China Sunsine Chemicals Holdings

[ricklim1]

Looks like an uptick in this company's business in coming year or so. Anyone vested ?

I've held the shares since 2008. When physical AGMs were permitted in the past I had attended several and was impressed by the Chairman's principles and approachability. The dividends paid out over the years more than covered the cost of my shares.

[tiongkokgor]

Bluechipfan,

You mentioned "YZJF is the second S-chip that I invested heavily. First one was China Sunsine [CS] which I still have 100k shares at the average cost of 27 cents post split. I have held 500k shares of CS at one point before gradually exit most of it just prior to the announcement of split."

Pardon me for the seemingly unrelated information above, but I find it kind of relevant because as with CS, YZJF is also simply viewed negatively by some quarters with the label of S-chip. Some people just don't trust S-chip but I hope YZJF can turn out to be another CS for me.

UOBKayhian has set 45.3c as the target price of Sunsine shares. As the broking firm has projected a cash balance of RMB 2,220m (without bank borrowings) as of the end of this year, translating into 45c per share, does it mean the rubber chemical business is worthless, or the cash is fake? Grateful for your view.

The analyst report can be found at https://www.chinasunsine.com/investors/a...-coverage/

First of all, it has been a while since I am here and I wish everyone a very huat rabbit year going forward. YZJF is the second S-chip that I invested heavily. First one was China Sunsine [CS] which I still have 100k shares at the average cost of 27 cents post split. I have held 500k shares of CS at one point before gradually exit most of it just prior to the announcement of split.

Pardon me for the seemingly unrelated information above, but I find it kind of relevant because as with CS, YZJF is also simply viewed negatively by some quarters with the label of S-chip. Some people just don't trust S-chip but I hope YZJF can turn out to be another CS for me. It wasn't easy investing in S-chip because the negative opinions/views on S-chip can be overwhelming at times. It's hard to ignore them and sometimes it make people, who are vested in S-chip, started to have self doubts. I still remember some comments on CS such as 'it's high risk, the factory could be on fire' or something to that effect.

For YZJF, what attracted me to it was the historical high profits and generous dividend payout pre split [YZJS]. Once the management undertake the dividend policy of at 40% payout NPAT, the only question I have to ask is how likely the profits will continue and sustain post split as YZJF. After seeing their management recruitment and insiders buying post split, I decided to build my position in YZJF. If Ren and the management can build YZJS from scratch in the past, Ren with his management can now also build up YZJF. This is track records. They just need time and I figure that while waiting, the risk can be mitigated with the dividends and the relatively low cost of purchases due to the suppressed share price. My average cost is now about 38 cents and I reckon that if the dividend is between 1.5-2 cents per year, not only it will bring down my 'average cost' correspondingly, the share price will bound to surpass 40 cents too and/or even more within 2 years. I think the cost and the risk is commensurate in this case and 2-3 years is reasonable timeframe to have a even clearer picture one way or another.

[Bluechipfan]

Bluechipfan,

You mentioned "YZJF is the second S-chip that I invested heavily. First one was China Sunsine [CS] which I still have 100k shares at the average cost of 27 cents post split. I have held 500k shares of CS at one point before gradually exit most of it just prior to the announcement of split."

Pardon me for the seemingly unrelated information above, but I find it kind of relevant because as with CS, YZJF is also simply viewed negatively by some quarters with the label of S-chip. Some people just don't trust S-chip but I hope YZJF can turn out to be another CS for me.

UOBKayhian has set 45.3c as the target price of Sunsine shares. As the broking firm has projected a cash balance of RMB 2,220m (without bank borrowings) as of the end of this year, translating into 45c per share, does it mean the rubber chemical business is worthless, or the cash is fake? Grateful for your view.

The analyst report can be found at https://www.chinasunsine.com/investors/a...-coverage/

First of all, it has been a while since I am here and I wish everyone a very huat rabbit year going forward. YZJF is the second S-chip that I invested heavily. First one was China Sunsine [CS] which I still have 100k shares at the average cost of 27 cents post split. I have held 500k shares of CS at one point before gradually exit most of it just prior to the announcement of split.

