RTN Investments Blog

Thoughts on Investing, Economics, Current Events, and Anything Else I Want to Ramble About

China Sunshine Chemical Holdings (QES: SGX): A Cheap Stock Trading Below Net Current Asset Value


I’d like to talk about a stock that’s recently caught my attention.  This company trades below its net current asset value and carries zero debt.  It’s flush with cash and buying at the current price of SGD 0.36 or RMB 1.83, you’re getting the business for free.

It’s a Singapore-listed company based in China called China Sunshine Chemical Holdings.  They trade under the ticker symbol QES on the Singapore exchange.  They are one of the world’s largest producers of rubber chemicals used for the manufacture of tires.  They serve around 2/3 of the world’s top tire makers including Bridgestone, Michelin, Goodyear, in addition to the top China tire makers Hangzhou Zhongce and GITI Tire.  China Sunshine is the largest producer of rubber accelerators in the world and the largest producer of insoluble sulfur in China.  Specifically they produce rubber accelerators, insoluble sulfur, antioxidants and other vulcanizing agents.  Vulcanization is a chemical process that converts natural rubber by heating, into rubber for tires.  This results in improved elasticity, resilience, tensile strength, viscosity, hardness and weather resistance for the rubber.

Needless to say, China Sunshine Chemical provides a key input into the tire-making process.  It’s also important to note that the demand for new tires will continue to grow, especially as China further industrializes, and a larger portion of their population starts driving cars.  According to a recent study, the number of cars per 100 households in China is 33.  (https://www.statista.com/statistics/233678/number-of-cars-per-100-households-in-china-by-income/)  This is in stark contrast to the United States, where car ownership is reported by about 93% of households.  (https://www.valuepenguin.com/auto-insurance/car-ownership-statistics)

Furthermore, less than 30% of tires are used in new cars, while the remaining 70% are used as replacement tires for used cars.  This is a recurring revenue stream for tire makers.  Tires get replaced at a far greater rate than cars do.  Plus, tires are an essential part of any vehicle.  It’s not some repair you can put off like your air conditioning or radio not working.  If your car doesn’t have proper tires, it’s dangerous, and you’re risking your life.  It seems like tire manufacturers will be around for a long-time, unless we start manufacturing flying vehicles soon.

For this reason, I think China Sunshine is uniquely positioned to benefit from China’s growth and further adoption of vehicles by their population.  This is why I was fairly surprised to find China Sunshine trading at such a low valuation.  Granted, their business was negatively affected by COVID-19, lower commodity prices for rubber chemicals, along with low oil prices.  They are also expected to report lower revenue and earnings for FY 2020 compared to FY 2019.  However, their shares are priced as if there will never be a recovery and like they’re going out of business.  The key however, is that they don’t have any debt and are flush with cash.  It’s very hard for a company with no debt and a lot of cash to go bankrupt.

Let’s look at some numbers for China Sunshine Chemical. (QES):

Price:  SGD 0.36 (RMB 1.83), as of June 17, 2020

Market Cap:  1778m RMB

SGD = Singapore Dollars, the currency that the stock is listed and traded in

RMB = Chinese Renminbi, the currency that the company’s financials are reported in

We’ll use RMB for our analysis.

As of March 30, 2020 they reported that they have RMB 1350m in cash and no debt.  They have 972m shares outstanding.

Their most recent balance sheet as of the end of 2019 reports the following: (RMB million)

Accounts Receivable:  539

Inventory:  369

Other Current Assets:  31

Therefore, total current assets are:

1350 + 539 + 369 + 31 = 2289

Their total liabilities are 357

Therefore, their net current asset value (NCAV), which is what you’d get if you’d collect all current assets, use it to pay off all liabilities and ascribing zero to their property plant and equipment (listed at 659 on their books) is:

2289 – 357 = 1932

Dividing by 972 shares outstanding, we get a NCAV value of:

1932 / 972 = RMB 1.99

The current share price is RMB 1.83

China Sunshine Chemical’s cash alone represents 76% of their share price.  Note, that at this share price you’re getting the business for free.  This is because I’m conservatively giving zero value to their actual business including property, plant, equipment, manufacturing know-how, patents, customer connections, dominant market position, etc, when I calculate net current asset value.  However, these aforementioned things have value.

Now, if this was a business with high debt and high cash burn I would understand the pricing because the market is probably assuming they’ll go out of business soon.  However, according to their recent communications they’re managing the pandemic and economic downturn pretty well.  In an April 2020 article, they mention:

     “We are of the view that the pandemic will end eventually and the economy will recover and grow. We
currently focus on two aspects.

     First, increasing domestic sales as we expect domestic demand to pick up as many industries have resumed
production. Second, reducing internal consumption and putting in place cost-saving measures as we focus on
innovation, productivity and automation in our production processes.”

Unless I’m missing something here, it’s hard to see how you can lose money buying this stock for RMB 1.83  or SGD 0.36.

Some other facts to note about China Sunshine Chemical are:

  • They’ve been able to compound their book value over the past 9 years at an average annual rate of 15%
  • Cash balance has grown from RMB 130m 9 years ago to RMB 1350m today; cash represents 76% of their share price today
  • Revenue has grown at a compound annual rate of about 11% over the past 9 years
  • Compounded their EPS over the past 9 years at an average annual rate of 14%
  • Their average return on capital for the past 9 years has been around 19%
  • Zero debt over the years
  • Dividends paid yearly for the past 10 years
  • P/S ttm = 0.66, P/E ttm = 4.6
  • P/FCF ttm = 4.8, EV/EBITDA ttm = 0.83

I usually find that with many investments, if you can eliminate a good deal of the downside risk, then you don’t have to worry about calculating the upside.  I think that China Sunshine Chemical is a low-risk, high-reward play.  You’re betting on a strong balance sheet, a stock price below NCAV, and the eventual recovery of the Chinese economy from COVID-19 and further adoption of vehicles in China.

Robert Nowak is the founder of RTN Investments, LLC.  RTN is a registered investment advisory managing separate accounts for clients and is modeled after Warren Buffett’s original partnerships.  RTN’s goals are the preservation of client’s capital and to outperform the S&P 500 on a rolling 5 year basis by investing in undervalued stocks of high quality companies.