1Q16 results largely consistent with our expectations.  Sunsine reported 1Q16 revenue/net profit of RMB445m (+3% yoy)/RMB33.6m (-29% yoy) and formed 25%/22% of our full year revenue/net profit forecasts, respectively. This set of results was largely consistent with our expectations as we have previously reduced our FY16F forecasts to factor in a further decline in ASP and margins. Although ASPs fell, higher than expected sales volume boosted revenue. Higher than expected operating expenses, though, eroded its better than expected gross margins. Other variables that impacted our bottomline expectations came from higher than expected net interest costs.

Strong cash flows debt inches down.Operating cash flow remained respectable (RMB72m) in 1Q16, with Sunsine making net debt repayments of RMB0.5m. Net cash at the company is now RMB265m (RMB196m in 4Q15). We believe Sunsine&rsquo s balance sheet puts it in a favourable position to further dominate the industry as other players are already highly leveraged.

Slightly improved outlook.  Despite reiterating its challenging environment, Sunsine sees that demand dynamics for the sector is beginning to look more promising in 2Q16. Sunsine believes that the utilization rates of Chinese tire makers, which had been low during 2H15, are beginning to creep up as tire inventory has depleted over time. During Sunsine&rsquo s 1Q16 results briefing, Sunsine&rsquo s CFO, Mr. Tong, has also shared that Sunsine has made the relevant applications to the local authorities to build its new plant (capex: ~RMB100m) that will focus on TBBS (higher and more resilient price point) production. The planned capacity for the plant is 30k tons p.a. with an initial phase one capacity of 10k. The plant is estimated to be ready by early 2017.

A potential takeover/privatisation candidate.In spite of its challenging operating environment, we retain our view that Sunsine has broken into a higher level of earnings (higher peaks and troughs). However, with Sunsine trading at only 5.6x FY16F P/E, 0.7x P/B (MRQ) and FY16F EV/EBITDA of 3.4x, we think the company&rsquo s stock price has yet to reflect this new reality. No changes are made to our forecasts and our conservative target price of S$0.54 (based on 8x FY16F P/E), which still presents a huge upside. We also continue to see Sunsine as a potential takeover/privatization candidate given its low valuation, strong fundamentals and dominant market position.

 



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Renfred Tay
Analyst
Research Department 

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