Greetings friends, I haven’t really write much since I join this community. I’ve done research on some industries and many businesses but lack a stock that I really like to add into my portfolio and that might be the reason why I’m not here so often. But I promised myself that I’d write a post once a week to share my thoughts and performance, It is also to refresh what I’ve learnt and thus they could stuck longer in my mind. On the other hand I have to admit that my writing sucks because I don’t write much since I graduated from school not to mention that I was a below average student back then.(I’m a Chef now) So I hope I could improve along the way.. and sorry if it still sucks.

$China Sunsine(CH8.SI)
One business that I’m considering buying is Sunsine China.
Many people already familiar with what the company does so lets start with the management.
It was a SOE before the state government wanted to end the business. However, the employees decided to buyout the company and Xu Cheng Qiu who owned like 60% of the company become their leader. With his team, since then the small company has managed to turnaround and eventually become the largest rubber accelerator maker in the world. Let me share few numbers regarding the performance:

Average Return on Equity for past 5 years: 18.80%
If the business is not giving out all of its profit for dividend, what does it do with our rightful money? It is to reinvest into the business so it could generate greater long term benefit than just giving dividend. RoE shows the earning power of every dollar that the company retain. One of the best indicator of the efficiency of a business. A company deserve higher valuation if they could consistently get a high RoE. And Sunsine has a great record for maximising shareholder’s benefit.

Average Return on Assets for past 5 years - 13.56%
Every company need assets to profit whether it is tangible or intangible. Asset = equity + liability, so If a company have low RoA but high RoE it shows that the company tends to rely on leverage to earn money (like bank). 13.56% is a very high number across every industry. It shows that Sunsine does not need debt to expend their business. If you think about their EPS growth rate with this ROA, it is truly a remarkable achievement.

Dividend 5 Year Growth Rate - 23.42%
While the Business keep growing after retaining and make good use of most of the profit. It is increasing its dividend of more than one fifth every year. The cash that actually goes into our pocket is at the same time compounding.

The Long term

To get a good business result, it is crucial to have big and expanding market. It determine the upside limit of your company. Walmart would have a different market cap now if it were a Singapore company. So it is equally important not only to look at competitive advantage AKA moat, but how big of a pie the company can take from current market demand or future market demand. I spend most of my time doing research on the whole industry rather than a single company that I’m interested. How you could fully understand a moat of a business without even looking at its competitor? How could I determine the upside without knowing the potential growth capability of a business? (Of course the upside could also be made larger by another factor- Price of its share) In order to have Margin of Safety, you would want your upside a lot bigger than your downside.
The reason the management had a good numbers for the past few years was because there are more cars every year in Asia. But is the market mature? Can more money dump into tyre manufacturer market in the future so the demand for chemical needed expand? That is the question that I have to answer.

From the future outlooks of the biggest tyre maker they are still very optimistic about the growth of tyre demand.

Goodyear indicated that market in China is far from mature compare to US and Europe and they are still continue adding capacity like every other tyre companies in their 1H2018 earning call.
“the tightening credit environment the near-term deceleration in the market does not alter our intermediate view of the opportunity.”
“China offers a tremendous long-term growth opportunity despite the recent slowdown and we continue to prudently invest to meet that projected demand.”
Bridgestone share similar optimism with forecast y/y growth on passenger car radial tyre +6%~+10% while truck and bus radial tyre +16%~20% in china/asia pacific.

And we are now at the start of interesting time of automobile revolution with EV, self-driving, ride-sharing all come together at a same time.
These are some of the things that might impact tyre industry:

Electric vehicles weigh more (about 20-30% more than an ICE counterpart) and that with instant torque, tyres will wear out much quicker.

Smart tyres - Equipping tyres with sensors that capture information to optimise performance and safety and build a big data to raise drivers’ awareness of the condition of their tires. Incentive for people to change their tyre more often.

Cloud-based solutions for fleet cost optimisation. Benefit from growing demand for sharing economy and e-commerce

Development of EV’s tyres which is more demanding and compromising.
Such as ultra-low resistance tyres for better battery life or silent tyres that reduce road noise. Bespoke tyre could command a higher price which also might allow bigger room for cost transfer from upstream to downstream.

Competition

Competitive advantage comes when the entry barrier is high. When you see people are making money and lots of people could get in easily, people is going to keep going in until no one is earning any profit. The chemical industry is facing the same situation as steel company. China government is doing all they can in order to reduce pollution. Shutting off many sub-par factory and trying to consolidate them in order for better control. If accelerator or sulphur does not have glut which I believe is likely for foreseeable future under current policy, the price will not fluctuate much from normal area.

Big 3 losing market share
Bridgestone, Michelin, Goodyear had 46% global sales in 2008 but the share reduced to 38% in 2016
More downstream customers and less upstream factory will have a positive effect on ASP and more diversity in income source.