Pardon me for the seemingly unrelated information above, but I find it kind of relevant because as with CS, YZJF is also simply viewed negatively by some quarters with the label of S-chip. Some people just don't trust S-chip but I hope YZJF can turn out to be another CS for me. It wasn't easy investing in S-chip because the negative opinions/views on S-chip can be overwhelming at times. It's hard to ignore them and sometimes it make people, who are vested in S-chip, started to have self doubts. I still remember some comments on CS such as 'it's high risk, the factory could be on fire' or something to that effect.

For YZJF, what attracted me to it was the historical high profits and generous dividend payout pre split [YZJS]. Once the management undertake the dividend policy of at 40% payout NPAT, the only question I have to ask is how likely the profits will continue and sustain post split as YZJF. After seeing their management recruitment and insiders buying post split, I decided to build my position in YZJF. If Ren and the management can build YZJS from scratch in the past, Ren with his management can now also build up YZJF. This is track records. They just need time and I figure that while waiting, the risk can be mitigated with the dividends and the relatively low cost of purchases due to the suppressed share price. My average cost is now about 38 cents and I reckon that if the dividend is between 1.5-2 cents per year, not only it will bring down my 'average cost' correspondingly, the share price will bound to surpass 40 cents too and/or even more within 2 years. I think the cost and the risk is commensurate in this case and 2-3 years is reasonable timeframe to have a even clearer picture one way or another.

Of course Sunsine's cash is real. No disruption of dividend payout since IPO, no cash call at all and had conducted SBB from time to time. I am not sure why UOBKaykian gives such low TP despite Sunsine's increasing cash in hands. Perhaps the market simply think this is S-chip and it is also not a very big company. Just look at the PE, for a company that constantly achieve EPS of sgd 10 cents in most years, the PE hardly cross over 5x. 

I have been holding the view that the only way for Sunsine's share price to go up, is that they increase their dividend payout ratio. Other than the one time 20% payout few years back, the payout ratio has been around 10% or even lower. With no debt, I don't see why can't they pay at least 50% of EPS. Maybe it is due to capex considerations and having said that, their capex should be slowing down from now on and who know, one day they will start paying at least 4 cents dividend. That will be around 40% of EPS and should move the share price up to at least 80 cents.

[d.o.g.]

This company produces specialty chemicals which are ultimately commodity products, anyone who can meet the specification is able to bid for the contract. So the company is a price-taker. It may have a good relationship with key customers, but that doesn't mean they will pay above the market price.

During supply shortages (2014-2018) the company has enjoyed super-normal profitability, conversely during oversupply (2012-2013) it has suffered accordingly.

Perhaps it is this inability to control pricing that has led the company to hoard cash, against the day that it loses money and has to draw down reserves. Certainly the cash on hand is far in excess of normal requirements. At least it has been buying back shares, albeit at a very slow rate. To the company's credit, it sold 27m treasury shares in 2017, when the share price was above book value. Very few companies have been able to take advantage of capital markets in both directions.

I find it interesting that the chairman appears to have *reduced* his pay. In the IPO Prospectus, his service agreement entitles him to a fixed pay of RMB 1.25m plus 20% of pretax profit above RMB 85m. In recent years the Group's pretax profit has been multiples of RMB 85m, such that his bonus should have been RMB 50-100m in 2017, 2018, 2019, 2021 and 2022.

However his pay topped out at SGD 7.3m (RMB 44m assuming RMB:SGD = 6:1) in those record-breaking years, and the pay breakdown shows his fixed pay is now RMB 2.2m. So it looks like he negotiated a higher base pay in exchange for a higher hurdle rate. Working backwards, it looks like the hurdle rate is somewhere around RMB 250m.

So basically the chairman gave up an "easy" RMB 34m of bonus on RMB 170m of incremental pretax profit, in exchange for RMB 1m more of base salary. Net benefit to shareholders is RMB 33m a year. I would give the company some extra credit for this.

As for the outlook, the company has already noted that the market is currently in oversupply. So investors should be prepared for a bad 2H also.

