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18 July 2016
QR DeCode
Tsaker Chemical – 2016 - Year of Recovery CHEMICALS
Tsaker Chemical is the world’s largest producer of DSD Acid and DMSS,
dye and pigment intermediates, with about 57.4% and 27.5% market share
respectively in 2014. After the headwind in 2015, the Group is likely to see a
turnaround this year, driven by new products launches, capacity expansion,
better economies of scale and potential M&As.
Earnings to recover in 2016 – Tsaker’s net profit fell 30% YoY to RMB102mn in
2015; this is due to a combination of factors including pre-listing expenses,
pre-operating costs of the new facilities, a drop in product prices and a higher tax
rate. With the normalization of SG&A, the expansion in output, and the
contribution by ONT and other new products, the company’s net profit should see
a rebound in 2016.
Volume growth as new production facilities comes on stream – Tsaker is the
world’s largest producer of DSD Acid, and dye intermediate that is essential for
producing optical brightening agents. Its customers include Sun Chemical and
BASF (BAS GR; EUR71.63; NR). Tsaker is scaling up its production capacity of
DSD Acid from the present 35k mpta to 55k mpta in 2018, with additional cost
savings coming from vertical integration.
Expansion of product portfolio – Tsaker has started the production of
mononitrotoluene, namely PNT, ONT and OT. PNT is the key material of DSD
Acid while ONT and OT are agricultural chemical intermediates. The company is
also examining vertical M&A opportunities to strengthen its leadership position in
the current niche market.
Potential vertical integration – With the leading market share in DSD Acid as
well as an established raw material supply, the Group may find opportunities for
downstream development for a stable distribution channel and selling price, such
as OBA manufacturer overseas. We believe that forward integration will create
better synergy and hence strengthen its leadership position in the current niche
market.
Key Financials – Fiscal Year Ended December 31
(RMB mn) FY13 FY14 FY15
Revenue 864 897 876
Operating profit 208 246 161
Net profit 109 145 102
EPS (RMB) na na 0.23
Growth na na na
DPS (RMB) na na 0.062
BVPS (RMB) na na 1.68
PER (x) na na 15.6
PBR (x) na na 2.1
EV/EBITDA (x) na na 9.8
Dividend Yield (%) na na 1.7
Source: Company data, Bloomberg *Consensus according to Bloomberg numbers
Share Information
Stock Code 1986 HK
Quam’s Rating Non-Rated
Last Closing HKD4.16
52-week range HKD2.71-HKD4.90
ADT (3M) HKD0.3mn
Market Cap. HKD2.1bn
Shares outstanding 501.1mn
Free float 18.8%
Substantial Shareholders
Yi Ge 68.2%
Winshare Hongtai Shenzhen 6.9%
Wider Pacific 6.1%
Share Price Performance
Source: Bloomberg
Brian Ngo
T: +852 2971 5438
Howard Wong
T: +852 2971 5435
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Tsaker Chemical (1986 HK) 2
Tsaker Chemical is a fine chemical manufacturer based in Fujian, China. Its main products are DSD Acid, a dye intermediate, and DMSS, a pigment intermediate, of which it is the largest producer in the world. It had 57.4% of market share in DSD Acid and 27.4% market share in DMSS in 2014, according to the Frost & Sullivan findings. DSD Acid and other dye intermediates accounted for about 63% (RMB552.1mn) of the Group’s turnover while DMSS and other pigment intermediates contributed about 21% (RMB185.5mn) in 2015. Going forward, the Group plans to expand the capacity for mononitrotoluene (including PNT, ONT and MNT) and DSD Acid, and it expects that it will also be able get into the CDMA, 2B Acid and 4B Acid market in coming years (Fig 6). Figure 1: Revenue breakdown in FY2015