The Short Term

Now lets talk about short term that everyone loves. Their 1H18 result is already significantly higher than whole FY2017. If conservatively adding half of the profit of FY17 into 1H18 to make it imaginary FY18. under minimum dividend policy of 20% it means 6.19% dividend which is higher than some REIT. Plus the remaining 80% retained earning.

Risk
Outside China rubber processing chemicals market in India alone is projected to grow at a CAGR of 7.5% by 2023. That could potentially create pressure in Asia’s accelerator’s ASP.

There is not useful record of management integrity. Mr Koh, its independent director recently had SGX RegCo against him because of the oriental group case. In addition the board chose to support the formal CFO. Apparently they have a very close relationship which I don’t know if it is good for healthy cooperate governance. On the other hand, the audit firm is not one of the big four. It is beneficial for shareholder if some of them could convince the management to switch to a more reputable audit firm. It turn me bit off.

Watchlist
$HYPEBEAST(8359.HK)
$Delong(BQO.SI)
$Cityneon(5HJ)
$ASIARAY(1993)
$TENCENT(700)
$MU
$AEM(AWX.SI)

special thanks to @Waterflow for helping me discover hypebeast and asiaray :) You guys reading gonna visit his awesome blog!

I'm not holding any share of Sunsine China now and this whole article is just for entertainment purpose only. do not trust me. do your own due diligence.

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32 likes
56 comments
smallfry

Sunsine has become relatively quiet these days. I have not taken any actions since the last purchase at $1.19. The next Qtr report will be out in nov, so whose buying and selling :)

slapmeplease

Reply to @smallfry : Centurion!!!

layers

car growth has peaked n declining stated from this article

clim

Reply to @clim : haha by right discount better. who dont like cheaper valuation haha

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Bluechipfan

Very good write-up. The stock is currently under bashing mode. Sellers from left, right and centre and it appears that bad sentiment is enough to cause contagion in selling, never mind the fundamentals of the stock.

I think many holders, who have held the stock for at least 6-9 months, had existed with profits. That's only nature but the recent bad sentiment plus price action would cause some recent holders with marginal paper profits or even break even to quickly exit too before the holding turning into losses. I think majority who can't stand the price below $1 would have sold but who know what the market will do for sure. So selling may be continue for a while and the selling tide would only stop when strong buyers emerge.

I do think the company's fundamentals are strong and the prospect - notwithstanding the domestic element, specifically the 'Battle for Blue Sky' initiative as well as the external trade worry- should still be good. I see that the company has buy back some shares and the directors also buying. Whether the market willing to take heed that company is signalling that the shares is undervalued or not remain to be seen. Whatever it is, this shall pass too.

clim

Reply to @vincentwong10 : haha i would say relatively popular compared to the plunge period last year?

anyway Delong has limited public float so cant be too popular.

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Pizzaprata

Congratulations on holding on to Delong. I exited too early at $4+ as I don't know how long the high steel prices will last and I deemed the management as not investor friendly. They finally gave out dividends recently though which is why it's one of the few not affected by the current bearish market.
I am not so sure about AEM though, the problem is with their customer Intel. Intel is having so much problems with their new 10nm process which has been delayed so many times that they gave up giving dates on when the new 10nm chips will start shipping. As they were planning to move to 10nm, their current 14nm production capacity is unable to meet demand. This is causing a shortage of PC chips in the market. Intel is enjoying the high prices but as capacity is not increasing, their suppliers do not benefit. Nevertheless AEM is oversold at the current prices.
Good write up on China Sunsine. I totally agree with you that they should appoint one of the big four auditors. Also how can they appoint their former CFO as an Independent Director? It may be allowed by SGX but the director's independence will be questionable.

vincentwong10

Reply to @Pizzaprata : I'm not familiar with the processor technology but I guess it is due to the differentiation between pc/data center's cpu and ARM based cpu. they might have more economic and performance gain going other direction of lithography development than TSMC and samsung.. just a guess. Intel still have dominance in the industry and they are not going anywhere in foreseeable future. they still need tester and improved efficiency. at current price the price is really cheap. their machine growth could remain stagnant and still have good return.

limotoslim

Why AEM never issue profit warming due to uncertainty for next year 2019 ?

Invinciblesummer

Reply to @limotoslim : Because they're not sure what orders they will get for next year. If confirmed that next year's orders are lower than this year, then they will announce officially. For now, they still don't know. That's why they say visibility is dim.

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clim

Hello chef, good to see your writing. I don't have any issue reading and understanding your nicely written post; and I like the risk part especially. Great to know about the growth of rubber chemicals in India market and the possible disruption to the industry worldwide as a whole.

