China Sunsine Chemical Holdings Ltd. Company note · China Sunsine Chemical Holdings Ltd. Company note 4 June 2017 ... must be vulcanized using additives such as sulphur ... MBTS,

China Sunsine Chemical Holdings Ltd.

Company note 4 June 2017

Overweight

Current Price S$0.785 Fair Value S$1.245 Up / (downside) 58.6%

Stock Statistics

Market cap S$386.0m

52-low S$0.358

52-high S$0.825

Avg daily vol 520,991

No of share 491.7m

Free float 38.7%

Key Indicators

ROE 17F 16.9%

ROA 17F 14.2%

P/BV 1.36x

Net gearing Net cash

Major Shareholders

Xu Cheng Qiu 60.3%

Historical Chart

Source: Bloomberg

Tight Capacity to Keep Prices High

▪ Production unaffected by 20 May environment inspection. China Sunsine has updated on 1 June that it has installed the requisite on-line monitoring equipment at the relevant chimney in its plant. Following the inspection by environmental protection officials on 20 May, the company has clarified that production remains unaffected, signalling that the findings are not severe and that the company is largely compliant with prevailing laws. In the interim, the company continues to improve on other areas such as site management etc.

▪ Positive dividend history is reassuring. We like the fact that Sunsine has thus far only raised funds twice in the last decade – at IPO in 2007 and via the placement of treasury shares on 10 May 2017. Conversely, Sunsine has paid out more cash in the form of dividends and share buybacks than funds raised at listing. Finally, our confidence is further boosted by Sunsine’s track record of access to low cost borrowings (e.g. 4% pa in 2015) from domestic banks, indicating their approval of Sunsine.

▪ Tight capacity to support selling prices in 2017. While selling prices have lagged costs since 4Q16, we found that key competitors i.e. Yanggu Huatai and Kemai are operating at close to 90% utilization for their rubber accelerator capacities. This implies that Sunsine will continue to be able to pass on some of higher costs to customers. Moreover, crude oil prices have softened on average in 2Q17, indicating potential margin gains.

▪ China’s vehicle population to grow. Moreover, demand for vehicles has yet to peak in China where the motorization rate remains at about 10% of the population. In other parts of Asia, the motorization rate ranges from 20% to 50% of the population. In fact, we estimate that Sunsine has to add 10,000 tonnes per annum (tpa) of capacity every two years to maintain its market share for accelerators, implying positive long term growth prospects.

▪ Tightening environmental controls present key risk. The risk is that we cannot rule out there could be more findings from prior and future inspections, especially as China tightens standards. Potential scenarios include the partial shutdown of facilities for refitting of equipment which may take one to two quarters. However, the company will add 10,000 tpa of accelerators capacity in 2H 2017, which will mitigate against any downtime. Moreover, the higher standards affect all industry players equally and supports our case for robust selling prices as overall capacity tightens.

▪ Higher dividends - a potential catalyst. The placement of treasury shares in 2017 was meant to improve liquidity and the proceeds will be used to pay dividends in the future, signalling higher dividends in 2017. Overall, we like Sunsine’s attractive valuation as it trades at 7.5 times FY16 earnings while its competitors trade at 11.5 times to 26.7 times trailing 12-month earnings.

Liu Jinshu

(+65) 6236-6887 [email protected] www.nracapital.com

Key Financial Data

(RMB m, FYE Dec) 2015 2016 2017F 2018F 2019F

Sales 1,859.1 2,036.9 2,395.7 2,663.8 2,821.2

Gross Profit 492.0 540.4 602.7 721.5 743.2

Net Profit 195.2 221.7 255.5 332.7 339.5

EPS (RMB cents) 41.9 47.7 52.0 67.7 69.0

EPS growth (%) -11.4 13.7 9.0 30.2 2.0

PER (x) 9.89 8.70 7.55 5.80 5.68

NAV/share (RMB cents) 252.5 293.4 336.7 391.8 445.9

DPS (Singapore cents) 1.5 1.5 2 2.5 3

Div Yield (%) 1.9 1.9 2.5 3.2 3.8

Source: Company, NRA Capital

0.23

0.53

0.83

1.13

0

1

2

3

05/16 07/16 09/16 11/16 01/17 03/17

http://www.nracapital.com/


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1 http://www.substech.com/dokuwiki/doku.php?id=vulcanization_of_rubber 2 http://www.nocil.com/Downloadfile/DTechnicalNote-Vulcanization-Dec10.pdf

Background

China Sunsine Chemical Holdings Ltd. is principally engaged in the manufacture of rubber chemicals from mainly petrochemicals and their derivatives. Sunsine’s products include rubber accelerators, insoluble sulphur and anti-oxidants.

Rubber vulcanisation. Natural rubber is characterised by long and regular macromolecule chains that give it its elastic properties. However, it deforms easily when warm and becomes brittle when cold. To overcome these limitations, rubber is treated in a process known as rubber vulcanisation.

Rubber vulcanisation is a process where “the elasticity and strength of the rubber is improved by heating it in the presence of sulphur.”1 In the process, other additives such as rubber accelerators, anti-oxidants and anti-scorching agents are added. Hence, Sunsine’s products, namely insoluble sulphur, accelerators and anti-oxidants, are used heavily in the vulcanisation process of the manufacture of rubber products such as tyres.

Synthetic rubber such as butadiene rubber and styrene-butadiene rubber also must be vulcanized using additives such as sulphur and accelerators. However, sulphur is not necessarily always the vulcanising agent used. In some types of synthetic rubbers, such as chloroprene and ethylene-propylene rubbers, metallic oxides and peroxides are used as the vulcanizing agent.

Figure 1: Graphical Representation of Rubber Vulcanisation Process

Source: http://www.nocil.com, http://apwh.pbworks.com/w/page/7624881/Vulcanization%20and%20Bessemer%20process

Rubber accelerators are added to “increase the speed of vulcanisation and to permit vulcanisation to proceed at lower temperature and with greater efficiency.” 2 Hence, rubber accelerators allow for vulcanisation to occur economically. In the absence of accelerators, each “crosslink” between the macromolecules requires 40 to 55 sulphur atoms in a process that takes around six hours at 140 degrees Celsius for completion.2 Conversely, the vulcanisation process is shortened to minutes when accelerators are used.