Source: Company data, Quam Securities
DSD Acid is one of the core elements in producing OBA (optical brightening agent), which is used to brighten or whiten paper and textiles. DMSS is used for the production of quinacridone pigments and photosensitive polymer. Figure 2: Expanding product portfolio
Source: Company data, Quam Securities
DMSS & Other Pigment
Intermediates21%
DSD Acid and other Dye
Intermediates63%
Monomitrotoluene, OT and
others16%
Tsaker Chemical (1986 HK) 3
According to the COGS breakdown in 2015, about 66.9% of costs are attributed to raw materials, which consist mainly of the petroleum products. Different from the expenses on salary, depreciation, energy and production costs, the costs from raw materials are more volatile due to the price fluctuation of oil, which directly affects the cost and selling price of Tsaker’s products. Figure 3: Tsaker’s COGS breakdown in 2015
Source: Company data, Quam Securities
Price changes in ONT and OT are closely related to the oil price, with the selling prices climbing about 10% in 1H 2016 when compared to FY2015 in accordance with the increments in the oil price. However, unlike ONT and OT, DSD Acid, a product of PNT, is less sensitive to oil price fluctuations. The selling price of DSD Acid was relatively flat in 1H 2016 when compared to 2H 2015, which may continuously squeeze the profit margin of DSD Acid. If the oil price remains high, we believe that it will be more beneficial to the Group. Figure 4: Major products’ price and gross margin of Tsaker
Category Product Price (RMB/tonnes) Gross margin
Dye Intermediates DSD Acid 16,577 34.5%
Pigment intermediates DMSS 39,543 42.2%
DATA 67,248 35.2%
DMAS 15,987 25.8%
Mononitrotoluene ONT 6,973 22.8%
OT 10,073 18.0%
Source: Company data, Quam Securities
The Group has a number of clients around the world, namely China, India, Germany, the USA and Indonesia, which contributed 56.2%, 13.6%, 6.3%, 5.9% and 4.9% of revenue in FY2015, respectively. Currently, SunChemical, the world’s largest producer of pigments, and Tranfer, investor of Tsaker that engaged in chemicals and agricultures etc, are also the customers of Tsaker. In FY2015, about 46.8% of revenue came from its five largest customers. Figure 5: Major Customers of Tsaker are International Chemical Tycoons
Source: Company data, Quam Securities
67% 7%
4%
12%
11%
Raw materials
Salary
Depreciation
Energy
Production cost
Tsaker Chemical (1986 HK) 4
Capacity expansion and new products In 1Q 2016, Phase II of Dongao Chemicals commenced production, which doubled the production capacity of mononitrotoluene (including PNT, ONT and MNT) from 40,000 tonnes to 80,000 tonnes. We believe that the Group will be benefit from, More stable supply of PNT: With given amount of raw materials, PNT, ONT and MNT have
to be produced together at a proportion of 35%, 65% and 5%, respectively. PNT is said to be a by-product of ONT. PNT is a key raw material to produce DSD Acid, and accounting to over 60% of the latter’s COGS. As such, it is estimated that Tsaker can produce about 80% of the PNT demand in-house.
Increasing contribution from ONT and OT: Tsaker is one of the largest consumers in PNT globally. As Tsaker increases the rate of self-production, it is anticipated that the global supply of ONT and OT will be lowered accordingly. Indeed, Tsaker will become an important supplier of ONT and OT, allowing the Group to explore new customer groups. It is expected that the sales from OT and ONT would increase to about RMB300mn in 2016. Moreover, the gross margins of OT and ONT are expected to rebound to about 20% due to the absence of initial cost compared to the previous year.
