Monday, October 13, 2014

Vallianz – An emerging OSV play

The first time that I came into direct contact with Vallianz Holdings (“Vallianz”) was in early Aug 2014 where Mr Ling Yong Wah, Executive Director of Vallianz did a presentation at CIMB Securities. My first impression of him was pretty positive as he went to great lengths to explain his company’s business and prospects. He was also candid and shared with us some of the potential investors’ concerns about his company. A week later, I met him on a 1-1 chat over coffee on his company to understand more about the company and also to clarify some of my queries.

Vallianz has fallen approximately 32% from its intraday high of $0.135 on 22 Aug 2014 to $0.092 on 13 Oct 2014. With the sharp decline in its share price, it seems to be time to take a closer look in this stock.

Description

Vallianz is a provider of offshore support vessels (“OSV”) and integrated offshore marine solutions to the oil and gas industry. They own a young fleet of over 29 offshore support vessels with an average fleet age of 2.3 years. Their fleet comprises of 19 anchor handling tugs (“AHTs”), six platform supply vessels (“PSVs”), two towing tugs and two other vessels. They cover markets in Asia Pacific, the Middle East and Latin America with their headquarters in Singapore.

Vallianz is listed on the SGX Catalist with a market capitalization of S$281m as of 13 Oct 2014. Please visit their website  http://www.vallianzholdings.com/corporate-profile.html# for more information.

Investment merits

Industry dynamics seem positive

Industry dynamics seem positive for Vallianz. Firstly, amid the delivery of new rigs in 2014 & 2015, the supply of rigs is expected to increase. This is likely to underpin demand for OSVs. Based on Figure 1 below, the OSV – rig ratio is likely to decline to 4.25x in 2015 (lower than that of 2013) and may decline to below 4x beyond 2015.

Figure 1: OSV – rig ratio


Secondly, according to Tidewater and Gulfmark, customers are placing more emphasis on younger vessels as these vessels typically have higher specifications such as dynamic positioning technology and better fuel efficiency. Based on Figure 2 below, more than 25% of the OSV fleet is more than 25 years old and likely to be less competitive vis-à-vis OSV owners with younger fleet. It is noteworthy that the average age of Vallianz’s fleet is about 2.3 years old. This compares favourably with the global average of about 11 years for AHTS and 18 years for PSVs. Furthermore, according to Vallianz, 17 out of 19 of their AHTs and all their six PSVs have dynamic positioning technology, which is increasing a pre-requisite for most offshore projects.

Figure 2: Age of OSV fleet


With reference to Figure 2 above and Figure 3 below, although there is an overbuilding of OSVs prior to 2008 where the AHTs and PSVs order book to fleet soared above 30%, this ratio has dropped to an average 8% for AHTs and 27% for PSVs. It is noteworthy that all of Vallianz’s vessels are below 7,999 BHP where the order book to fleet ratio is around 5%.

Figure 3: AHTs order book to fleet ratio

Vallianz’s order book of US$494m stretches to 2018 provides visibility

As of 30 Jun 2014, Vallianz has an order book of US$494m and is tendering for projects valued at around US$1.2b. According to the company, around 50% of the order book is likely to be recognized in 2HFY14F and FY15F. (See Figure 4 below)



Figure 4: Vallianz’s order book

Source: Company

Vallianz has executed several noteworthy initiatives in 2014

Firstly, Vallianz announced on 12 Apr 2014 that they have entered into a collaboration arrangement with a first class Chinese shipyard to build Vallianz – designed vessels. Vallianz has the right of refusal for up to 200 vessels. This is a strategic step to manage their asset base and fleet renewal.