Generally, a mixture of accelerators is used for different purposes. For instance, secondary accelerators such as guanidines are used to activate primary accelerators such as thiazoles and sulfenamides. Anti-scorching agents are added to prevent vulcanisation from taking place at lower than intended temperatures. In all, there are about 150 different accelerators, of which about 50 are commonly used.2

http://www.nocil.com/


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3 http://www.struktol.net/markets-products/rubber-additives/sulphur-preparations/sulphur-preparations-based-on-insoluble-sulphur.html

Figure 2: Classification of Accelerators

Accelerators (Sunsine’s products’ in bold) Chemical Group Vulcanisation speed

BA, HMT Aldehyde Amine Slow

DPG, DOTG Guanidine Slow

MBT, MBTS, ZMBT Thiazole Semi ultra fast

ZBDP Thiophosphate Ultra fast

CBS, TBBS, MBS, DCBS Sulfenamides Fast-delayed action

ETU, DPTU, DBTU Thiourea Ultra fast

TMTM, TMTD, DPTT, TBzTD Thiuram Ultra fast

ZDMC, ZDEC, ZDBC, ZBEC Dithiocarbamate Ultra fast

ZIX Xanthates Ultra fast

Source: http://www.nocil.com/Downloadfile/DTechnicalNote-Vulcanization-Dec10.pdf

Figure 3: Use of Accelerators for Different Types of Rubber

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Aldehyde Amine 1 1 1 3

Guanidine 1 1 1 3

Thiuram 1 1 1 1 4

Dithiocarbamate 1 1 1 1 1 5

Thiazole 1 1 1 1 4

Sulfenamides 1 1 1 1 4

Thiourea 1 1 1 3

Thiophosphate 0

Xanthates 1 1 1 1 1 5

Source: http://adhesives.specialchem.com/selection-guide/accelerators-for-rubbers-selection-guide/select-the-right-accelerator-for-your-elastomer#content

Figure 2 shows that there are generally nine types of rubber accelerators of which Sunsine’s products are generally focused on thiazoles and sulfenamides, followed some guanidines and thiurams. We understand from the company that demand for other accelerators is relatively low and that it can best achieve economies of scale by focusing on these key products.

Products such as DPG (Diphenyl Guanidine), MBT (2- Mercaptobenzothiazole), MBTS (2-2’-Dithiobis(benzothiazole)), TBBS (N-tert-butyl-2-benzothiazole sulfenamide), CBS (N-Cyclohexyl-2-benzothiazole sulfenamide) and DCBS (N,N’-dicyclohexyl-2-benzothiazole sulfenamide) are either nitro-amines free or safe. Some rubber accelerators are known to produce nitro-amines which are carcinogenic, and are thus subject to regulation.

Figure 3 shows that Sunsine’s products can be used to treat natural rubber and styrene butadiene rubber. These are the key rubber compounds used in tyre production – the key target market of Sunsine.

Insoluble sulphur, rather than sulphur, does not dissolve and migrate rubber.3 Natural sulphur contain S8 ring molecules that combine with each other at high temperatures, whereas insoluble sulphur is relatively stable. The migration of sulphur in turn affect the properties of the rubber compound such as its tackiness. Therefore, insoluble sulphur is preferred for quality control purpose, especially in the tyre industry.


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Positive Track Record with Shareholders

Returned S$58m of cash to shareholders after raising S$43.7m at IPO in July 2007. Sunsine was listed on the SGX Mainboard on 5 July 2007. Then, it issued 120m new shares at S$0.390 each to raise net proceeds of approximately S$43.7m. Thereafter and until 10 May 2017, Sunsine has not raised any new equity capital, but has returned S$6.447m of capital to shareholders in the form of share buybacks and distributed close to S$52m in dividends back to shareholders. The company’s positive capital and profit distribution track record vis-à-vis its limited fundraising history is strong testament of the quality of the company.

Figure 4: Summary of Changes in Equity from 2007 to 2016


Figure 5: Dividend Track Record


Has set aside another S$17.5m for dividends. On 10 May 2017, Sunsine placed out all of its treasury shares for net proceeds of S$17.5m, having acquired them at a cumulative cost of S$6.447m over the years. The company has indicated that the placement was to widen its shareholder base and increase the liquidity of its shares. Institutional investors who took up the shares include Asdew Acquisitions, Island Asset Management and ICH Capital. In addition, the net proceeds will be retained by the company for the payment of dividends in the future.

79.3

1,361.6

313.5

1,232.1

-3.1

-31.4 -228.9

0.0

1,000.0

2,000.0E

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2006

Pre-IP

O and IP

Ofunds raised

Prior-year

adjustments

Cu

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comprehensiveincom

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Purchase of treasury

shares

Dividends paid

Equity as of 31 D

ec

2016

RMB millions Increase Decrease

25.0321.57

23.26 25.1723.14 23.14 22.91

31.48 33.17

0.0

15.0

30.0

45.0

2008 2009 2010 2011 2012 2013 2014 2015 2016

RMB millions

Increase in dividend from 1 to 1.5 Singapore cents per share.


page 5

Expect higher dividends in 2017. The net proceeds of S$17.5m translates to 3.56 cents per share, not to mention that the company pays out 1.5 cents of dividends each year depending on the performance of the company. Therefore, shareholders are suffering a mere 6% dilution or increase in shares outstanding, for the prospect of higher dividends in the future. Likely, the company may raise dividends by up to 33% or from 1.5 cents to 2 cents. Given the company’s conservative but consistent approach towards dividends, we do not expect a large one-off special payout.

Access to bank financing in China. Sunsine’s bankers include China Construction Bank Corporation Heze/Shanxian/Weifang Branch, Agricultural Bank of China Shanxian/Weifang Branch, Bank of China Shanxian Branch, Industrial and Commercial Bank of China Shanxian Branch, Postal Savings Bank of China Shanxian Branch, Standard Chartered Bank and DBS Bank Ltd.

As of 31 March 2017, Sunsine only has notes payable of RMB1.5m against cash of RMB337.9m. Adding in the S$17.5m raised recently and translating the cash as of 31 March at SGDRMB 4.93, we derived a net cash per share of 17.4 Singapore cents.

Nonetheless, Sunsine has historically tapped on bank borrowings for its capital needs. Total borrowings rose to RMB258m in 2014 before dropping to RMB144.9m in 2015. In 2014, Sunsine expanded its anti-oxidant production capacity by 80% from 20,000 tonnes to 45,000 tonnes per annum. From 2012 to 2014, Sunsine added new rubber accelerators capacity each year and doubled its insoluble sulphur capacity in 2013. No new capacity was added in 2015 and 2016, thus explaining for the lower borrowings. Nonetheless, Sunsine’s track record shows that it has been able to obtain domestic bank borrowings, implying support and approval from the local banks.

Figure 6: Cash and Borrowings Profile


Track record of clean auditors’ opinion. Sunsine’s financial statements were audited by Foo Kon Tan Grant Thornton for FY2007, Paul Wan & Co for the period FY2008 to FY2011 and Nexia TS Public Accounting Corporation for FY2012 to FY2016. Nexia will also continue as Sunsine’s auditors for FY2017. We noted that Sunsine’s has received clean and unqualified independent auditors’ opinions since its listing to-date, except in FY2012 when Nexia highlighted that the financial statements for the preceding financial year i.e. FY2011 were reported on by another independent auditor i.e. Paul Wan & Co.