Furthermore, Tsaker’s new DSD Acid plant is expected to complete in 2H 2016. However, the additional 20k tonnes of capacity will only be available in 2018 as the Group will upgrade its existing 35k tones capacity with a set of environmentally friendly facilities. Tsaker also begins the production of CDMA in 2016, 2B Acid and 4B Acid in 2017, which are used in the production of color pigments used in printing ink, and the coating and coloring of plastic rubber. Figure 6: Tsaker’s Production Capacity Plan (FY2015 – 2017E)
Production capacity (tonnes) 2014 2015 2016E 2017E
DSD Acid 35,000 35,000 35,000 35,000 (Expect to be 55,000 in 2018)
DMSS 4,500 4,500 4,500 4,500
DMAS 2,000 2,000 2,000 4,000
ONT - 24,000 48,000 48,000
PNT - 14,000 28,000 28,000
MNT - 2,000 4,000 4,000
DATA 1,000 1,000 2,500 2,500
CDMA - - 3,000 3,000
2B Acid - - - 3,000
4B Acid - - - 7,000
Source: Company data, Quam Securities
Potential vertical integration Apart from its original business, the company is also examining M&As to further enrich its product portfolio. With strong bargaining power and market share in DSD Acid industry, we believe that vertical integration will favour the Group in terms of (i) product development and distribution, and (ii) stabilization of material price and supply. Apart from backward integration that can be partially satisfied by the expansion of self-production in ONT, OT and PNT, downstream M&As are also worth consideration for the Group in terms of stable distribution channels and selling price. Especially with its leading market share but mid single market growth in DSD Acid, we believe that forward integration will create synergy and hence strengthen its leadership position in the current niche market.
Tsaker Chemical (1986 HK) 5
Earnings recovery Tsaker Chemical has been producing DSD Acid and DMSS since 1997. In FY2015, production and sales of dye intermediates and pigment intermediates contributed about 84% of total revenue. The plummeting oil price resulted in a 22.1% and 4.6% drop respectively in the ASPs of DSD Acid and DMSS in FY2015, which overcame the increase in sales volume of DMSS and stable sales volume of DSD acid during the period. As a result, the Group experienced a 2.4% decline in total revenue and over 7% drop in gross margin. In addition, due to a combination of factors including pre-listing expenses, pre-operating costs of the new facilities and a higher tax rate, its net profit fell by about 30% YoY to RMB102mn in FY2015. With a rebound in oil prices, the ASPs of DMSS, ONT and OT also rebounded, although the ASP of DSD Acid remained at the trough as in 2015 2H due to the stagnant raw material costs. As the ASP is set on a monthly basis onshore and on a quarterly basis offshore, higher oil price will benefit the Group to a very large extent. Adding to the normalization of SG&A and the contribution from ONT and OT, it is expected that the company’s net profit should see a meaningful rebound in 2016.
Valuation Tsaker may be the only Hong Kong listed comapny primarily engaged in the production of dye and pigment intermediates. However, there are still some comparisons that are engaged in the production of other fine chemicals. At about HKD2.1bn market cap, Tsaker is now trading at about 15.6x FY2015 PER and 2.1x FY2015 PBR. A tough operating environment in FY2015 drove up the valuation to a high-than-average level, which is just below Yip’s Chemical that also faced a tough year but had a higher dividend yield in FY2015. We believe that better performance in FY2016 will improve the valuation to a more attractive level. Figure 7: Peers comparison
Company Name Ticker Last Price
(HK$) Market Cap
(HK$b) 2015 P/E
(x) P/B (x) ROE (%) ROA (%)
Dividend Yield (%)
Tsaker Chemical Group Ltd 1986 HK 4.16 2.08 15.6 2.1 17.8 9.5 1.8
Yip's Chemical Holdings Ltd 408 HK 2.7 1.52 31.8 0.6 1.7 0.6 5.4
Tiande Chemical Holdings Ltd 609 HK 1.43 1.21 6.1 0.9 15.4 13.2 7.0
China First Chemical Holdings 2121 HK 1.4 1.12 7.6 0.5 6.3 3.7 1.2
Manfield Chemical Holdings Ltd 1561 HK 0.99 0.59 10.3 1.0 8.0 7.0 2.5
China Sanjiang Fine Chemicals 2198 HK 1.33 1.32 N/A 0.5 -6.6 -1.4 11.3
EcoGreen International Group 2341 HK 1.43 0.93 9.4 0.5 5.9 3.1 3.4
Industry Average
1.25 13.5 0.87 6.94 5.10 3.83
Source: Bloomberg, Quam Securities