Secondly, Vallianz announced on 22 Sep 2014 that they were acquiring a Singapore incorporated Jetlee Shipbuilding and Engineering Pte Ltd so as to establish their own marine base for docking and maintenance operations. According to the company, this should result in cost savings and enhance operational efficiencies. The purchase of Jetlee would be settled by issuance of 143.3m Vallianz shares at an issue price of $0.138 per share. It is noteworthy that the issue price of $0.138 was at a 24% premium to Vallianz’s volume weighted average price (“VWAP”) of $0.1116 per share. The owners of Jetlee Group are industry veterans and comprise of Mr Chan Kwan Bian (co-founder of Labroy Marine), Mr Teo Guo Ping (previously working at Pan-United Corp) and Mr Ng Chee Keong (founder of Jetlee through a joint venture with Pan-United Marine Limited.) As the consideration will be entirely settled via Vallianz shares, priced at a significant premium to the current price (then), it is likely that the Jetlee owners are confident in Vallianz’s business and growth prospects.

Thirdly, Vallianz announced on 30 Sep 2014 that they are acquiring OER Holdings Pte Ltd, a provider of manpower services to the offshore industry for US$27.7m. OER Holdings’ 2013 earnings before interest, tax, depreciation and amortization (“EBITDA”) was around US$5.6m. Thus, it was priced at approximately 5x 2013 EBITDA. According to management, this acquisition not only brings an additional source of revenue and income but is likely to open doors to new customers and geographical market, especially in Asia. It is noteworthy that this acquisition would also be settled solely by the issuance of 250m shares at an issue price of $0.140 per share. This is at a 27% premium to Vallianz VWAP of $0.1101 per share which undermines OER Holdings’ confidence in Vallianz.

All of the above initiatives seem to be part of Vallianz strategic move to grow its business over the medium to long term.

As with any company, there are noteworthy points to consider



Risks

Possibility of a delay in fleet expansion

As of 30 Jun 2014, Vallianz plans to increase their fleet by 72% to 50 vessels by end 2016.  Their current vessels are built by 3rd party shipyards. Any delay by the shipyards to deliver the vessels to Vallianz may have an adverse impact on Vallianz.

Contracts cancellation is possible in dire circumstances

Some investors fear that if the oil prices continue its decline, charter contracts may be cancelled. Despite Vallianz’s long term charter contracts, their customers are allowed to give a one month notice to Vallianz before they cancel their charter contracts. However, this practice is an industry norm for all players. A noteworthy point to note is that Vallianz’s vessels operate in shallow water, hence oil price may have to tumble below US$40 before their customers decide it is not worthwhile to continue drilling for oil.

Order book replenishment

Since the company’s announcement on 12 Apr 2014 that they were bidding for US$1.2b worth of contracts, they have only announced one Latin America contract worth US$82m on 15 May 2014. I understand from management that the contract award for some of their contracts is typically in 4Q which may explain the hiatus in the contracts being awarded.

Significant gearing is a sticky point for most investors

As of 30 Jun 2014, short term and long term totaled US$508m. This is significant vs. its total equity of US$169m. Vallianz’s loans are mainly USD denominated with floating rate obligations. This naturally brings up two issues especially with the strengthening USD and talk of rising interest rate environment.

According to management, although its loans are mainly USD denominated, its assets are also USD denominated. Furthermore, both earnings and expenses are USD denominated hence there is a natural hedge to a certain extent. It reports results in USD terms too. Thus, an appreciating USD is likely to have an overall muted impact on Vallianz.

As a corollary of its large debt obligations, Vallianz, in their 1HFY14 results, posted finance costs of around US$7.5m. This is significant as compared to its 1HFY14 net profit of around US$10.1m. It is logical that if interest rate rises in the next 1-3 years, (assuming that Vallianz’s debt quantum remains unchanged), its finance costs will rise further. However, if all the above initiatives and Vallianz’s confidence in securing contracts bear fruit, Vallianz earnings and cash flow should improve over time.

Chart outlook – All time oversold

Based on Chart 1 below, Vallianz has fallen approximately 32% from its intraday high of $0.135 on 22 Aug 2014 to $0.092 on 10 Oct 2014. Both Pacific Radiance and POSH have also dropped 26% and 28% respectively during the period. Thus, the sharp drop in Vallianz may be due largely to the weakened sentiment in the OSV operators.