I agree that the company's capital allocation can be improved. It can (and should) increase its payout ratio. And maybe tender to buy back a large block of shares, perhaps 10%. But given its aversion to bank borrowings* shareholders may have to wait a long time.

*devil's advocate: maybe its banking relationships are not strong enough for it to borrow anything meaningful, and thus all capital needs must be self-funded.

YMMV.

[mslee888]

Fully agree that China Sunsine products are commodity products with no product differentiation. Its therefore of paramount importance to be a top volume producer. This has always been China Sunsine strategy as below:

The Group will strive to increase its sales volume amid the intense price competition under the guidance of the ‘Sales & Production Equilibrium’ principle. The Group will also continue to adopt a more flexible pricing strategy, strengthen its market leadership position, and tighten costs control.” “Given our strong balance sheet and financial stability, our market leadership position, our ability to consistently provide high-quality, economies of scale, a wide variety of rubber chemical products, and compliance with national environmental protection laws and regulations, we remain confident about the Group’s profitability in the next 12 months.”

Also, they do not like debts and leverage. They rather use their own cash balance for PPE. 

At least they are willing to fork out small dividends although shareholders have always asked for more payout during each meeting, so i guess the cash is real unlike other S-chips. To stay invested in this company really demands patience.

[weijian]

On question12, OPMI Tan gave a good summary on the quantum of cash. From a capital efficient perspective, the cash is probably too much.

Chairman Xu is 80 years old. So he was born in the year just before liberation from the Japs. As a teen and young adult, he went through the Great Leap Forward and Cultural Revolution. Could this have explained the cash retained within the Group?

The company is structured in this way - a BVI incorporated company owns 61% of the listed entity (incorporated in Spore). The Spore listed co 100% owns another Chinese holding company, which in turn owns 100% of all its subsidiaries. From this:

- An upwards declaration of dividends will attract 10% withholding taxes. So the more dividends, the more taxes.

- Money paid to OPMIs are paid to the BVI incorporated company. Putting taxes and the ability to bring the money offshore aside, will offshoring your profits earned in the Mainland to BVI, attract unnecessary attention from the Party?

RESPONSE TO THE QUESTIONS FROM OUR SHAREHOLDERS FOR THE PURPOSE OF AGM

After achieving a net cash position (RMB 196 mln) in 2015, cash has been building up fast to reach RMB 1,688 mln eight years later, in 2023. Had notes receivables been kept low, cash would have been around RMB 2,000 mln.

For perspective, RMB 2,000 mln is:
7.8 times 2023 employment benefits of RMB 257 mln; almost the same as 2023 raw material purchases of RMB 2,040 mln; and also higher than capital expenditures (RMB 1,255 mln) plus incremental working capital (RMB 629 mln) over seven years between 2017 and 2023. Helped by the "flexible pricing" strategy that pursues sales volume growth, Sunsine has been profitable every year since listing in 2007 despite shifting Aniline prices.

In the past seven years, profit peaked at RMB 606 mln in 2022 for a 15.8% net margin. When COVID-19 was at its worst in 2020, sales volume still edged up 1% with a profit of RMB 219 mln. When product prices were brought down by weak Aniline prices in 2023, sales volume grew 11% with a good profit of RMB 372 mln. The net margins for 2020 and 2023 were both a respectable 9.4% and 10.7% respectively. In 2020, only 0.4% of revenue was impaired. With such solid foundations and resilience to weather unexpected headwinds, why can’t the management be more liberal in dividend payout? For perspective again, every SGD 0.01 dividend entails RMB 50m.

https://links.sgx.com/FileOpen/20240423%...eID=797767

[dreamybear]

.....Just look at the PE, for a company that constantly achieve EPS of sgd 10 cents in most years, the PE hardly cross over 5x. 

I have been holding the view that the only way for Sunsine's share price to go up, is that they increase their dividend payout ratio. Other than the one time 20% payout few years back, the payout ratio has been around 10% or even lower. With no debt, I don't see why can't they pay at least 50% of EPS. Maybe it is due to capex considerations and having said that, their capex should be slowing down from now on and who know, one day they will start paying at least 4 cents dividend. That will be around 40% of EPS and should move the share price up to at least 80 cents.

