain healthy in the near term, we think China’s Covid woes may pose downside risk to its 2H sales volumes.
- Reiterate Add given undemanding valuations at 1.9x FY23F P/E (ex-cash).
A record 1H despite tough operating environment
Excluding a one-off Rmb36m refund for over-payment of FY21 tax expenses, Sunsine’s 1H22 core net profit came in at Rmb391m (+48% yoy), a record high and accounted for 87% of our previous full-year forecast. While sales volume declined 3% yoy in 1H22 due to supply chain interruptions from the Winter Olympics and strict Covid-control measures in China, this was more than offset by its higher ASPs (+18% yoy) and favourable gross profit spread during the period (as Sunsine was able to pass on the higher input costs to customers). This was further boosted by a lower effective tax rate as Sunsine was awarded the “High-Tech Enterprise” status in May 2022, which entitles it to a concessionary tax rate of 15% for three years. Sunsine declared a special interim dividend of 0.5Scts in celebration of the 15th anniversary of its IPO.
Near-term profit spread likely to remain favourable
According to sci99.com, a Chinese commodity market information service provider, rubber accelerator prices remained relatively stable on a mom basis in Jun/Jul, while aniline prices eased slightly. As Sunsine typically locks in the quarterly pricing of its rubber accelerator products with major customers (while taking spot prices for raw materials), we believe its near-term gross profit spread is likely to remain healthy in 3Q22F (GPM: c.30%).
But weaker macro environment could pressure sales volumes
However, we expect Sunsine’s sales volume could trend weaker in 2H22F, in view of 1) weakening economic growth, coupled with uncertainties from the Covid-19 pandemic situation in China, and 2) high inflation and a rising interest rate environment threatening to throttle global economic growth. As Sunsine’s key products are used mainly in tyre production, weaker consumer sentiment dampening the demand for automobiles could have a negative impact on its sales. We project 2H22F net profit of Rmb202m (-16% yoy).
We continue to like Sunsine for its consistent profitability and positive free cash flow generation track record, and attractive valuation of 1.9x FY23F P/E (ex-cash). We raise our FY22-24F EPS by 16-31% to account for higher ASP and margin assumptions. With the EPS hikes, our TP rises to S$0.70, still pegged to 0.90x FY22F P/BV, its 10-year historical mean. Potential re-rating catalysts: stronger downstream demand, easing Covid19 measures. Downside risks include lockdowns in Shandong and intensifying price competition which may negatively impact Sunsine’s profit spread.