Based on today’s close, Vallianz seems to have formed a *doji which may potentially be the start of a reversal. RSI closed at 14.6 last Fri. This is the lowest level since its trading history dating back to May 2001. The extreme oversold pressures are likely to limit any near term decline. Support is likely around $0.088 with strong support at around $0.085. Resistance is at $0.099 / 0.108 / 0.115.

*For doji to form, it is ideal but not necessary for the open and close to be the same price. In my opinion (chart interpretation is subjective), the candlestick formed on 13 Oct seems to fulfil a doji’s requirements.


Chart 1: Vallianz – all time oversold

Source: CIMB itrade as of 13 Oct 2014

Conclusion – This is just an introduction

In a nutshell, Vallianz seems to be in the right industry with bright prospects and they have executed several initiatives in 2014. If these are executed well, it should pave the way for continual growth in the medium to long term. However, it is noteworthy that contract replenishment, significant U.S. debt and finance costs, etc are some factors which readers should be aware of. If Vallianz continues to deliver on their earnings, contracts and their plans, it is likely that they may re-rate over time.

Readers who are interested should take a look at their website  http://www.vallianzholdings.com/corporate-profile.html# for more information. You can also email me at crclk@yahoo.com.sg  for the unrated analyst report on Vallianz (there is no rated report on Vallianz) and the informative industry reports. As I am not able to put in the above figures and chart, you can also drop me a note and I will forward a pdf writeup to you.






Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Wednesday, October 8, 2014

Midas – all time oversold

With the recent market weakness, as per my usual practice, I will screen out oversold stocks listed on our Singapore bourse.

Here is the list of the top ten most oversold stocks using CIMB’s stock filter as of yesterday, 7 Oct.

Company
Sector
RSI <=30
Yongmao Holdings Limited
Construction / Agricultural Machinery
6.7
VGO Corp Ltd
Retail - Apparel / Accessories
8.7
Nam Lee Pressed Metal Industries Ltd
Construction - Supplies / Fixtures
10.4
Midas Holdings Ltd
Aluminum
11.9
Junma Tyre Cord Company Limited
Chemicals - Specialty
12.5
Full Apex (Holdings) Ltd
Non-Paper Containers / Packaging
13.4
Jacks International Limited
Retail - Drugs
14.8
St. James Holdings Limited
Leisure / Recreation
15.8
JES International Holdings Limited
Shipbuilding - NEC
15.9
Chew S Group Ltd
Fishing / Farming
16.7
Source: CIMB itrade 7 Oct 14

One of the stocks in the above list caught my attention. Midas is the 4th most oversold stock in the SGX by RSI level as of yesterday. It has a market capitalisation of S$402m and has dropped 25% from $0.440 on 30 Jul 14 to close $0.330 on 7 Oct 14. Part of the decline may be attributed to its weaker than expected 2QFY14 results announced on 14 Aug 14.

Against the backdrop of 25% drop in Midas’ share price, Midas is the most oversold since its IPO with a RSI of 11.9 as of last Fri. ADX closed at an unsustainable high level at 57.0, indicating that the recent sharp downtrend is likely to ease. It trades at 0.67x P / BV with NAV of $0.491. Average analyst target is $0.533.

Chart 1:  Midas dropped 25% since 30 Jul 14; all time oversold by RSI


Source: Shareinvestor chart (8 Oct 14)


Conclusion – likely to have a technical rebound

At the time of writing this, Midas is trading down half a cent to $0.325. Its RSI is even lower today at 10.7. If the general markets were to rebound, based on chart, to a certain extent, Midas is likely to participate in the technical rebound. Resistances are around $0.350 – 0.360 / $0.380. Supports are at $0.325 – 0.330 / $0.315.

P.S: Do note that the basis of this writeup is based mainly on technical analysis. It is entirely possible that there may be some fundamentally negative information on the company (which I am not aware of) that results in its persistent weakness.


Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Wednesday, October 1, 2014

Giken – A potential Indonesia onshore oil field play

Giken – A potential Indonesia onshore oil field play

Most people would have shunned the following stock, given that it has skyrocketed 800% from $0.035 on 18 Feb 14 to $0.315 on 1 Oct 14. This is notwithstanding the series of shares placement which Giken has done since Feb.

Chart 1: Giken has skyrocketed 800% since 18 Feb 14

Source: CIMB chart as of 1 Oct 14 (not able to put here due to chart incompatibility with my blog. Readers who are keen can email me at crclk@yahoo.com.sg for my pdf version.) 

What piques my interest?

Giken seems to be a potential onshore Indonesia oil play. After doing some research on Giken, armed with my queries, I decided to connect with Giken’s management to understand more about their company and their prospects. Mr Sydney Yeung, CEO of Giken (“Management”) promptly agreed to meet me for an exclusive chat over coffee.

Key takeaways from the 1-1 meeting

Interesting business model – old wells programme

For their onshore oil production business, Giken, through PT Cepu operates through the following manner:

a)     Pertamina, Indonesia’s state-owned oil and gas company signs a Mother Agreement with the local co-operatives (e.g. KUD / BUMD);

b)    The local co-operatives will sign a Cooperative Agreement with PT Cepu (i.e. Giken) to produce oil. The revenue split for this cooperative arrangement is typically 20% (local co-operatives) and 80% (PT Cepu).

According to Management, Giken is the only player in this old wells programme for the whole of Indonesia. They believe that the above arrangement is beneficial to all three parties. Firstly, the oil produced from the old wells must be sold to Pertamina at approximately 70% of Indonesian crude price (“ICP”). Without this arrangement, Pertamina would have to source the oil from other parties, which is likely to be on less favourable prices.

Secondly, the local co-operatives which are the local governments would stand to benefit from the arrangement. Their villagers would be able to enjoy a higher standard of living, as some of them would be employed by Giken. The local governments would also be able to enjoy 20% of the revenue obtained from the sale of oil to Pertamina.

Thirdly, for Giken, they have nothing to lose. Their production cost is about US$20 / barrel of oil, thus the profit margin is still considerable, despite the revenue split between local co-operatives and Giken and the discounted selling price of the oil to Pertamina. In addition, Giken has less business risk as they have a guaranteed buyer i.e. Pertamina.

Extremely limited exploration risk

Giken utilizes “twinning” strategy where they drill new wells beside the old wells. These new wells are sturdier, more operation friendly and can be deeper than the old wells to increase the yield on each well. As the new wells are drilled beside the old wells which were previously producing, exploration risk is minimal.

Short payback period, cash flow generative operations

According to management, their business model and strategy offer a short payback period of approximately 5-6 months. Once the oil wells start producing, it generates cash flow immediately. Capex is low for each well as these are simple onshore wells. Management estimates the capex for each well to be approximately US$120,000-160,000. Part of the drilling capex can be funded by its existing production.

Highly scaleable model – likely growth in the next couple of years

With reference to Giken’s announcement on 22 Sep 14, Giken stated that it has increased its production from its Dandingilo-Wonocolo (“D&W”) and Tungkul fields by 31% from (14 wells) 670 barrels of crude oil per day (“bopd”) in June 14 to (15 wells) 880 bopd in Sep 14. There are two noteworthy points on the above figures.

a)     The above production update only pertains to 15 wells from D&W and Tungkul fields. D&W and Tungkul fields have a total of 139 wells.

b)    As mentioned above, the production update pertains to D&W and Tungkul fields. Giken has a total of five fields now with a combined number of 300 wells. Even without new expansion, there is likely to be enough work for Giken for several years.

Going forward, management expects to drill three to four wells each month. This should speed up production and subsequently their profitability. Management added that they may consider building tank farms once their production hit a significant level.

Selling price to Pertamina fixed yearly

Pertamina fixes the selling price of the oil at approximately 70% of ICP. According to management, this price is reset annually. Naturally, there are both positive and negative aspects to such an arrangement. However, my personal view is that with this arrangement, there is some stability to Giken’s business operations, unlike other oil & gas plays which may be extremely vulnerable to short term swings in oil prices.