Undervalued or not, what is clear is the plan on the cash pile based on the company's reply ...

I also think a higher dividend is likely to be positive for the share price. 

--------------------------

https://nextinsight.net/story-archive-ma...sh-pe-of-1
"It's undervalued by the market at a PE of around 5.5X and 1X ex-cash.

Sure, it may one day find a swell of investor favour, but for now it's the long-term investors who are holding and hoping."

https://links.sgx.com/FileOpen/CSCH%20-%...eID=804584
"The group has a large cash pile (war chest) of RMB1.6bil that has been accumulating for a number of years, can you share what are the Group’s plan for deployment of this capital?"

Mr Tong Yiping replies that working capital accounts for approximately RMB 300-400 million per year. Dividend payment amounts to approximately RMB 120 million. The current ongoing projects still need approximately RMB 200 million; upgrading and maintenance of current equipment amounts to approximately RMB 100 million, and R&D expenses amount to RMB 120 million every year. The above-mentioned amounts add up to about RMB 1 billion and the balance RMB 600 million will be reserved for unforeseen circumstances. "

[dzwm87]

Isn't working capital needs tied up in their working capital (i.e. receivables, payables, inventories, etc) and not cash?

I find it strange when management always reply that X% of cash is set aside for working capital. Granted that it fluctuates a lot across seasonality but rubber accelerator is not exactly a rapid growth industry. If the company does need more working capital from its idle cash, this should translate into growing revenue too but in this case, we only get one side of the equation. Sunsine's revenue didn't grow a lot from 2018. What did grow is receivables and what didn't really grow was payables.

[weijian]

hi dzwm87,

Let's look at some stats. Since FY18 looked like the peak year, I have arbitrarily taken FY14 for 10 year comparison with latest full year FY23:

FY14 ('000)
Revenue=2,077,272
COGS=1,509,882
Cash=122,790
Receivables=704,691
Inventories=168,030
Payables=311,586
Working Capital=704,691+168,030-311,586=561,135
Receivables turnover~120days
Payables turnover~75days
Inventory turnover~40days
Cash Conversion cycle=120+40-75=85days
Revenue/Working Capital = 2,077,272/561,135 = 3.7x
Cash/Working Capital = 122,790/561,135 = 0.2x

FY23 ('000)
Revenue=3,490,465
COGS=2,691,547
Cash=1,687,916
Receivables=1,265,269
Inventories=341,289
Payables=359,149
Working Capital=1,265,269+341,289-359,149=1,247,409
Receivables turnover~130days
Payables turnover~45days
Inventory turnover~45days
Cash Conversion cycle=130+45-45=130days
Revenue/Working Capital = 3,490,465/1,247,409 = 2.8x
Cash/Working Capital = 1,687,916/1,247,409 = 1.3x
(Cash-CAPEX-dividends)/Working Capital  ~1,200,000/1,247,409 ~ 1x

Notes:
- Conversion conversion cycle (CCC) increased from 85days to 130days, +45days (~50% increase). The main increase is coming from paying their suppliers by a whopping 1 month earlier, giving customers 10more days and stocking additional 5 days of stock. Maybe they get more discounts by paying suppliers earlier?

- It used to take 1dollar working capital to generate 3.70dollar revenue in FY14, but the same working capital dollar only produces 2.80dollar revenue by FY23. Not sure about business growth but it does seem that they are getting more capital inefficient. So it is possible that they will require that additional "300-400mil" to grow revenue by 800mil (300mil x 2.8) in the next few years. Maybe, OPMIs can comfort themselves by looking forward to FY23 revenue+800mil ~ 4.3bil revenue in the next 1-2years based on CFO Tong's "projection"?

- Another way to look at it: The calculated working capital is a summarized value taken at a point of time and does not account for the fluctuations through the year. In FY14, they were able to work with a cash pile that is 20% of working capital. But by FY23, it is better to have cash at 130% of working capital. If we account for all the CAPEX/dividends mentioned by CFO Tong, then they are working with a cash pile that is 100% of working capital. Well, I guess it feels safer to have cash in your bank. I have to admit whenever I feel insecure, i log onto my bank account to feel safe!