50.337.1 50.0

90.0

140.0

200.0230.0

258.0

144.9

0.0

113.2

184.2 195.7165.1

118.6105.0 107.8

122.8

341.3

275.9

0.0

200.0

400.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

RMB millionsTotal borrowings Cash


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Capacity Expansion to Drive Growth

Growing accelerators and insoluble sulphur capacity. Sunsine has not expanded capacity since the end of 2014. Based on 2016 production and year-end capacity, capacity utilisation has reached 95.1% for rubber accelerators, approximately 100% for insoluble sulphur and 69.4% for anti-oxidants. The company intends to expand accelerators capacity by 10,000 tonnes per annum by 2H 2017 and grow insoluble capacity by 10,000 tonnes per annum by end 2017.

Figure 7: Production Capacity


Figure 8: Production Statistics

2008 2009 2010 2011 2012 2013 2014 2015 2016

Accelerators 29,805 40,196 46,343 50,148 64,252 72,710 76,089 76,090 82,767

Insoluble Sulphur 464 3,468 4,413 7,873 10,724 11,948 12,102 15,417 20,031

Anti-oxidant 185 1,361 2,971 2,061 5,183 12,281 19,903 21,640 31,214

Others 333 395 548 825 1,212 1,406 879 1,425 1,779

Total 30,787 45,420 54,275 60,907 81,371 98,345 108,973 114,572 135,791


Figure 9: Capacity Utilization

*Based on sales volume divided by capacity as of year-end. Capacity utilization may exceed 100% due to inventory changes and new capacity installed mid-year. Source: Company, NRA Capital

3950 55 57 57

67 71

87 87 8797

5 5 8 10 10 1020 20 20 20

30

5 10 10 10

25 25

45 45 45 45

0

40

80

120

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E

'000 tonnes per annum

Accelerators Insoluble Sulphur Anti-oxidant

59.6%

73.1%82.0%

88.8%

96.6%

103.1%

87.5% 87.5%95.1%

9.3%

43.4%44.1%

78.7%

107.2%

59.7%

60.5%

77.1%100.2%

3.7%13.6%

29.7%20.6% 20.7%

49.1% 44.2% 48.1%

69.4%

-10.0%

30.0%

70.0%

110.0%

2008 2009 2010 2011 2012 2013 2014 2015 2016



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Figure 10: Utilization of Most Recently Added Capacity

*Computed based on the (Sales volume – Previously installed capacity) / (Most recent change in capacity). E.g. Sales volume in 2016 was 82,767 tonnes or 12,267 tonnes above the 70,500 tonnes of installed capacity as of 2013. During 2014, Sunsine raised total accelerator capacity by 16,500 tonnes to 87,000 tonnes per annum. Therefore, utilization of the most recently added capacity in 2016 was 12,267 tonnes or 74.3% of 16,500 tonnes per annum.


Higher selling prices supportive of capacity growth. Figure 10 shows Sunsine has been able to ramp up production of accelerator and insoluble sulphur products relatively quickly to utilize new capacity, compared to anti-oxidants. While the improved capacity utilization has usually been associated with lower average selling prices and corresponding market share gains (Figure 11), higher selling prices since 3Q16 (Figure 12) means less margin pressure as Sunsine ramps up production at the planned capacity additions by the end of 2017 for accelerators and insoluble sulphur. The improved pricing environment has been partly due to plant closures as China cracks down on pollutive plants.

Figure 11: Sunsine’s Average Selling Prices

*Calculated based on revenue divided by sales volume.


77.5%

155.3%

33.9%

33.9%

74.3%

136.2%

19.5% 21.0%

54.2%

100.3%

3.7%0% 0% 0%

31.1%

0.0%

40.0%

80.0%

120.0%

160.0%

200.0%

2012 2013 2014 2015 2016


18,614 18,478

21,219

18,466 17,752

11,302 11,525 11,1069,905 9,600

14,837 15,406

15,616

12,56510,889

5,000

10,000

15,000

20,000

25,000

2012 2013 2014 2015 2016

RMB per tonne



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Figure 12: Quarterly Average Selling Prices


Product mix changes may improve selling prices. In fact, average selling prices may increase slightly in 2017 as the company will be adding 10,000 tonnes per annum of TBBS rubber accelerator capacity. The average ASP of TBBS was about RMB21,000 to RMB22,000 per tonne, compared to RMB15,000 to RMB16,000 per tonne for MBTS, as per the draft prospectus of competitor Kemai Chemical Co., Ltd.

Figure 13: Direct selling prices of various accelerators in 2016*

Source: Kemai Chemical Co., Ltd draft prospectus, NRA Capital *Exclude VAT

17,97418,961

18,076 17,333 17,080 17,61418,911

20,061

10,131 9,815 9,596 9,591 9,382 9,526 9,886 10,448

12,771 12,54311,350

10,226 10,21311,102

12,019

14,204

5,000

11,000

17,000

23,000

2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17

RMB per tonne

Accelerators Insoluble sulphur Anti-oxidant

22,168.94 21,468.1720,281.07

18,058.8115,882.94

12,794.95

5,000.00

11,000.00

17,000.00

23,000.00

29,000.00

TBBS DPG DCBS CBS MBTS MBT

RMB per tonne


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4 http://abcnews.go.com/International/wireStory/china-auto-sales-shrink-april-demand-cools-sharply-47341330

Motorization Rate in China Remains Low

Auto sales slowed in 2017. Following strong growth of 13.7%, auto sales growth in China slowed to 2.5% in the first four months of 2017, after a sales tax was implemented on small engine vehicles.4 In 2016, China sold 28.03m vehicles against production of 28.12m units. The next largest markets are Europe and U.S. which sold 20.1m and 17.9m vehicles in 2016 respectively.

But motorization rate remains low in China. We are unfazed by the slowdown in auto sales growth in China in 2017 as the use of motor vehicles in China remains low, at 102 per 1000 inhabitants in 2014. In Asia, the motorization rate is about 232 vehicles per 1000 inhabitants in Thailand and 406 vehicles per 1000 inhabitants in South Korea. Even in Singapore, there are about 150 vehicles per 1000 inhabitants. In a nut shell, there is still room for significant growth in the China market.

Figure 14: Global Auto Sales

Source: http://www.oica.net, NRA Capital

Figure 15: Global Motorization Rate

Source: www.oica.net

19.3 22.0 23.5 24.7 28.0

0

20

40

60

80

100

2012 2013 2014 2015 2016

m vehicles

China Rest of Asia/Oceania/Middle East U.S. Europe Others


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5 http://www.chinadaily.com.cn/bizchina/motoring/2017-05/17/content_29381233.htm 6 Kemai draft prospectus Page 117 7 https://www.chinamoneynetwork.com/2017/04/26/china-eyes-two-million-new-energy-vehicles-in-annual-production-by-2020 8 http://www.michelin.com/eng/media-room/press-and-news/michelin-news/Innovation/Electric-Tires 9 https://www.wired.com/2016/05/hidden-battle-make-perfect-tires-electric-car-divas/

Implications for rubber accelerator market. Annual vehicle production in China will exceed 50m in eight to ten years based on growth of approximately 7% per annum. 5 According to statistics provided by the company, global production of rubber accelerators is about 450,000 to 500,000 tonnes per annum. China’s production in 2016 was equivalent to about 225,700 tonnes.6 Assuming similar rates of growth, the market for rubber accelerators in China may grow to more than 400,000 tonnes or by more than 70% during the same period.

