China Sunsine Chemical - Positive sign in volume growth

2Q09 revenue saw significant improvement over 1Q09, rising 32.5% QoQ to RMB 177.7m. This was mainly on historical high sales volume of 11,130 tons, with over 90% coming from rubber accelerators. Although contributions from Insoluble Sulphur (IS) and Anti-Oxidant (AO) are minimal, 2Q09’s stable volume growth form these new products seems promising to us. Overall ASP in 2Q09 also contributed partly to the improved revenue, recovering some 6.6% QoQ to RMB 16,000/ton.

Net profit in 2Q09 increased 133.9% QoQ to RMB 25.5m. Consequently, Sunsine’s net profit for the first half of 2009 amounted to RMB 36.4m, about 47% of our FY09E forecast of RMB 77m.

Sunsine has completed the construction of 7,000 ton MBTS plant as at June 2009, rightly on schedule. The plant is currently under trial production and will commence commercial production in August 2009. Management noted that the plant is also capable of producing medical grade MBTS and Sunsine has already received 20 tons of trial order from a key customer.

That aside, expansion of IS and AO plant to 10,000 tons each are still expected to be completed by end FY09. However, the Group has decided to reschedule the expansion of DCBS workshop from 500 tons to 3,000 tons to end of FY09. According to management, current DCBS capacity is still sufficient to meet demand.

We have increased our sales volume forecast for FY09E and FY10E on the back of gradual return of demand, especially from the Chinese market. Our gross margin assumption remains at 22-23% given 2Q09’s promising margin.

Since our previous call in May 2009 with target price of S$0.24 when the share price was S$0.195, the stock has rallied and hit a 52 weeks high of S$0.27. Looking past FY09E into a new FY10E earnings forecast, we derived a new target price of S$0.37. Maintain BUY.

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