Tsaker Chemical (1986 HK) 6
As the world’s leading producer of DSD Acid with about 60% global market share, Tsaker's relative size confers several advantages:
Economies of scale; Strong bargaining power; Close relationships with major customers (Fig 5); and Higher and stable product quality Affected by the nearly HKD19.7mn listing expenses recognized in FY2015 and the price cut of the products, net profit had dropped to a larger extent, which implies a higher valuation in terms of FY2015 PER. After the headwind in 2015, the absence of listing expenses and the potential recovery in the profit margins of ONT and OT may drive the the Group to enjoy a 25%+ bottomline growth in FY2016. The forward FY2016 PER will go down to about 12.5x, which is a more attractive level for a company with relatively high growth and clear future development. There were some concerns in the financial performance in FY2015, but we believe that those concerns are under control and at an acceptable level. As at the end of 2015, the trade receivables increased from RMB115mn to RMB163mn, and the days sales outstanding climbed to about 80 days from 64 days. It is mainly attributed to the introduction of ONT and OT in 2015, and the Group providing longer credit terms to the distrbutors with some of the credit terms now 50 – 60 days compared to the usual 30 – 40 days. As production capacity of mononitrotoluene doubled in early 2016, there may be pressure in providing longer credit terms, but the management is still confident and has confirmed that there were no bad debts recognized from the receivables in 1H 2016. Furthermore, short-term debts climbed to RMB317mn from RMB81mn, which was attributed to domestic loans under overseas guarantees, increasing the net-debt-to-equity to 14.8% from a net cash position. Despite potential financing needs for aggressive expansion, we believe the current gearing ratio is under control and feasible for further re-financing. Our major concern is the depreciation in RMB, which may (i) lower the incentive of M&As outside China as the valuation of the target company could be adversely affected; and (ii) potential margin squeeze because the products sold are denomiated in RMB while the initial raw material, namely petroleum, is denominated in USD.
Tsaker Chemical (1986 HK) 7
Company Overview Tsaker has over 20 years of experience in producing dye and pigment intermediates. The Group was listed on the HKEX on 3
rd Jul 2015 at an IPO price of HKD4.01 per share, raising HKD505.8mn.
The Group is 68%-owned by Ge Yi, the father of Ge Jianhua, the founder of the company. The other major shareholders, Winshare Hongtai (Shenzhen) Investment Partnership and Wider Pacific Limited, are the corner stone investors and the former exchangeable bondholders respectively; they are currently holding about 6.9% and 6.1% of total shares. Figure 8: Shareholding Structure
Source: Company data, HKEX, Quam Securities
Tsaker Chemical (1986 HK) 8
Appendix: Financial Statements & Ratios Figure 8: Financial Statements Income Statement (RMB mn) 2013 2014 2015
Revenue 864 897 876
Cost of goods sold (607) (555) (606)
Gross profit 257 342 270
Other income and gains, net 18 16 16
Other operating expenses (67) (112) (125)
Operating profit 208 246 161
Finance costs (25) (7) (10)
Other gains / (expenses) (9) (13) (3)
Profit before tax 174 226 148
Income tax expense (41) (55) (46)
Profit after tax 133 172 102
Attributable profit to shareholders 109 145 102
Minority interest 24 27 0
Key Ratios 2013 2014 2015
Debt to equity (%) 40.9 26.4 37.7
Net debt to equity (%) 34.5 (4.7) 14.8
Current ratio (x) 1.2 0.9 1.4
Quick ratio (x) 0.5 0.7 0.7
Interest coverage (x) 15.0 50.3 116.5 Days inventory (days) 50.8 49.2 41.6
Days receivable (days) 72.1 64.1 79.6
Days payable (days) 57.3 96.8 100.2 Cash conversion cycle (days) 65.6 16.5 21.1
Ratio Analysis 2013 2014 2015
Growth (YoY%)
Revenue 4.1 3.9 (2.4)
EBITDA 13.5 17.0 (29.6)
Net profit 5.8 32.4 (29.4)
Diluted EPS na na na
Margins (%)
Gross profit margin 29.8 38.1 30.8
EBIT margin 27.5 31.0 22.3
Net profit margin 12.7 16.1 11.7
Other ratios (%)
Return on average assets 13.7 19.9 9.46
Return on average equity 37.1 49.7 17.8
Dividend payout ratio na na na
Balance Sheet (RMB mn) 2013 2014 2015