Market has room for Sunsine to continue growth. Based on these information, we can infer that Sunsine is currently a top rubber accelerator producer in China with a domestic market share of 37% based on its production of 82,767 tonnes in 2016. Secondly, Sunsine will need approximately 150,000 tonnes of capacity or approximately 50% more capacity from end 2017 to maintain its market share at roughly 37% if production in China grows to 400,000 tonnes. Roughly, Sunsine will need to grow its capacity by 10,000 every two years.

Global portfolio of distinguished clients. For Sunsine, it has over the years managed to expand its client base to include major names such as Bridgestone, Michelin, Goodyear, Cooper, Sumitomo, Hankook, Yokohama, Kumho Tire, Toyo Tire, Pirelli, GITI Tire, Hangzhou Zhongce, Double Coin and Guizhou Tire. In 2016, international sales accounted for 32.4% of group revenue. Therefore, Sunsine is partially shielded from any temporary slowdown in the domestic market, such as in 2017.

“Green” cars present an opportunity for growth. The Chinese government is trying to encourage the production and use of “new energy” cars, i.e. cars powered by alternative energy sources, including hybrids and electric cars. The aim is to achieve annual production and sales of two million vehicles by 2020 and the government is considering increased financial and tax support for new energy vehicle companies.7

These initiatives mean that certain market segments will continue to grow even as the broader auto market slows in China and Sunsine can benefit from this trend by working with customers that supply to electric car makers for instance.

Secondly, fuel efficiency is important in the design of green cars and manufacturers are increasingly offering custom tires for electric vehicles to maximize performance vis-à-vis fuel efficiency.8 Some of these tires are made from customized rubber compounds that may provide new product opportunities for Sunsine.9

Replacement tyre market – a major source of demand. As of 2014, there were 1.2 billion vehicles in use, of which 142.4 million vehicles were in use in China. Assuming annual addition of approximately 25 million vehicles, there are approximately 200m vehicles in China and close to 1.3 billion vehicles in use globally. The large population of vehicles present a source of demand for rubber and its chemicals, due to replacement demand for tyres. In fact, we reckon that new vehicles only account for approximately a fraction of demand for accelerators each year.


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10 Actually self-sufficiency may be lower than expected as production is spread across three locations. We understand that the Guangshun heating plant mainly supplies to the Shanxian facility. That said, the company has been selling excess heating power to external customers.

Soft Crude Oil Prices to Support Margins

Raising self-sufficiency in electricity and steam. In 2016, Sunsine consumed 15% to 16% more electricity and steam while sales volume grew by 18.5% to 135,791 tonnes. Thus, electricity consumed per unit of output fell from 1,050 kWh/unit to 1,018 kWh/unit. Steam consumed fell from 6.82 ton/unit to 6.63 ton/unit.

At the end of 2014, Sunsine completed and commenced commercial production at its new heating plant. According to Sunsine’s 2016 sustainability report, the company generates about 36% of its electricity consumption internally and 77% of its steam consumption internally.

Currently, Sunsine is adding one boiler (for steam production) and one electricity generator to its heating plant. These additions are expected to be completed by end 2017. Currently, only one of two boilers is operational at any time at the Guangshun heating plant, which also houses one electricity generators. Therefore, electricity and steam self-sufficiency can be expected to increase to around 50% and 100% respectively in 2018.10 In turn, we can expect these improvements to improve gross margin by several percentage points.

Figure 16: Sunsine’s Energy Consumption

Total Consumption 2015 2016 Change

Total Electricity Consumed (kWh) 117,480,714 135,782,815 15.6%

Internally generated 47,370,000 49,430,000 4.3%

% 40.3% 36.4%

2015 2016 Change

Steam (tons) 763,248 884,729 15.9%

Internally generated 575,585 679,450 18.0%

% 75.4% 76.8%

Coal (tons) 124,565 129,906 4.3%

Sales volume 114,572 135,791 18.5%

Energy consumption per unit 2015 2016 Change

Coal (ton/unit) 1.11 0.97 -12.6%

Electricity (kWh/unit) 1,049.98 1,018.12 -3.0%

Steam (ton/unit) 6.82 6.63 -2.8%

Source: Company Sustainability Report 2016

Selling prices and costs track crude oil prices. Raw material costs account for about 80% to 85% of Sunsine’s cost of sales. Key raw materials include aniline, cyclohexylamine, morpholine, carbon disulphide, tert-butylamine and other chemicals. Most of these chemicals are made from crude oil by-products such as benzene. Figure 17 shows the relationship between the company’s selling prices, cost of sales per tonne of volume against crude oil prices. Generally, selling prices and cost of sales per tonne track that of crude oil, subject to a lag of roughly one quarter.

But margins depend on pricing power. The company generally could pass on higher costs to customers, except in 2012 and 2013 when costs outpaced selling prices and gross margins dropped to 17.2% and 18.2% respectively.


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Figure 17: Sunsine’s ASP, Cost of sales per tonne and Crude Oil Prices

Figure 17 is computed by scaling the respective data by its mean over the relevant period. E.g. the scaled average WTI crude oil price for 1Q17 is obtained by the computed quarter daily average divided by the mean of quarter daily average price from 1Q08 to 1Q17.

Source: Bloomberg, Company, NRA Capital

Figure 18: Quarterly Gross Margin vs Crude Oil Price

Source: Bloomberg, Company, NRA Capital

Figure 18 shows that higher crude oil prices do not necessarily lead to lower margins for Sunsine. For instance, gross margin reached 35.6% in 2008 when crude oil prices reached a high of around RMB800 to RMB1000 barrel. Conversely, margins also expanded to more than 30% in the last quarter of 2014 when oil prices fell.

Soft crude prices to also help maintain margins. Declines in crude prices from 2014 have not led to as steep declines in cost of goods sold (Figure 17). In fact, cost of goods sold climbed when crude prices recovered in 2H 2016. This suggests relatively tighter supply of raw materials such as aniline. Since 4Q16, cost of goods sold as risen faster than average selling prices, suggesting that scope to pass on higher costs to customers is being stretched (Figure 19). That said, costs should remain steady in 2Q17 as average crude prices from 1 April to 16 May have dropped when translated to RMB (Figure 20). In addition, margin improvements from electricity and steam savings should help to mitigate against raw material cost inflation.

