20140829-光大证券-Seeking_Strategic_Growth_20页_287kb

Summary of Century Sunshine (509 HK) Company Report

Core Content

Century Sunshine (509 HK), listed in 2004, is a manufacturer and distributor of ecological fertilisers and magnesium alloys. The company has been strategically positioning itself to capitalize on high-value segments of both markets. Its primary focus is on developing and distributing Si-Mg fertilisers and producing rare earth magnesium alloys, which are expected to drive future growth.

Main Business Segments

• Ecological Fertilisers:

  • Core business since 2004.
  • Offers NPK compound fertilisers and organic fertilisers under well-known brands.
  • Si-Mg fertilisers are gaining traction due to soil deficiencies in Silicon and Magnesium, particularly in rice paddies.

• Magnesium Alloys:

  • Entered the market in 2008 with the acquisition of China Magnesium Limited.
  • Produces both basic magnesium products and rare earth magnesium alloys.
  • Rare earth magnesium alloys are in high demand due to their superior properties like light weight, high strength, and corrosion resistance.

Key Growth Drivers

• Si-Mg Fertilisers:

  • Targeting soil deficiencies in China, especially in rice cultivation.
  • Expected to grow faster than traditional NPK fertilisers.
  • Projected to increase from 20% of segment revenue in 2013 to 32% by 2016.

• Rare Earth Magnesium Alloys:

  • High-growth segment with a gross margin of 40.3% in 2013.
  • Expected to grow at 33% in 2014 and 110% and 70% in 2015 and 2016 respectively.
  • These alloys are critical for auto parts, 3C products, high-speed trains, and aerospace applications.

• Market Trends:

  • Magnesium demand is expected to grow at 26.7% CAGR through 2015, faster than the average growth of non-ferrous metals.
  • Global demand is projected to reach 6m tonnes by 2015.
  • Government policies in China and abroad support the use of lightweight materials to reduce emissions and improve fuel efficiency.

Competitive Advantages

• Technological Edge:

  • Holds 21 patents, including two in the U.S.
  • Supported by the Chinese Academy of Sciences and has a strategic partnership with the Changchun Institute of Applied Chemistry.

• Cost Efficiency:

  • Located near major customers (e.g., FAW, Jinbei) within 500km, reducing transportation costs.
  • Has access to low-cost raw materials such as dolomite, coal, and ferrosilicon.
  • Efficient production processes and technology innovation contribute to higher gross margins.

• Government Support:

  • Received a HK$130m grant to support production technology.
  • Grants are booked as deferred revenue and recognized over the life of the depreciable assets, reducing depreciation expenses.

Financial Performance

• Revenue Growth:

  • Revenue increased by 29% in 1H14 to HK$922m.
  • Magnesium segment contributed 34% of total sales, while fertiliser segment accounted for 60%.

• Gross Margin:

  • Overall gross margin improved to 33.5% in 1H14 from 30.2% in 1H13.
  • Rare earth magnesium alloys have a higher gross margin (40.3%) compared to basic magnesium products (17.3%).

• Net Profit:

  • Net profit attributable to shareholders reached HK$127m in 1H14, up 46% y/y.
  • Net margin improved to 13.7% in 1H14.

Investment Highlights

• Valuation:

  • Target price of HK$1.31 based on 0.3x PEG or 14.5x target PE multiple.
  • Current share price of HK$1.08 suggests a potential upside of 21%.

• Capital Structure:

  • Raised significant capital through new share issues, convertible bonds, and loans.
  • Net cash is expected to reach HK$645m by end of 2014, up from HK$122m in 2013.

• Equity Investment:

  • Holds 2.3% equity in TTG Fintech Limited (TUP.AU), with an estimated unrealized gain of HK$288m.

Growth Outlook

• Fertiliser Segment:

  • Sales mix is shifting toward higher-margin products like Si-Mg and organic fertilisers.
  • Expected to maintain a stable gross margin, with a focus on cost savings through process improvements.

• Magnesium Segment:

  • Plans to expand production capacity from 16,000 tonnes (2013) to 75,000 tonnes by 2016.
  • Rapid expansion in rare earth magnesium alloys is expected to drive significant growth.

• Strategic Positioning:

  • The company is well-positioned to benefit from both the fertiliser and magnesium alloy markets.
  • Strong balance sheet and access to capital allow for flexibility in operations and potential acquisition-driven growth.

Conclusion

Century Sunshine is a well-established company with a strategic focus on high-value segments of the fertiliser and magnesium alloy industries. Its technological edge, cost advantages, and government support position it for strong growth. The company is expected to benefit from the increasing demand for lightweight materials in the automotive and electronics sectors, as well as the growing need for compound and organic fertilisers in China. With a Buy rating and a target price that suggests a 21% upside, it presents a compelling investment opportunity.