CGS-CIMB upgraded its call on rubber chemicals producer China Sunsine Chemical to “add” from “hold”, given the recent increase in the average selling prices (ASPs) of rubber accelerators, which the brokerage thinks could point to better H2 financials for the company.

In a report on Thursday (Sep 21), its analysts noted how September’s 21 per cent month-on-month growth in ASPs was largely driven by rising raw material costs, increased utilisation from domestic tyre producers and healthy export volumes in recent months.

Therefore, CGS-CIMB is now more confident in the group’s cost pass-through ability. It projects China Sunsine to achieve half-on-half improvement in H2 gross profit margins (GPM) to 24.6 per cent, up from 23.8 per cent in H1.

The recent rise in rubber accelerator prices could bode well for China Sunsine’s Q4 FY2024 ASPs and profit spreads, said its analysts, as the group typically adjusts its pricing on a quarterly basis for its major customers.

CGS-CIMB viewed its FY2024 GPM forecast of 24.6 per cent, and 25 per cent for FY2025 as “sustainable”, given the group’s historical 10-year GPM average of 27 per cent.

The research house also raised its FY2023 to FY2024 earnings-per-share estimates by between 9 per cent and 10 per cent on higher ASP and margin assumptions, to result in a higher target price of S$0.47, up from S$0.42 previously.

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This target remains 60 per cent of the research house’s book value estimate, which is one standard deviation below the stock’s five-year historical mean.

In CGS-CIMB’s opinion, China Sunsine’s current valuations are “undemanding” as the stock now trades near its Covid-trough valuation of 56 per cent of book value.

Shares of China Sunsine : QES 0% were trading flat at S$0.405 as at 9.56 am on Friday.