Non-current assets
PPE 253 359 569
Others 14 24 24
Total non-current assets 267 383 594
Current assets
Inventories 89 60 78
Account receivables 167 148 234
Bank balances and cash 21 95 193
Others 206 18 358
Total current assets 484 321 864
Total assets 751 704 1,457
Current liabilities
Account payables 130 149 193
ST borrowings 113 81 317
Others 153 130 96
Total current liabilities 396 360 607
Non-current liabilities
LT borrowings 20 0 0
Other non-current liabilities 9 38 8
Total non-current liabilities 29 38 8
Total liabilities 425 398 615
Shareholders’ equity
Share capital 0 0 31
Reserves 276 307 811
Total shareholders’ equity 276 307 842
Minority interest 50 0 0
Total equity 326 307 842
Per Share Items (RMB) 2013 2014 2015
EPS na na 0.23
Diluted EPS na na 0.23
DPS na na 0.062
BVPS na na 1.68
Source: Bloomberg
Tsaker Chemical (1986 HK) 9
Rating Definitions Disclaimer and Risk Statement BUY We expect the stock to have a total return of > 15% over the
next 12 months This document is published by Quam Securities Company Limited ("Quam Securities"), a licensed corporation (CE number AAC577) regulated by the Securities and Futures Commission in Hong Kong. Quam Securities is an affilitate of Quam Limited (0952.hk) and its group of companies (collectively "Quam Group"). This document is not intended for distribution to or use by, any person or entity who is a citizen or resident of any jurisdiction where such distribution or use would be contrary to applicable law or regulation within such jurisdiction. In particular but without limitation, neither this document nor any copy hereof may be taken or transmitted into Japan, Canada or the United States or distributed, directly or indirectly, into the United States or to any U.S person (within the meaning of Regulation S under the U.S. Securities Act of 1933) or general public located in Mainland China (but not including people in Hong Kong, Macau and Taiwan). This document is circulated to addresses solely and may not be reproduced or redistributed to any other person or published, in whole or in part, for any purpose. Quam Group has an investment banking relationship with the issuer within the preceding 12 months from the date of publication of this document This document does not constitute an offer or a solicitation of an offer to buy or sell any securities. Any recommendation does not have regard to specific investment objectives, financial situation and particular needs of any specific addressee. Quam Securities accepts no liability whatsoever for any direct or consequential loss arising from any use of this document. The opinions and/or recommendations of this document do not take into account the recipients' own investment objectives, investment experience, financial situation and other personal circumstances. The recipients of this document shall be solely responsible for making their own independent investigation of the business, financial condition and prospects of companies referred to in this document. The research is based on information obtained from sources believed to be reliable, but Quam Securities does not make any representation or warranty as to its accuracy, completeness or correctness. This document is for informational purpose only and should not be treated as a recommendation on any particular securities, financial instrument, investment portfolio or trading strategy. Opinions and/or recommendations expressed in this document are subject to change without prior notice to all recipients. The prices of securities may move up or down, and past performance is not an indication of future performance. Investors shall consider seeking separate legal or financial advice before making investment decisions. The following analysts hereby certify that their views about the issuer and its securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Howard WONG (CE No. ADV962), Brian NGO (CE No. BDX181). Howard WONG (CE No. ADV962), Brian NGO (CE No. BDX181) and their associates declare that as of the date of the publication of this report, they do not hold any financial interest in the company.
HOLD We expect the stock to have a total return of < 15% and >-15% over the next 12 months
SELL We expect the stock to have a total return of < -15% over the next 12 months