Senergy commissioned to prepare reserve report on Kawengan, Trembul and Gabus fields

There was a valuation report prepared by Senergy Oil & Gas (Singapore) Pte Ltd (“Senergy”) which valued the D&W and Tungkul fields to be worth a (best scenario) net present value of US$195m based on a 10% discount rate (See Table 1 below).




Table 1: Projected net present value of D&W and Tungkul fields using a 10% discount rate
Source: Senergy report dated 26 May 14

With reference to Giken’s announcement today, Giken has commissioned Senergy to prepare a reserve report on Kawengan, Trembul and Gabus fields. It is noteworthy that Kawengan, Trembul and Gabus fields have a total of 161 wells vs the 131 wells from the D&W and Tungkul fields. Furthermore, according to management, their data showed that Trembul and Gabus fields have deeper oil wells than the other fields, providing greater potential for the production of oil.

Thus, based on my (purely) layman perspective, the Senergy reserve report on Kawengan, Trembul and Gabus fields may likely yield a figure comparable to US$195m, similar to that of D&W and Tungkul fields. This is likely to (at least) add some assurance to Giken’s shareholders and may raise the overall valuation of Giken. 

Indonesia – committed to increase domestic oil production

Indonesia, a former OPEC member, has been a net exporter of oil till 2008 where they became a net importer. Falling oil production has hit Indonesia hard. Thus, they are likely to continue their push towards increasing domestic oil production which should bode well for Giken. It is noteworthy that Indonesia has more than 10,000 old wells, thus the growth opportunity for Giken is significant.

Existing contract manufacturing business likely to do better

Giken’s 1HFY14 rev and net profit from the contract manufacturing business were S$38.5m and S$708K respectively. Although their contract manufacturing business environment is likely to continue to be competitive, management expects their results to gradually improve in the next two years.

Jokowi to suspend operations at Pertamina unit à no impact to Giken

With reference to a Business Times article on 24 Sep, it was reported that Mr Joko Widodo plans to halt operations at Pertamina's energy trading unit Petral. However, according to management, this has no impact to Giken as they do not deal with Petral. ‎They sell their oil only directly to Pertamina and not its subsidiaries.

Investment risks

Customer concentration risk

For the oil produced, Giken can only sell to Pertamina who has the right to set the selling price and the exchange rate. Although there seems to be a large customer concentration risk on Giken’s aspect, I will like to draw readers’ attention to the following points which may alleviate the risk to a certain extent:

a)     Pertamina is buying a minuscule portion of the oil it requires from Giken. Even if Pertamina prices the oil at 70% discount to ICP, it is unlikely to result in meaningful cost savings for Pertamina.  

b)    Giken is the only player in this old wells programme for the whole of Indonesia. Furthermore, Indonesia has more than 10,000 old wells, and as Indonesia is looking to increase their domestic production, it is likely that Pertamina wants a cordial working relationship with Giken.

Ability to extend agreements

The ability for Giken to extend the Cooperative Agreement with the local co-operatives and to sign new Cooperative Agreement are key factors for Giken’s long term growth. Furthermore, the ability for the renewal of the Mother Agreement between Pertamina and the local co-operatives is important too. It is noteworthy that Giken is currently producing oil from 15 wells out of their 300 wells. Even without new Cooperative Agreements, there is likely to be enough work for Giken for several years.

Limited track record in producing oil

Based on limited published figures, Giken’s oil production has risen from 300 bopd to 880 bopd in less than six months. However, there is limited data (we need more data over time) to ascertain management’s track record in oil production.

Foreign country risk

Giken’s onshore oil business operates in Indonesia hence they are subject to Indonesia’s politics, laws and regulations. Any adverse change in the above factors is likely to have a negative impact to Giken.

Senergy report

Based on Table 1 above, although Senergy estimated that D&W and Tungkul fields are worth a (best scenario) net present value of US$195m based on a 10% discount rate, it is noteworthy that the actual stake Giken has in the fields are likely to be worth less than US$195m. See Figure 1 below on the corporate structure.

