The superstock of the week is a Singapore stock - China Sunsine Chemical Holdings Ltd (SGX: CH8). This company holds a special place in my h...

Weekly Superstock Scan 24 Jul - 28 Jul: China Sunsine Chemical Holdings Ltd (Singapore)

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The superstock of the week is a Singapore stock - China Sunsine Chemical Holdings Ltd (SGX: CH8). This company holds a special place in my heart. It was one of the first three stocks that I bought when I started trading around ten years ago. Then I have no strategy and bought the stock because it was falling. I believe that I exited the trade with a loss but I cannot recall the exact amount. Ten years later, with a tested strategy on hand, will my fate be different this time?






China Sunsine is engaged in the production of speciality chemical, rubber accelerators and insoluble sulphur in China. It has two reportable business segments, namely (1) the manufacturing and sale of rubber chemicals and (2) the production and supply of heating power. 

Their customers are mainly tire companies which rely on the automotive industry including Bridgestone, Michelin, Goodyear, Pirelli. They do not produce the rubbers for the tires but the chemicals used in the process. The diagram below will explain how China Sunsine is involved in the production of tires.



Technical



China Sunsine has been on a rise since the end of 2016. Since then, the stock price has doubled from $0.40 to $0.80 in just six months. In May 2017, the rally appeared to take a break as price start to consolidate in a box from $0.69 to $0.835.

Last week, price broke out of the box strongly to close at $0.91 after reaching a high of $0.92. The volume for the week was 20.7 million shares, more than 10 times its average trading volume.

There is no news last week that can explain the surge in price. However, it might be linked to the upcoming second quarter result release on 28th July.


Fundamental



Including the current quarter, China Sunsine reported 4 consecutive quarters of year on year EPS growth. 

Increased Capacity

To cope with the rising demand for rubber accelerator TBBS due to the increase in production of radial tires, the Group has started construction of a 30,000-ton annual capacity plant in Shanxian, to be split into 2 phases. As at the end of the last quarter,  the machineries under the new Phase 1 10,000-ton TBBS production line are still undergoing testing, and the trial-run and commercial production are scheduled to commence in the 2nd half of FY2017. This will bring the annual capacity to 97,000 ton, up from 87,000 ton in 2016.

Addition capacity of 10,000 ton of Insoluble Sulphur will also be added to the Dingtao plant's existing 20,000 ton capacity and the upgrade will be completed by the end of the year.

Stringent Environmental Regulations 

In the recent years, the Chinese government imposed stringent industry-wide environmental protection measures. Many small and medium size factories that constantly flout the rules are forced to closed down. China Sunsine, on the other hand, has been investing heavily in environmental and therefore benefited from more redirection of orders from its competitors. 

Due to the clampdown, the supply was reduced and China Sunsine also benefited from the higher average selling price.

Dividend Policy

China Sunsine has been consistently paying out dividends for the past few years. However, it was only this June that they adopt a dividend policy of paying out not less than 20% of the Group’s consolidated net profit after tax, excluding non-recurring, one-off and exceptional items for FY17 and FY18

China Sunsine announced in May that it sold 27.6m treasury shares to various institution funds, corporate and individual investors. The company highlighted that proceeds would be used to fund future dividend payments. This provides more confidence for investors of China Sunsine and may attract the interest of dividend investors.

Matrices
+ Low P/E - Even with the recent surge in price, China Sunsine is still trading at a low P/E of  8.3 times trailing twelve month EPS. 
- Large Float  - China Sunsine has a large float of 113.5 million shares. It volume is decent at 2.53 million shares. The float is thus 45 times its trading volume.


Risk Factors/ Things I do not like


  • Regulations - Earlier on I mentioned that China Sunsine has benefited from the stringent regulations that allowed it to take share from competitors, but China Sunsine itself is not immune to the regulations. An inspection team from China's Ministry of Environmental Protection had visited Shandong Sunsine on May 20 and found a number of issues on the chimney, oil furnace and on-sight management issues. While the issues does not amount to any breach of the laws that warrant a stop or suspension issue, the risk remains.
  • Raw Material Cost - Volatility in international crude oil prices causes fluctuation of the raw material prices and consequently their gross profit margin.





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All information in The Trader Diaries (TTD) does not constitute to investment advice or recommendation to buy, sell or hold. Readers are advised to consult their financial advisors prior to making any investment or pursuing any investment strategy. TTD will not be liable for any losses resulted from information published or shared from the blog.