+ Second record-high profit margin with a decent growth of volume. 2Q19 GPM and NPM arrived at 34.7% and 21.4%, compared to the record high of 36.7% and 27.2%* in 2Q18 respectively (1Q19 GPM and NPM: 34.3% and 16.0%). Gross profit/tonne dropped 32.3% YoY or 4.5% QoQ to RMB5,886/tonne during the period, which was owing to the narrow spread between ASP and raw material (main: aniline) prices. The spread fell by 19.1% YoY and 10.2% QoQ to RMB11,400/tonne in 2Q19. The respective implied capacity utilisation rate of Accelerators, Insoluble Sulphur (IS), and Anti-oxidant arrived at 97.2%, 101.0%, and 104.0% in 2Q19. Therefore, the production lines were running full during the period.
* Excluding the one-off tax credit of RMB48mn, the adjusted NPM was 21.8% in 2Q18.
– ASP is yet bottomed. The YoY plunge of performance in 2Q19 was due mainly to the phenomenally high ASP in 2Q18. The downtrend beginning in 3Q18 continued. However, the aniline price slightly recovered by 6% QoQ to RMB5,200/tonne during the period.
Figure 1: Price spread (accelerator/antioxidant and aniline)
Source: CEIC, PSR
CSSC is experiencing a cyclical downturn in ASP after the peak in 2Q18. Nonetheless, the timely and visionary capacity expansion initiated before the price correction mitigates the price headwinds. The company manages to deliver a healthy performance owing to the established buffers, including the quality products, solid and long-term relationship with clients, and leading market position. Therefore, we believe the company will deliver more than 30% GPM and 16% NPM in 2019. The future growth still stems from the ramp-up of capacity, including 20,000 tonnes of Accelerator TBBS (scheduled in 2019/2020) and 60,000 tonnes of IS (under planning), and both can be internally funded. According to management, the rationale that choosing IS for the next production expansion is that 1) China still imports IS and 2) IS has the highest GPM (around 40%) among the category. In the next couple of years, we foresee that CSSC’s performance will level up once the new production lines commence and ASP bottoms out.
Maintain BUY with an unchanged TP of S$1.43
We maintain FY19e and FY20e EPS at 21 SG cents and 22 SG cents respectively. Based on the same required rate of return of 10%, we maintain our BUY recommendation with an unchanged target price of S$1.43.