-1.0

-0.5

0.0

0.5

1.0

1.5

Average WTI Crude Oil Price (in RMB) ASP (All products)

COGS per ton

35.6%

14.2%

31.7%

23.5%

23.7%0.00

200.00

400.00

600.00

800.00

1000.00

10.0%

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Gross margin Average Average WTI Crude Oil Price (in RMB)


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Figure 19: Quarterly Change in ASPs and Cost of Goods Sold


Figure 20: Recent WTI Crude Prices in RMB

Source: Bloomberg, NRA Capital

Figure 21: Revenue Comparison

Source: Kemai draft prospectus, Yanggu huatai AR, Company, NRA Capital

-4.4% -5.1%-3.9%

4.6%

7.8% 8.1%

0.2%

-6.1%-7.7%

3.1%

9.6%

12.5%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

4Q15 1Q16 2Q16 3Q16 4Q16 1Q17

Quarterly Change in ASP Quarterly Change in unit COGS

150

200

250

300

350

400

2,077.3

1,613.4

745.4

1,859.1

1,388.6

860.0

2,036.9

1,335.9 1,239.9

0.0

750.0

1,500.0

2,250.0

Sunsine Tianjin Kemai Yanggu Huatai

RMB millions

2014 2015 2016

Unit COGS has risen faster than ASP.

Unit COGS falls faster than ASP.


page 14

11 Kemai draft prospectus Page 103.

Limited Excess Capacity Supportive of Growth

The rubber accelerators industry in China is relatively concentrated. Firms with annual sales of more than RMB500m account for more than 60% of industry output, while firms with annual sales of more than RMB200m account for more than 80%.11 In all, there are about 22 firms in China with annual sales of more than RMB200m.11 Key domestic competitors include

1) Sinopec Nanjing Chemistry Industry Co., Ltd. (中国石化集团南京化学工业

有限公司) – a major producer of anti-oxidant products.

2) Shandong Yanggu Huatai Chemical Co., Ltd. (山东阳谷华泰化工有限公司)

– a major producer of anti-scorching agents, rubber accelerators, microcrystalline paraffin and insoluble sulphur.

3) Kemai Chemical Co., Ltd (科迈化工股份有限公司) – a major producer of

anti-oxidant products and rubber accelerators.

Foreign competitors include firms such as Eastman Chemical Company, Lanxess AG and Nocil Limited. Yanggu Huatai is listed on the Shenzhen stock exchange while Eastman, Lanxess and Nocil are listed on the NYSE, Frankfurt and India stock exchanges respectively. Among these firms, Yanggu Huatai and Kemai are the most similar to Sunsine, in terms of product portfolio and target markets. Eastman and Lanxess can be considered to be large diversified chemical companies.

Among Yanggu Huatai, Kemai and Sunsine, Sunsine is the largest company by revenue and volume. Its revenue is 52% larger than that of the next largest competitor Kemai while sales volume is 77% larger than that of Yanggu Huatai. On the other hand, Yanggu Huatai and Kemai are roughly similar in size, but focus on different products. Sunsine has the largest capacity in rubber accelerators and insoluble sulphur while Kemai is the market leader in anti-oxidants capacity. Yanggu Huatai has the largest capacity in scorching agents.

Figure 22: Production Capacity

Sunsine Kemai Yanggu Huatai

Rubber Accelerators 87,000 51,000 40,000

Insoluble Sulphur 20,000 NA 8,000

Anti-oxidant 45,000 50,000 13,000

Anti-scorching agent NA NA 20,000

Total Capacity 152,000 101,000 81,000

Volume 135,791 76,511 76,787

Capacity Utilization 89.3% 75.8% 94.8%

Capacity statistics are dated as of 2016, while that of Yanggu Huatai is obtained from http://finance.sina.com.cn/roll/2017-02-03/doc-ifyafenm2578988.shtml. Volume refers to sales volume for Sunsine and production volume for Kemai and Yanggu Huatai. Capacity utilization is based on volume divided by total capacity.

Source: Sunsine AR, Kemai draft prospectus, Yanggu Huatai 2016 AR

Capacity utilization remains high at all three firms in 2016. We see Yanggu Huatai as the closest competitor to Sunsine, owing to the former’s fast growth in recent years. However, the capacity utilization of both Yanggu Huatai and Sunsine appears to be high, suggesting that both companies are more likely to raise than to cut prices until new capacity comes online. The same goes for Kemai whose accelerators capacity utilization was 91% in 2016. Kemai’s anti-oxidant capacity utilization was only 60%, thus dragging overall capacity utilization to 76%.


page 15

12 Eastman 2016 annual report. 13 http://www.projectstoday.com/News/NOCIL-to-expand-capacity-at-Dahej-plant

Figure 23: Volume Comparison

Sales volume for Sunsine, production volume for Kemai and Yanggu Huatai

Source: Kemai draft prospectus, Yanggu huatai AR, Company, NRA Capital

The high rate of capacity utilization comes after stiff competition in 2015 when selling prices dropped. In 2015, Sunsine maintained accelerators sales volume at 76,090 tonnes while Kemai’s sales volume for accelerators fell by 17% or 8,400 tonnes to 41,899 tonnes. Yanggu Huatai does not break down its sales volume but its overall volume rose by 52% to 61,159 tonnes across all products.

In 2016, competition and hence selling prices, started to stabilize. Yanggu Huatai’s sales volume grew by 24% while that of Kemai and Sunsine grew by 6.4% and 18.5% respectively across all products. The stabilization of market conditions was in part due to the closure of smaller pollutive plants which drove demand to large players. For Sunsine, growth was also driven by newer products such as insoluble sulphur and anti-oxidants. In the long run, the ability to sell new products will be crucial as the industry becomes more concentrated. In turn, economies of scale (and cost efficiency) become less critical as a competitive advantage.

Foreign competition may pose a threat. Eastman makes about US$500m a year from the sale of tire additives out of group revenue of US$9.0 billion in 2016. Eastman appears to be most aggressive in expanding its insoluble sulphur business with a new manufacturing facility in Malaysia expected to be operational in 2H 2017. In the words of the company, the Malaysia facility is expected to be the “largest and lowest cost” facility in the world.12 Nocil is also expanding its rubber chemicals capacity, from 7,000 to 15,000 tonnes per annum and the new capacity is expected to be completed in 3Q 2018.13

108,973

81,530

45,629

114,572

70,92962,026

135,791

76,511 76,787

0

80,000

160,000

Sunsine Tianjin Kemai Yanggu Huatai

tonnes

2014 2015 2016


page 16

14 http://news.ifeng.com/a/20170523/51143431_0.shtml

Tightening Environmental Controls Present Risk

Recent bad press about environmental controls. We are mindful that Sunsine recently received some flak regarding its environmental controls. On 20 May 2017, an inspection team led by officers from the Ministry of Environmental Protection visited Shandong Sunsine to carry out an inspection as part of heightened enforcement efforts. Weaknesses pointed out include

a) The absence of real time emission monitoring equipment, b) The discharge of flue gas to the ground instead of into the chimney after

spraying with water c) Neutral pH level for dedusting water spray d) Desulphurisation facilities not running e) Excessive waste gas emission f) Improper storage of hazardous and waste material14

Faults are being rectified. The firm has clarified that real time emission monitoring must be installed by 31 May 2017 and that it was in the midst of installing such equipment. Therefore, it is acting in compliant with the relevant regulations, except that the inspection team came before the stipulated deadline. In general, Sunsine’s clarification in relation to the above findings suggest that the issues were isolated events and that adequate environmental protection facilities have been installed. Points e and f were deemed as site management issues and that they are being rectified by the company.