Figure 1: Giken’s corporate structure

*Not able to show here due to technical constraints

Limited analyst coverage

Only Voyage Research covers Giken with a potential price of $0.450. I.e. there is limited analyst coverage. It is reasonable to say that the investment community is still not familiar with Giken, especially to its foray into the onshore oilfield in Indonesia. Management is cognizant and is doing their best to raise the awareness of the investment community on Giken.

Giken’s chart analysis

Based on Chart 1 above, Giken has been trading within the range of $0.315 - $0.360 since 9 Jun 14. It seems to be testing the support of $0.315-0.320. A sustained break below $0.315 points to a measured technical target price of around $0.275. However, there are multiple levels of support from $0.300 – 0.310 due to the placement price at $0.300, Fibonacci level and 100D EMA. Resistances are at $0.330 – 0.335 / $0.350 – 0.360. A break above $0.360 negates the slight negative bias of the chart.

Conclusion – This is just an introduction

In short, Giken seems to be a budding Indonesia onshore oil play. Short payback period, cash flow generative operations, guaranteed customer and favourable Indonesia dynamics etc. are points which interest me. However, it is noteworthy that customer concentration risk, ability to extend agreements and limited track record are some factors which readers should be aware of.

Readers who are interested should take a look at their website http://www.giken.com.sg/ for more information. You can also email me at crclk@yahoo.com.sg  for the analyst report on Giken.

Disclaimer
The information contained herein is the writer's personal opinion and provided to you for information only, and is not intended to, or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied. In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Monday, September 1, 2014

China Sunsine – Recovery in play

On 21 Feb, I have done a writeup on China Sunsine pointing that they may be on the cusp of a recovery http://www.sharesinv.com/articles/2014/02/25/sunshine-michelin-tyres/. Since my writeup (Sunsine closed at $0.255 on 21 Feb), it has surged 36.7% (inclusive of a dividend of $0.01 during the period) to touch an intraday high of $0.335. It closed at $0.310 on last Friday.

Sunsine’s 1HFY14 net profit exceeds the entire net profit earned in FY13

Based on Table 1 below, Sunsine seems to be turning around with 2QFY14 sales and net profit up significantly from the previous few quarters and on a year on year comparison. What is interesting is that 1HFY14 net profit has exceeded the net profit earned in the entire 2013. This good set of results is on the back of the increase in ASP, as well as, sales volume.

Table 1: Sunsine’s results snapshot (Not able to post here due to formatting problems)

Source: Company & Ernest’s compilations
*ASP may differ slightly with company’s reports due to rounding

3QFY14F looks bright on several aspects

The upcoming 3QFY14F looks bright on several aspects.

Firstly, according to brokerage 中信建投证券, the supply of MBT, an intermediate product necessary for the production of MBT based accelerators dropped more than 30% as some of the MBT producers were forced to close down or suspend production due to their inability to meet the environment standards set up by the Chinese authorities. As MBT prices rise, so does the MBT based accelerators. Although China Sunsine has their own factory for production of MBT, they have been compliant with the environment standards hence their production is not affected.

Secondly, the accelerators’ inventory levels in China have been reduced due to an increase in export of accelerators to overseas.

The above trend of relatively high prices of accelerators is unlikely to ease in the near term as companies take time to rebuild / improve their production facilities and comply with the environment standards. In addition, China is likely to maintain their resolve in reducing pollution especially with the upcoming APEC meeting in November.

Thirdly, raw material prices continue to be stable hence it is unlikely to have a significant adverse impact on its upcoming 3QFY14F results.

Sunsine has paid $0.01 / share as dividends for seven consecutive years

For seven consecutive years, Sunsine has paid $0.01 / share as dividends. At Friday’s closing price of $0.310, this represents a dividend yield of 3.2%. There may be scope for higher dividends as Sunsine 1HFY14 net profit eclipses that of FY13.
Stark discount to its Chinese peers

Sunsine trades at 0.8x P/BV and annualised 2014F PE of around 4.3x. Net asset value per share is around $0.380. On a historical basis, Sunsine trades at an average P/BV and P/E of around 1.0x and 7.3x respectively.

