China Sunsine Chemicals Holdings

[CityFarmer]

Moderator
The remaining portion of the announcement refers to the findings of the feasibility study conducted by the Shangdong Institute of Heating and Electricity:

“Accordingly, a feasibility study was commissioned by Shandong Sunsine and carried out by the Shandong Institute of Heating and Electricity, to assess the financial and operational feasibility of Shandong Sunsine undertaking the Project.
Based on our needs for steam supply, our current steam cost, the requirements of Local Government, the results of the Feasibility Study, and the fact that it is customary practice in the PRC that users of steam pay the charges upfront before usage, and that the State Grid will purchase the by-product which is electricity from CHC which should ensure healthy cash-flow from operations, the Board is of the view that it is in the best interest of the Group to undertake the Project and for Shandong Sunsine to establish a New Subsidiary to operate the same.”

Sunsine has not stated explicitly the financial viability of the central heating company, besides the following:
(a) Its wholly-owned central heating company will sell steam at market rates;
(b) Users of steam pay the charges upfront before usage; and
© The state Grid will purchase electricity, the by-product. (Is steam to be produced at a constant rate, and when the demand for steam is low, the excess is diverted to drive turbine to generate electricity?)

As central heating will lower carbon emissions as well as the unit cost, and the Shanxian Chemical Industrial Zone will have no alternative sources of steam, the central heating company is unlikely to fail, given government’s resolve to curb air pollution in China.

I didn't read the news in detail, because it is immaterial with my story of the company.

The company was selected to my watchlist, due to its link to growth of car population in China and its expansion plans. I am bullish on the car population growth in the next decade. The company seemed executing the expansion plans well too to capture the growth.

But the management has been deploying a low-margin-high-volume business model in the last few years. It is never a low-margin-high volume business, due to its low asset-turnover and high capex for expansion, IMO. The "wrong" business model seems verified by its deterioration of ROA/ROE in the last few years. The ROA/ROE (FY2008) was 16%/20%, while the last FY2012 was 3%/4%. That may be partly due to the excess capacity after expansion, but the key culprit was the business model, IMO.

Overcapacity is a lingering issue in all sectors of China, and market consolidation seems happening everywhere in China. One of feasible strategies is to capture market share in order to secure pricing power, and then raising ASP. It might work, but I doubt the management is focusing on it, with its "diversification" moves recently.

I will keep it within watch-list for few quarters and might remove it after then.

(not vested)