Ability to continue production suggests minor or permissible lapses. What’s important is that production was not affected. This is a significant signal as plants that were found to be severely pollutive would usually be shut down, suggesting that the lapses were generally minor or within permissible ambits.

Risk of more environmental challenges as China tightens standards. What we are concerned about is that there may be more of such environmental issues, especially when standards are being tightened at a rapid pace. In the worst case scenario, there could be partial plant shutdowns as officials target specific production lines for refitting of environmental protection equipment.

However, the company is expected to add 10,000 tonnes per annum of TBBS capacity in 2H 2017 and 10,000 tonnes per annum of insoluble sulphur capacity from 3Q 2017. Therefore, these capacity additions will help to mitigate for the risk of any capacity downtime.


page 17

Forecasts and Valuation

In our model, we assume flat rubber accelerators sales volume growth in 2017 owing to the production outages, but project 6.5% sales volume growth per annum for insoluble sulphur and anti-oxidants over 2017 and 2018. We chose a growth rate of 6.5% as it is reflective of China’s GDP growth. Rubber accelerators sales volume is expected catch up and grow at a faster rate of 13.4% (6.5% compounded over two years) in 2018. Thereafter, we assume sales volume growth of 6% in FY19 and FY20, followed by 5% in FY21.

Selling price assumptions. As a base case, we assumed constant average selling prices across our forecast horizon, using that of 1Q17 as reference, which are already 20.7% higher than that of 2016. Implicitly, we assume that tight capacity will keep prices supported, but do not factor in higher prices yet.

We are aware that average selling prices may rise slightly due to product mix changes when the new TBBS plant comes online later in 2017. As actual selling prices may vary from now till then, we decided to remain prudent and not factor in the impact of higher TBBS production for now.

Cost assumptions. We noted that cost of goods sold (COGS) per tonne rose from RMB11,020 in 2016 to RMB13,151 in 1Q17. However, costs are seasonally higher in the first quarter of each year due to fewer working days. From 2008 to 2016, second quarter COGS per tonne are on average 1.2% lower than that of first quarter, falling in five out of nine years. Therefore, we assume that COGS per tonne in 2017 will be 2% lower than that of 1Q17, which is in line with prior year changes of 2.1% to 5% (See Figure 24).

Figure 24: Change in Second Quarter COGS per tonne from First Quarter


We next assumed that COGS per tonne will drop by a further 2% in 2018 due to contribution from the expanded heating plant. Thereafter, COGS per tonne is assumed to grow by 1% per annum. If annual inflation is about 2%, we are implying that Sunsine will reasonably be sharing part of higher costs with its customers. This is in line with the trend since 4Q16 when unit costs rose faster than selling prices which we have factored in by basing our assumptions on 1Q17 selling prices and costs, adjusted for seasonality.

While limited capacity prevents customers from switching suppliers, customers may also resist higher prices depending on the suppliers’ gross margins. Therefore, we reckon that it is more reasonable to assume cost sharing rather than full cost pass-through.

3.3%

-4.4%

1.4%

3.9%

-2.1%

-5.7%-4.4%

4.6%

-7.7%

-12.0%

-8.0%

-4.0%

0.0%

4.0%

8.0%

2008 2009 2010 2011 2012 2013 2014 2015 2016


page 18

Because of the above assumptions, we expect gross margin to moderate from 26.5% in 2016 to 25.2% in 2017. On balance, we expect full year PATMI to come in at RMB255.5m or 15% higher than in 2016.

The company had RMB3.8m of government grants received and RMB12.6m of currency exchange gains in 2016. Excluding these items from 2016 net profit, projected growth rises to approximately 24%.

Figure 24: Key Financial Assumptions and Forecasts

Capacity (At year end) 2014 2015 2016 2017F 2018F 2019F 2020F 2021F Remarks

Accelerators 87,000 87,000 87,000 97,000 107,000 107,000 117,000 117,000 as per company five year plan

Insoluble Sulphur 20,000 20,000 20,000 30,000 30,000 30,000 30,000 30,000

Anti-oxidant 45,000 45,000 45,000 45,000 45,000 45,000 45,000 45,000 Sales volume (tons) 2014 2015 2016 2017F 2018F 2019F 2020F 2021F

Accelerators 76,089 76,090 82,767 82,767 93,876 99,509 105,480 110,753

Insoluble sulphur 12,102 15,417 20,031 21,333 22,720 24,083 25,528 26,804

Anti-oxidant 19,903 21,640 31,214 33,243 35,404 37,528 39,780 41,769 Others 879 1,425 1,779 1,779 1,779 1,779 1,779 1,779 0% growth pa

Total 108,973 114,572 135,791 139,122 153,779 162,899 172,566 181,105

Heating power 0 25,180 30,311 30,311 30,311 30,311 30,311 30,311 0% growth pa

ASP (RMB/ton) 2014 2015 2016 2017F 2018F 2019F 2020F 2021F

Accelerators 21,219 18,466 17,752 20,061 20,061 20,061 20,061 20,061 Based on 1Q17 ASPs

Insoluble sulphur 11,106 9,905 9,600 10,448 10,448 10,448 10,448 10,448 Based on 1Q17 ASPs

Anti-oxidant 15,616 12,565 10,889 14,204 14,204 14,204 14,204 14,204 Based on 1Q17 ASPs

Others 20,023 17,684 16,526 19,949 19,949 19,949 19,949 19,949 Based on 1Q17 ASPs

Heating power 0 167 158 158 158 158 158 158 0% growth pa

COGS per ton (RMB/ton) 13,856 11,932 11,020 12,888 12,630 12,757 12,884 13,013 Based on 1Q17 COGS / ton less 2%.

