Positives

+ Maintain high margins amid volume growth. 1Q19 GPM and NPM arrived at 34.3% and 16.1%, compared to 34.3% and 14.1% in 4Q18 respectively (1Q18 GPM and NPM: 34.8% and 17.4%). Gross profit/tonne dropped 24.8% YoY or 2.3% QoQ to RMB6,163/tonne during the period. The expanded spread between ASP and raw material (main: aniline) prices resulted in the high level of margins. Meanwhile, the new capacities (respective 10,000-tonne of accelerator TBBS and Insoluble Sulphur) realised a full quarter performance during 1Q19. However, owing to the long Chinese New Year holiday, 1Q19 sales volume could reflect less than 90% of the capacities which were above 90% or fully utilised.

Negatives

– ASP fell to a 7-quarter low:  The weaker profitability was mainly attributable to the plunge of ASP which arrived at RMB17.6k/tonne (-24.1% YoY or 7.8% QoQ) in 1Q19. Meanwhile, aniline price nosedived by 51.9% YoY or 19.7% QoQ to RMB4.9k/tonne during the period.

Outlook

Apart from the drop of aniline price, the current ASP headwind also comes from intense peer competition which results from the resumption of operation after their technological upgrade and improvement of environmental protection and safety production. However, the Yancheng explosion triggered the government to undertake a series of heightened safety inspections which stalled the productivities of the chemical industry across the nation. The accident is expected to support the raw material prices from dropping further. Market leaders could be benefited as the event will strengthen the industry consolidation.

On the other hand, the recovering crude oil prices that bottomed out since Jan-19 will also support the chemical raw material prices. We expect CSSC to continue to enjoy the 30%+ GPM for FY19e. The catalyst is still the ramp-up of capacity that the group is ready to implement with sufficient capital and authority approvals. We believe the rest planned 20,000-tonne TBBS capacity could be realised in the foreseeable future. The increase in sales volume could mitigate the impact of the unfavourable lower ASP.

Maintain BUY with a lower TP of S$1.43

We revise down FY19e EPS by 4.1% to 21.1 SG cents and FY20e EPS by 6.4% to 22.1 SG cents. Based on an unchanged required rate of return of 10%, we maintained our BUY recommendation with a lower target price of S$1.43.