24 JULY 2009(http://www.sharesinv.com)-Spurred by the Automotive Revitalisation plan, Chinese auto sales have chalked up an impressive 36.5% growth y-o-y in June, hitting 1.14m vehicles. For 1Q09, China’s auto industry sold a total of 2.67m units outpacing that of America. Given the robust Chinese growth and faltering American market, experts and analysts expect vehicle sales in the Middle Kingdom to exceed the US in 2009.
In a year where good news comes rarely for car manufacturers, this data brought much-needed cheer to companies related to the automotive industry. On the Singapore Exchange, corporations such as China Kunda and China Sunsine Chemical Holdings (China Sunsine) are the beneficiaries of the upswing.
Listed on the Singapore Exchange on 5 July 2007 at $0.39 apiece or 14.4x FY06 earnings, China Sunsine offers a once-in-a-lifetime opportunity to embrace the Chinese’s growing love affair with automobiles.
The Chinese-owned, Singapore-listed company is engaged in the production of rubber chemicals such as rubber accelerators, anti-oxidant and insoluble sulphur. These rubber chemicals are essential additives in the curing process during the production of rubber products.
Margins Fell But Fundamentals Intact
Not too long ago, China Sunsine has reported 1Q09 results for the month ended 31 March 2009. Revenue and earnings took a dip, as the company reduced prices to maintain its competitive position and gain market share.
Gross profit margin (GPM) declined to 16.6% from 20% a year ago. According to Koh Choon Kong, chief financial officer of China Sunsine, “Margins are expected to come in the range of 15% to 20% in FY09. For the long term, we are targeting a 20% GPM.”
The company derives its revenue primarily from the tire industry, which accounted for 77% of total revenue in 2008. While earnings may have taken a knock in 1Q, domestic sales had more or less remain firm.
We expect China Sunsine, the largest rubber accelerators producer with a well-diversified customer base of more than 600 customers in China and overseas to weather the storm in relatively good shape. Counting 45 of the global top 75 tire makers, such as Michelin and Bridgestone among its clients as well as prominent local brands such as Giti Tire and Hangzhou Zhongce, the company is relatively insulated from bad debts and the danger of defaults.
Even this recession which proves so fatal to other rubber accelerators producers could be a boom to China Sunsine. According to Koh, “Smaller competitors are being weeded out and tire manufacturers are increasingly looking for a reliable supplier.”
Big Is Better
Equipped with modern machinery to handle intensive volume, China Sunsine’s two production facilities at Shanxian, Shandong Province are capable of producing 50k tons of rubber accelerators, making the company the largest manufacturer in the world.
To a producer of a common product, economies of scale is perhaps the most important factor for success, allowing the corporation to offer products at a competitive price. Further, MNCs will rather do business with a big company than a smaller one especially with regards to the supply of a crucial production ingredient.China Sunsine’s huge capacity also means that the company can ramp up production in times of robust demand hereby securing additional business when other competitors are busy coping with overwhelming demand.
From 26.3k tons of rubber accelerators in 2006, the company has recently increased its annual capacity to 50k, surpassing LANXESS, its closest rival. By the end of 2009, production capacity is expected to reach 55k tons.
Being pro-environment and prescient, China Sunsine is also upgrading its wastewater treatment plant at facility 2 amidst an ongoing tightening of environmental standards that will further handicap environmentally unfriendly domestic competitors.
Dancing With The
’Elephant’
Recession aside, China Sunsine has been busy sniffing out opportunities in other parts of the world. Setting the foundation for future growth in the South Asia, the company appointed Malaney Industries, a subsidiary of the Malaney Group, as its exclusive agent for the sales of rubber chemicals in India, Sri Lanka and Pakistan.
With the launch of the Nano car and expected 6-7% growth rate, the Indian market could well be the next big thing for the auto sector after China.
Nonetheless, as China Sunsine’s market share in India is still miniscule, the Middle Kingdom is expected to account for the lion share of sales in the near-future.
Going forward, projected car sales in China is expected to climb at a CAGR of 12% reaching 13m in 2011, which bodes well for the industry.
As for the challenges that China Sunsine faces, Koh thinks that understanding customers and becoming responsive to their needs will be increasingly important as the company looks towards increasing its global market share.
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