Gross margin 27.3% 26.5% 26.5% 25.2% 27.1% 26.3% 25.6% 24.8%

2014 2015 2016 2017F 2018F 2019F 2020F 2021F Revenue (RMB m) 2,077.3 1,859.1 2,036.9 2,395.7 2,663.8 2,821.2 2,988.1 3,135.4

Gross profit 567.4 492.0 540.4 602.7 721.5 743.2 764.7 778.7

Other income and gains 6.9 38.6 18.7 2.8 4.2 5.1 6.4 7.7 1% of prior year cash balance

Selling & Admin exp -253.8 -232.8 -245.2 -248.9 -261.3 -274.4 -288.1 -302.5 5% increase pa after 2017

Finance -18.1 -10.4 -4.4 0.0 0.0 0.0 0.0 0.0

Profit before tax 302.5 287.5 309.5 356.6 464.4 473.9 483.0 484.0

Income tax -82.3 -92.3 -87.8 -101.1 -131.7 -134.4 -137.0 -137.3 28.4% eff rate as per 2016

Net profit 220.2 195.2 221.7 255.5 332.7 339.5 346.0 346.7 Average receivable turnover days 109.3 117.9 100.9 100.0 100.0 100.0 100.0 100.0

Average inventory turnover days 37.7 41.3 35.0 35.0 35.0 35.0 35.0 35.0

Average payable turnover days 61.4 69.7 52.8 50.0 50.0 50.0 50.0 50.0

Capex -234.0 -50.7 -82.0 -200.0 -200.0 -200.0 -200.0 -200.0


We highlight that we have kept working capital assumptions stable while raising estimated capex to RMB200m per annum over our forecast horizon. This is to factor in more aggressive capex spending following tighter environmental restrictions. The higher capex also depressed our discounted free cash flow valuation of the firm.

To value Sunsine, we discounted its free cash flows to equity by 10% per annum, thus yielding a fair value of S$1.245 per share or 12.0x FY17F earnings. We benchmarked Sunsine against Eastman, Lanxess, Yanggu Huatai and Nocil. These four peers trade at an average P/E ratio of 18.01x. Our valuation of Sunsine can be considered to be reasonable when taking into consideration other metrics such as price-to-sales and price to book value.


page 19

Figure 25: Discounted Cash Flow Valuation and Peer Comparison

FY17F FY18F FY19F FY20F FY21F

Net profit after tax 255.5 332.7 339.5 346.0 346.7

Depreciation & Amortization 83.0 100.7 115.7 128.4 139.2

Capex -200.0 -200.0 -200.0 -200.0 -200.0

Change in non-cash working capital -30.6 -67.3 -37.5 -39.7 -34.9

Change in borrowings 0 0 0 0 0

Free cash flow to equity 107.9 166.1 217.6 234.7 251.0

Terminal value 3200.7

Discount factor 1.10 1.21 1.33 1.46 1.61

PV of cash flows – A 98.05 137.25 163.50 160.29 155.87

PV of terminal value – B 1987.37 Cash as of 31 Dec 2016 – C 275.90

Proceeds from placement – D (S$17.5m x 5) 87.50

Total value of equity (A+B+C+D) 3065.72

SGD @SGDRMB=5 613.14 Toal number of shares (millions) 491.69

Value per share (S$) 1.245 Discount rate 10%

Implied P/E against FY17F EPS 12.00 Terminal value 2%

Source NRA Capital

Mkt Cap (S$m)

FY16 Revenue

(S$m)

FY16 PATMI (S$m)

FY16 Net

Margin

FY16 Sales

Growth

FY16 Earnings Growth

TTM P/E

TTM P/S P/BV

Dividend yield

Eastman Chemical Co 16,081.1 12,521 1187.1 9.5% -6.6% 0.7% 11.53 1.29 2.49 2.55%

Lanxess AG 8,974.5 11,933 297.6 2.5% -2.6% 16.4% 26.69 0.71 2.27 1.11%

Shandong Yanggu Huatai 713.2 251.5 31.8 12.6% 44.2% 298.8% 19.87 2.54 5.17 0.81%

Nocil Limited 364.8 172.1 17.0 9.9% 0.4% 37.0% 13.95 2.26 3.62 1.73%

Average 6,533.4 6,219.6 383.4 8.6% 8.8% 88.2% 18.01 1.70 3.39 1.55%

China Sunsine 381.1 407.4 44.3 10.9% 9.6% 13.6% 7.24 0.82 1.34 1.94%

Valuation 613.1 NA 12.26 1.55 2.23 1.17%

Source: Bloomberg, NRA Capital Extracted on 29 May


page 20

Recommendation

To summarise, we like China Sunsine Chemical Holdings Ltd for its strong capital discipline and demonstrated dividends and share buyback track record. The fact that it has distributed and returned more cash than funds raised prior to the recent placement is comforting.

Secondly, the long term upside of Sunsine remains intact as the motorization rate in China remains low. As such, demand for tires and its additives can be expected to remain robust, tracking China’s economic growth.

Thirdly, Sunsine has been able to pass cost increments to customers. While recent scope to raise prices seems stretched, lower crude oil prices in 2Q 2017 is supportive of margins. In fact, we see little evidence of prices dropping as capacity remains tight among the top players in the industry. In fact, there could be upside risk for selling prices.

Based on Sunsine’s 1Q 2017 selling prices, we are able to derive a valuation of S$1.245 per share which is equivalent to about 12.0x FY17 P/E. In contrast, Sunsine’s competitors trade from 11.53 to 26.69x P/E.

As a catalyst, one possible way for Sunsine to realize value is to engage more foreign investors who may be willing to pay higher P/E multiples for a market leader in rubber accelerators globally. Higher dividends could also be another catalyst.

Key risks include 1) tightening environment regulations may force the company to partially stop production, especially considering recent findings by the Ministry of Environmental Protection. Officials may revert with an order to stop production, if necessary. 2) There have been periods in the past when the company failed to pass higher costs to customers, e.g. in 2013. This risk is particularly heightened when competitors decide to expand capacity.

On balance, we rate Sunsine Overweight with high-average return and average risk classification.


page 21

Profit & Loss (RMB m, FYE Dec) 2014 2015 2016 2017F 2018F 2019F 2020F 2021F

Revenue 2,077.3 1,859.1 2,036.9 2,395.7 2,663.8 2,821.2 2,988.1 3,135.4

Operating expenses -1,676.3 -1,505.9 -1,645.7 -1,958.9 -2,102.9 -2,236.8 -2,383.1 -2,520.0

EBITDA 401.0 353.2 391.2 436.9 560.9 584.4 605.0 615.4

Depreciation & amortisation -87.3 -94.0 -96.0 -83.0 -100.7 -115.7 -128.4 -139.2

EBIT 313.6 259.2 295.2 353.9 460.2 468.8 476.6 476.2

Net interest & invt income -11.2 28.2 14.3 2.8 4.2 5.1 6.4 7.7

Associates' contribution 0 0 0 0 0 0 0 0

Exceptional items 0 0 0 0 0 0 0 0

Pretax profit 302.5 287.5 309.5 356.6 464.4 473.9 483.0 484.0

Tax -82.3 -92.3 -87.8 -101.1 -131.7 -134.4 -137.0 -137.3

Minority interests 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Net profit 220.2 195.2 221.7 255.5 332.7 339.5 346.0 346.7

