China Sunsine Chemicals Holdings

[Bluechipfan]

Bluechipfan,

You mentioned "YZJF is the second S-chip that I invested heavily. First one was China Sunsine [CS] which I still have 100k shares at the average cost of 27 cents post split. I have held 500k shares of CS at one point before gradually exit most of it just prior to the announcement of split."

Pardon me for the seemingly unrelated information above, but I find it kind of relevant because as with CS, YZJF is also simply viewed negatively by some quarters with the label of S-chip. Some people just don't trust S-chip but I hope YZJF can turn out to be another CS for me.

UOBKayhian has set 45.3c as the target price of Sunsine shares. As the broking firm has projected a cash balance of RMB 2,220m (without bank borrowings) as of the end of this year, translating into 45c per share, does it mean the rubber chemical business is worthless, or the cash is fake? Grateful for your view.

The analyst report can be found at https://www.chinasunsine.com/investors/a...-coverage/

First of all, it has been a while since I am here and I wish everyone a very huat rabbit year going forward. YZJF is the second S-chip that I invested heavily. First one was China Sunsine [CS] which I still have 100k shares at the average cost of 27 cents post split. I have held 500k shares of CS at one point before gradually exit most of it just prior to the announcement of split.

Pardon me for the seemingly unrelated information above, but I find it kind of relevant because as with CS, YZJF is also simply viewed negatively by some quarters with the label of S-chip. Some people just don't trust S-chip but I hope YZJF can turn out to be another CS for me. It wasn't easy investing in S-chip because the negative opinions/views on S-chip can be overwhelming at times. It's hard to ignore them and sometimes it make people, who are vested in S-chip, started to have self doubts. I still remember some comments on CS such as 'it's high risk, the factory could be on fire' or something to that effect.

For YZJF, what attracted me to it was the historical high profits and generous dividend payout pre split [YZJS]. Once the management undertake the dividend policy of at 40% payout NPAT, the only question I have to ask is how likely the profits will continue and sustain post split as YZJF. After seeing their management recruitment and insiders buying post split, I decided to build my position in YZJF. If Ren and the management can build YZJS from scratch in the past, Ren with his management can now also build up YZJF. This is track records. They just need time and I figure that while waiting, the risk can be mitigated with the dividends and the relatively low cost of purchases due to the suppressed share price. My average cost is now about 38 cents and I reckon that if the dividend is between 1.5-2 cents per year, not only it will bring down my 'average cost' correspondingly, the share price will bound to surpass 40 cents too and/or even more within 2 years. I think the cost and the risk is commensurate in this case and 2-3 years is reasonable timeframe to have a even clearer picture one way or another.

Of course Sunsine's cash is real. No disruption of dividend payout since IPO, no cash call at all and had conducted SBB from time to time. I am not sure why UOBKaykian gives such low TP despite Sunsine's increasing cash in hands. Perhaps the market simply think this is S-chip and it is also not a very big company. Just look at the PE, for a company that constantly achieve EPS of sgd 10 cents in most years, the PE hardly cross over 5x. 

I have been holding the view that the only way for Sunsine's share price to go up, is that they increase their dividend payout ratio. Other than the one time 20% payout few years back, the payout ratio has been around 10% or even lower. With no debt, I don't see why can't they pay at least 50% of EPS. Maybe it is due to capex considerations and having said that, their capex should be slowing down from now on and who know, one day they will start paying at least 4 cents dividend. That will be around 40% of EPS and should move the share price up to at least 80 cents.

This company produces specialty chemicals which are ultimately commodity products, anyone who can meet the specification is able to bid for the contract. So the company is a price-taker. It may have a good relationship with key customers, but that doesn't mean they will pay above the market price.

During supply shortages (2014-2018) the company has enjoyed super-normal profitability, conversely during oversupply (2012-2013) it has suffered accordingly.

Perhaps it is this inability to control pricing that has led the company to hoard cash, against the day that it loses money and has to draw down reserves. Certainly the cash on hand is far in excess of normal requirements. At least it has been buying back shares, albeit at a very slow rate. To the company's credit, it sold 27m treasury shares in 2017, when the share price was above book value. Very few companies have been able to take advantage of capital markets in both directions.

I find it interesting that the chairman appears to have *reduced* his pay. In the IPO Prospectus, his service agreement entitles him to a fixed pay of RMB 1.25m plus 20% of pretax profit above RMB 85m. In recent years the Group's pretax profit has been multiples of RMB 85m, such that his bonus should have been RMB 50-100m in 2017, 2018, 2019, 2021 and 2022.

However his pay topped out at SGD 7.3m (RMB 44m assuming RMB:SGD = 6:1) in those record-breaking years, and the pay breakdown shows his fixed pay is now RMB 2.2m. So it looks like he negotiated a higher base pay in exchange for a higher hurdle rate. Working backwards, it looks like the hurdle rate is somewhere around RMB 250m.

So basically the chairman gave up an "easy" RMB 34m of bonus on RMB 170m of incremental pretax profit, in exchange for RMB 1m more of base salary. Net benefit to shareholders is RMB 33m a year. I would give the company some extra credit for this.

As for the outlook, the company has already noted that the market is currently in oversupply. So investors should be prepared for a bad 2H also.

I agree that the company's capital allocation can be improved. It can (and should) increase its payout ratio. And maybe tender to buy back a large block of shares, perhaps 10%. But given its aversion to bank borrowings* shareholders may have to wait a long time.

*devil's advocate: maybe its banking relationships are not strong enough for it to borrow anything meaningful, and thus all capital needs must be self-funded.

YMMV.

Good to see Sunsine share price indeed hit above $0.80 a while back, that's as good as $1.6 pre split!. Unfortunately, I have existed all before it scale such high price. The company has also started to pay higher dividend and as I mentioned, it is the only way for it share price to trend up and indeed so. Reason for exiting Sunsine is not because its fundamentals have weaken but purely for capital reallocation and to certain extend, the old age of Mr Xu and seemingly no clear succession plan or at all.
I am also glad to see YZJF indeed has turned the corner in about 2 years and hit ATH of $1.24 pre split. Another vindication and it is now trading at about $0.52 post split with YZJM commencing trading soon with indicative price of $0.6 based on the private placement deal. Of course, the market may or may not trade at this price for a start. Thanks Sunsine for the good investment, if only it started to pay higher dividend earlier and I may still hold on to it but it is too cautious in my view.