With reference to Figure 1 below, it is noteworthy that its peer Shandong Yanggu Huatai Chemical (“YGHT”) trades at 35x FY14F PE and 4.6x FY14F P/BV. Furthermore, YGHT’s estimated FY14F revenue and net profit are lower than Sunsine’s 1HFY14 figures.

Figure 1: Analysts’ estimates of YGHT’s financials in the next 3 years

Source: Bloomberg as of 25 Aug 14

As with all investments, there are naturally risks and noteworthy points to be aware of.

Investment risks

Illiquidity

Average 30D and 100D volume amount to 1.3m and 557K shares respectively. Although this is still pretty illiquid, it has improved from my last writeup where the average 30D and 100D volumes amount to 1.19m shares and 422K shares respectively. Based on its annual report 2013, the top twenty shareholders have about 83.7% of Sunsine’s outstanding shares. Thus, there is little free float which results in its illiquidity. This is not a liquid company where investors can enter or exit quickly.

S chip risk

This is a Chinese company helmed by Chinese management hence the usual S chip risk applies.



No analyst coverage

According to Bloomberg, there is currently no rated analyst coverage on this stock. It is reasonable to say that the investment community is not familiar with Sunsine yet. However, there seems to be more interest in this counter as I have started seeing unrated reports on Sunsine and online forums where they talk more about Sunsine than before.

Exposed to the vagaries of the automotive industry cycle

As Sunsine’s products are used mainly by the tyre manufacturers, Sunsine is exposed to the vagaries of the automotive industry cycle in China. For 1H2014, China’s auto sales rose 11% on a year on year comparison to 9.1m. A significant slowdown in the China’s automotive market is likely to have an adverse impact on Sunsine.

Margins dependent on raw material cost

Most of its cost of sales came from direct raw material costs, namely Aniline. According to Sunsine’s AR2013, ceteris paribus, every 10% increase / decrease in the prices for Aniline would have the effect of decreasing / increasing the net profit by RMB30.1m in FY13. As such, raw material costs do play a significant aspect in Sunsine’s profitability. As mentioned above, Aniline prices have remained pretty stable since the start of the year.

Other developments

Sunsine is on track to complete its new heating plant by 3QFY2014. This may incur some additional costs but it is likely to be an interesting cash flow generating investment over the medium term. See my previous writeup for more information on this.

Sunsine’s chart analysis

Since my writeup (Sunsine closed at $0.255 on 21 Feb), it has surged 36.7% (inclusive of a dividend of $0.01 during the period) to touch an intraday high of $0.335. It closed at $0.310 on last Friday. Based on Chart 1 below, Sunsine has closed the gap around $0.290 – 0.310 as it weakens from $0.335 on 7 Aug. It seems to have just formed an upside break in the flag formation. However, we have to monitor how the price performs in the next few days.  A sustainable upside breakout above $0.305 with volume points to a measured eventual technical target of around $0.365.

Supports and resistances are as follows

Supports: $0.300 / 0.290 / 0.275

Resistances: $0.320 / 0.330 - 0.335 / 0.350



Chart 1: Seems to have staged a flag breakout on the upside



Source: CIMB chart as of 28 Aug 2014

Conclusion – FY14F likely to be a record year for Sunsine

Sunsine seems to be in a sweet spot at the moment and FY14F may well be a record year for Sunsine. Nevertheless, as there is no rated analyst coverage on this stock, it may take time for the market to appreciate it. Notwithstanding the potential positive points about Sunsine, readers should note that this is an S chip which is subject to S chip risk, fluctuations in raw material prices and the vagaries of the automotive industry cycle in China. Readers who are interested should take a look at their website http://www.chinasunsine.com/ and they can email me at crclk@yahoo.com.sg for the unrated reports on Sunsine.




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