Shares at year-end (m) 465.5 465.5 464.0 491.7 491.7 491.7 491.7 491.7

Balance Sheet (RMB m, as at Dec) 2014 2015 2016 2017F 2018F 2019F 2020F 2021F

PPE 613.1 562.8 549.4 667.0 767.0 851.9 924.1 985.5

Investment properties 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other long-term assets 29.5 43.7 42.5 41.9 41.3 40.7 40.1 39.4

Total non-current assets 642.6 606.4 591.9 708.9 808.2 892.6 964.2 1,025.0

Cash and equivalents 122.8 341.3 275.9 422.1 513.3 642.0 774.5 925.9

Stocks 168.0 141.5 145.4 171.9 186.2 199.2 213.1 225.9

Trade debtors 704.7 496.7 629.2 656.4 729.8 772.9 818.6 859.0

Other current assets 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Total current assets 995.5 979.5 1,050.6 1,250.3 1,429.3 1,614.2 1,806.3 2,010.9

Trade creditors 311.6 210.3 222.7 245.6 266.1 284.7 304.6 322.8

Short-term borrowings 214.0 144.9 0.0 0.0 0.0 0.0 0.0 0.0

Other current liabilities 57.3 55.4 58.2 58.2 58.2 58.2 58.2 58.2

Total current liabilities 582.9 410.6 280.9 303.8 324.3 342.9 362.8 381.0

Long-term borrowings 44.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Other long-term liabilities 0 0 0 0 0 0 0 0

Total long-term liabilities 44.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Shareholders' funds 1,011.3 1,175.3 1,361.6 1,655.4 1,926.7 2,192.4 2,452.4 2,700.7

Minority interests 0 0 0 0 0 0 0 0

NAV/share (RMB) 2.172 2.525 2.934 3.367 3.918 4.459 4.988 5.493

Total Assets 1,638.1 1,585.9 1,642.5 1,959.2 2,237.6 2,506.8 2,770.5 3,035.8

Total Liabilities + S’holders' funds 1,638.1 1,585.9 1,642.5 1,959.2 2,250.9 2,535.3 2,815.2 3,081.8

Cash Flow (RMB m, FYE Dec) 2014 2015 2016 2017F 2018F 2019F 2020F 2021F

Pretax profit 302.5 287.5 309.5 356.6 464.4 473.9 483.0 484.0

Depreciation & non-cash adjustments 96.6 103.6 102.5 80.3 96.4 110.5 122.0 131.5

Working capital changes -74.2 133.2 -124.1 -30.6 -67.3 -37.5 -39.7 -34.9

Cash tax paid -63.5 -94.2 -85.0 -101.1 -131.7 -134.4 -137.0 -137.3

Cash flow from operations 261.3 430.1 202.9 305.1 361.8 412.5 428.3 443.3

Capex -234.2 -30.7 -82.6 -200.0 -200.0 -200.0 -200.0 -200.0

Net investments & sale of FA 0.2 -20.0 0.6 0.0 0.0 0.0 0.0 0.0

Others 1.1 1.2 2.4 2.8 4.2 5.1 6.4 7.7

Cash flow from investing -232.9 -49.5 -79.6 -197.2 -195.8 -194.9 -193.6 -192.3

Debt raised/(repaid) 17.9 -110.0 -147.9 0.0 0.0 0.0 0.0 0.0

Equity raised/(repaid) 0.0 0.0 -3.2 87.5 0.0 0.0 0.0 0.0

Dividends paid -22.9 -31.5 -33.2 -49.2 -61.5 -73.8 -86.0 -98.3

Others -18.1 -10.4 -4.4 0.0 0.0 0.0 0.0 0.0

Cash flow from financing -23.1 -151.9 -188.6 38.3 -61.5 -73.8 -86.0 -98.3

Change in cash 5.3 228.8 -65.4 146.2 104.6 143.9 148.6 152.7

Change in net cash/(debt) -13.0 331.6 79.5 146.2 91.2 128.7 132.4 151.4

Ending net cash/(debt) -135.2 196.4 275.9 422.1 513.3 642.0 774.5 925.9

KEY RATIOS (FYE Dec) 2014 2015 2016 2017F 2018F 2019F 2020F 2021F

Revenue growth (%) 22.5 -10.5 9.6 17.6 11.2 5.9 5.9 4.9

EBITDA growth (%) 230.0 -11.9 10.7 11.7 28.4 4.2 3.5 1.7

Pretax margins (%) 14.6 15.5 15.2 14.9 17.4 16.8 16.2 15.4

Net profit margins (%) 10.6 10.5 10.9 10.7 12.5 12.0 11.6 11.1

Effective tax rates (%) 27.2 32.1 28.4 28.4 28.4 28.4 28.4 28.4

Net dividend payout (%) 10.6 17.9 15.7 19.2 18.5 21.7 24.9 28.4

ROE (%) 24.1 17.9 17.5 16.9 18.6 16.5 14.9 13.5

Free cash flow yield (%) 1.5 19.7 6.4 5.6 8.6 11.3 12.2 13.0



page 22

NRA Capital Pte. Ltd (“NRA Capital”) has received compensation for this valuation report. This publication is confidential and general in nature. It was prepared from data which NRA Capital believes to be reliable, and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. No representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information or opinions in this publication. Accordingly, neither we nor any of our affiliates nor persons related to us accept any liability whatsoever for any direct, indirect, special or consequential damages or economic loss that may arise from the use of information or opinions in this publication. Opinions expressed are subject to change without notice. NRA Capital and its related companies, their associates, directors, connected parties and/or employees may own or have positions in any securities mentioned herein or any securities related thereto and may from time to time add or dispose of or may be materially interested in any such securities. NRA Capital and its related companies may from time to time perform advisory, investment or other services for, or solicit such advisory, investment or other services from any entity mentioned in this report. The research professionals who were involved in the preparing of this material may participate in the solicitation of such business. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additional information is, subject to the duties of confidentiality, available on request. You acknowledge that the price of securities traded on the Singapore Exchange Securities Trading Limited ("SGX-ST") are subject to investment risks, can and does fluctuate, and any individual security may experience upwards or downwards movements, and may even become valueless. There is an inherent risk that losses may be incurred rather than profit made as a result of buying and selling securities traded on the SGX-ST. You are aware of the risk of exchange rate fluctuations which can cause a loss of the principal invested. You also acknowledge that these are risks that you are prepared to accept. You understand that you should make the decision to invest only after due and careful consideration. You agree that you will not make any orders in reliance on any representation/advice, view, opinion or other statement made by NRA Capital, and you will not hold NRA Capital either directly or indirectly liable for any loss suffered by you in the event you do so rely on them. You understand that you should seek independent professional advice if you are uncertain of or have not understood any aspect of this risk disclosure statement or the nature and risks involved in trading of securities on the SGX-ST.

China Sunsine Chemical Holdings Ltd. Company note · China Sunsine Chemical Holdings Ltd. Company note 4 June 2017 ... must be vulcanized using additives such as sulphur ... MBTS,

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