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.
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.
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.
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.
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.