• Trade price of core product holding firm
• Revising our estimates up to factor in tax rebate, higher ASP and cracking plant
contribution
• Maintain Buy, increased target price to $1.07
Tax incentive rebates
Sunvic announced that it has gotten approval to utilize the balance of the tax incentive which
was granted to its subsidiary in 2007 and 2008. The tax incentive amounts to RMB123.6
million out of which RMB11.5 million was already refunded in 2008. A further RMB19.3 million
would be refunded for 2010 while the balance of RMB92.8 million would be refunded by the
first half of 2011.
Benefits from mid-cycle expansion
In the tone of our strategist, the economy is in a mid-cycle which favours the basic materials
and capital goods segments. This arises from the general ‘feel-good’ sentiment of business
owners which then leads to investment and business growth. We classify Sunvic under the
basic materials segment which is appropriate as Sunvic provides the basic materials with
wide-ranging applications used in both the consumer and industrial sectors.
Persistently strong trade prices
Industry price for Acrylic Acid (AA) remains firm and checks on a trade website
www.16ds.com shows that prices for AA in China has steadily increased from July’10 till now.
We have not received permission to reproduce the price information so we can’t plot out a
graphical illustration, however the increases indicate that AA prices rose 11% in 4Q10 over
3Q10 and has remained firm. The prices of propylene, which is the main raw material for
synthesizing AA also increased during the same period, but at a lower rate of 7%.
Cracking plant contributes from 2Q11
The cracking plant will begin commercial production from 2Q11. The cracking plant has a 1
million tonnes refining capacity and will supply Sunvic with almost all of the propylene usage.
The cracking plant will also produce other refined products which will be sold to customers.
As the cracking plant is situated just beside Sunvic’s production facility, this upward
integration will provide cost savings in terms of lower transport and logistics expenses.
Raise our estimates and target price
We are adding in the tax rebates into our FY10E and FY11E estimates and also raising our
average ASP (average selling price) estimates in view of the persistently high trade prices.
Sunvic has a 71.2% effective interest in the cracking plant and we are consolidating the
revenue contribution. We are expecting 4Q10 revenue and net profit to come in at
RMB1,051.3m and RMB160.3m. This will bring full year revenue and net profit to
RMB3,504.5m and RMB 508.2m. We are raising our target price to $1.07, on 6x FY10E
earnings.
