Brokers’ take: UOBKH shaves China Sunsine target to S$0.46 in face of stronger competition

UOB Kay Hian (UOBKH) has lowered its earnings expectations for rubber chemicals producer China Sunsine Chemical to account for expected price adjustments arising from greater competition ahead.

Upon cutting its FY2023 earnings estimates by 34 per cent, 33 per cent for FY2024, and 27 per cent for FY2025, the research house has derived a reduced target price of S$0.46 compared with S$0.575 previously.

This comes after tweaking FY2023 to FY2025 gross margin assumptions to a range of 23 to 24 per cent, down from 29 per cent earlier, said UOBKH in a report on Thursday (Dec 14).

The brokerage maintains its “buy” call on the stock.

Its revised price target is based on a price-to-earnings multiple of six times FY2024 estimates, which is in line with the stock’s long-term average mean. 

Commenting on China Sunsine’s third-quarter financial updates released in November, UOBKH analysts pointed out that lower average selling prices (ASPs) and the group’s flexible pricing strategy led to lower overall sales despite a record-high quarterly sales volume.

“While domestic vehicle sales continue to improve, in the face of stronger competition, we have lowered earnings expectations for FY2023 to FY2025.”

UOBKH nonetheless believes China Sunsine could potentially benefit from the higher ASPs of rubber accelerators, which are the main earnings driver for the group.

Given how ASPs of rubber accelerators have risen by about 36.7 per cent from end-Q2 FY2023 to end-Q3 FY2023, the analysts foresee improved Q4 FY2023 margins for the group.

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This is because China Sunsine adopts a quarterly pricing model for its major customers, resulting in a pricing time-lag in raw-material price changes by about three months.

Higher vehicle sales as reflected in the group’s latest Q3 financials also point to potential improvement in China Sunsine’s capacity utilisation rate, they added.

“Together with its flexible pricing strategy and capacity expansion plans, China Sunsine is likely to remain competitive against its peers.”

Shares of China Sunsine were trading flat at S$0.395 as at 1.22 pm on Thursday.