• 2Q18 revenue and net profit exceeded our full year expectation due to higher ASP and GPM, as well as a one-off tax credit
• Uptrend in ASP and sales volume continued in 2Q18.
• GPM and NPM reached a record high in 2Q18.
• New capacity is expected to get approval by 3Q18.
• We revised down FY18e EPS to 22.9 SG cents (previously 23.3 SG cents) and FY19e EPS to 21.2 SG cents (previously 22.4 SG cents), due to higher R&D expenses and our expectation for upcoming product price to soften by 10.3% compared with the ASP of 1H18. We maintained our BUY recommendation with a lower target price of S$1.77 (previously S1.97).

Positives

+ Uptrend in ASP and sales volume continued in 2Q18:  In 2Q18, the total sales volume grew 8.7% YoY to 37.6k tonnes, due to higher production of insoluble sulphur and anti-oxidant. Meanwhile, overall ASP was still enjoying an upswing, touching RMB23.3k/tonne in 2Q18 (+25.8% YoY) (breakdowns are shown below):

+ GPM and NPM reached a record high in 2Q18: The respective GPM and NPM were reported at 36.7% and 27.2% in 2Q18 (2Q17: 28.5% and 11.4%; 1Q18: 34.9% and 17.4%). Excluding the one-off tax credit of RMB48mn, the 2Q18 NPM was 21.8%. The significant improvements of margins were attributed to the growth of ASP outpaced that of raw material costs resulting from the tight supply within the market.

Negatives

– New capacity is expected to get approval by 3Q18: The trial run of the respective 10k-tonne newly-added capacity of accelerator TBBS and insoluble sulphur plant will be postponed to 3Q18. Hence, both plants could commence a full operation by 4Q18.

Outlook

CSSC achieved stellar performance in 2Q/1H18 due mainly to the shortage of rubber chemicals. Hence, ASP maintained at an elevated level. On the other hand, aniline price has been trending down due to more supply entering the market. Moving forward, we believe the supply shortage will be relieved as new capacities start to enter the market, together with more supply of aniline due to exporters partially shift US exports back to the domestic market. As a result, ASP correction could start in 3Q18. In 2H18, we expect CSSC to maintain GPM at more than 30%. We expect CSSC to deliver healthy performance for the next two quarters.

The room for growth will come from the new capacity which can help maintain performance and offset the softer chemical prices. Besides, “Battle for a Blue Sky” could be a short-term negative impact but a long-term beneficial driver. More environmental inspections will cause temporary disruption on operation in the industry, but it will gradually phase out uncompetitive and unperformed manufacturers.  Therefore, CSSC will consolidate its market position as a leading supplier.

Figure 2: Price spread (accelerator/antioxidant and aniline) started to narrow

Source: CEIC, PSR

Maintain BUY with a lower TP of S$1.77

We revised down FY18e EPS to 22.9 SG cents (previously 23.3 SG cents) and FY19e EPS to 21.2 SG cents (previously 22.4 SG cents), due to higher R&D expenses and our expectation for upcoming product price to soften by 11.1% compared with the ASP of 1H18. We maintained our BUY recommendation with a lower target price of S$1.77 (previously S1.97).