It seems there are a few companies in the watchlist are in similar industry (hypebeast, cityneon, asiaray), have you also carried out a deep study for the sector?

How about LY corp and Memtech Intl that were previously in your watchlist? Have you decided to put them off after discovering something that makes the risk/reward not attractive?

Hope to see more of your posts here :)

clim

Reply to @vincentwong10 : haha thanks for sharing. its rare for a someone to share sth where he has yet invested or built up his portfolio on it (like sunsine in this case), really appreciate it :)

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WolfOfHougangStreet

Great write-up on the tyre industry!

Would like to add that regarding the shift to EV and the challenges on making efficient tyres with good grip, my take is that in the short term (say, within the next 3 years), I don’t see how China Sunsine’s business will be impacted. Afterall, Sunsine’s products are mainly used for the vulzanization of rubber so as long as tyres continue to be made of rubber, all is well.

Presently, it looks like most of the focus and attention is placed on the design of tyres than the material itself:
https://www.google.com.sg/amp/s/electrek.c...

And besides, it will take a long time for an alternative tyre material to be created and adopted by cars.

WolfOfHougangStreet

Reply to @vincentwong10 : Bingo! Yeah too bad I haven't started investing back then. A lot of people has lost faith in the company based on the recent earnings release though.

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Simone

China Sunsine current price is really very attractive.

edsim

Reply to @Simone : as for me, drop below nav is more attractive:)

edsim

US n China trade war looks never ending and worrying.trade with cautious :)


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Portfolio update November 19th 2018

Bought Pinduoduo at USD20.2

I like the founder and CEO Huang Zheng. In my opinion he and Zhang Yong of Haidilao are ones of the best if not the best in the world. but I do not understand the business well enough to predict the future cash flow. While I'm learning about the business I'd like to make a small bet in his company's shares. Just before the earning release. more of the company analysis write up later.

Portfolio

$HAIDILAO(6862.HK) 72.87%
$China Sunsine(CH8.SI) 23.53%
$PDD 3.59%

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Portfolio update 10th November


Bought Haidilao at HKD17.02


This would be my last purchase of Haidilao. Will write a post about this restaurant chain after they release their financial result so it is more up to date.


Portfolio after transactions

$HAIDILAO(6862.HK)                 73%

$China Sunsine(CH8.SI)             24.55%

Cash                                            2.15%

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Portfolio update 8th November 2018

Note
You ought to know why the ASP maintain at high level. It is mainly because two directions the government are going-
Environmental control - getting rid of factory that is not up to standard.
Quality production - getting rid of outdated production, a strategic shift from quantity to quality manufacturing, important part of supply side reform plan of President Xi.

So if the environmental policy continue, means the asp wont go down much
if it loosens a bit (not possible to reverse), the production go up, from what I can tell would be a lot faster than its competitors.
Demand is still rising from my research.
The entry cost of this business is getting a lot higher. You need scale. leadership in your business helps. And most importantly nowadays rich people like to burn money in internet company instead of in industrial factory.

It is important to know how China Communist Party structure governs its own country.
the day of local governments doing opposite policies against central is over while President Xi is gathering more power within the party. it is a long story. but to do business and investing in China, You have to understand how the government works.

Sold shares of $AEM(AWX.SI) at SGD0.935
Bought share of $China Sunsine(CH8.SI) at SGD1.09

Portfolio after transactions
Haidilao 63.46%
$China Sunsine(CH8.SI) 24.15%
Cash 12.29%

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Portfolio update 8th November 2018

Note
You ought to know why the ASP maintain at high level. It is mainly because two directions the government are going-
Environmental control - getting rid of factory that is not up to standard.
Quality production - getting rid of outdated production, a strategic shift from quantity to quality manufacturing, important part of supply side reform plan of President Xi.

So if the environmental policy continue, means the asp wont go down much
if it loosens a bit (not possible to reverse), the production go up, from what I can tell would be a lot faster than its competitors.
Demand is still rising from my research.
The entry cost of this business is getting a lot higher. You need scale. leadership in your business helps. And most importantly nowadays rich people like to burn money in internet company instead of in industrial factory.

It is important to know how China Communist Party structure governs its own country.
the day of local governments doing opposite policies against central is over while President Xi is gathering more power within the party. it is a long story. but to do business and investing in China, You have to understand how the government works.

Sold shares of $AEM(AWX.SI) at SGD0.935
Bought share of $China Sunsine(CH8.SI) at SGD1.09

Portfolio after transactions
Haidilao 63.46%
$China Sunsine(CH8.SI) 24.15%
Cash 12.29%

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Portfolio update 7th November 2018

Bought additional share of Haidilao at HKD16.98

HAIDILAO(6862.HK)     63.16%

$AEM(AWX.SI)              9.69%

Cash                              27.05%


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