China Sunsine Chemical - Margin pressure

1Q09 revenue decline 19.8% YoY to RMB 134.1m mainly on lower ASP. Overall sales volume of rubber chemicals jumped 16.6% YoY from 7,877 tons to 9,187 tons in 1Q09. This we believe is largely due to 1) pent up demand from low 4Q08 volume due to disruption of 2008 Olympic; 2) lower ASP.

ASP for the period plunged drastically as expected from RMB 21,234 in 1Q08 to RMB 14,599 in 1Q09, some 31.2% YoY. QoQ decline was 37.6% due to higher base. Main reasons were because of decline in raw material prices and to match marketpricing. Management also noted their strategy to lower ASP to entice volume and increase market share.

Consequently, gross margin was significantly lower at 16.6%against 20% in 1Q08 and 30.6% in 4Q08. We believe that margin for the remaining quarters could come under some pressure but downside should be limited given a historical low ASP.

Operating expenses were well maintained within expectation, translating to a net profit of RMB 10.9m, down 33.9% YoY. Forecast and valuation

We maintain our earnings forecast for Sunsine but warn of earnings downgrade should margin fail to improve further. We value Sunsine with a 6.8x PE (due to increase in average industry PE) and derive a new target price of S$0.24 and potential upside of 23%. Maintain BUY.

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