$Sinostar Pec^(C9Q) The Dwindling Chinese Star?

$Sinostar Pec^(C9Q) The Dwindling Chinese Star?

This column is jointly written by @gordon_ong and @devinnath from InvestingNote, as part of the #analystsondemand series
-Gordon has a demonstrable interest in equity investments, financial markets, and negotiating deals. As @NTUInvestmentClub president, he has an understanding of what factors drive an organisation’s success.
-Devin is a trader and investor who balances FA and TA in his investment decisions. He believes in using news and FA to spot the right stocks and rely on TA to give him the lowest risk-to-reward ratio possible.

Recent News

05 May 2017 Mandatory Cash Dividend/ Distribution\ (http://www.sinostar-pec.com/attachment/201…)
03 May 2017 Entry into Non-Binding Letter of Intent (http://www.sinostar-pec.com/attachment/201…)
02 May 2017 First Quarter Results (http://www.sinostar-pec.com/attachment/201…)
28 Apr 2017 Mandatory Cash Dividend/ Distribution (http://www.sinostar-pec.com/attachment/201…)
28 Apr 2017 Extraordinary/ Special General Meeting (http://www.sinostar-pec.com/attachment/201…)
28 Apr 2017 Annual General Meeting (http://www.sinostar-pec.com/attachment/201…)

Business Model

Sinostar PEC Holdings Limited, an investment holding company, produces and supplies petrochemical products in the People’s Republic of China. The company operates through two segments, Gas Separation; and Transport&Logistic Services. It sells its products to manufacturers of petrochemical and plastic products, as well as LPG distributors. The company is based in Dongming County, the People’s Republic of China. Sinostar PEC Holdings Limited is majority-owned by Intelligent People Holdings Limited, a shell holding company for Sinostar PEC’s non-executive Chairperson, Li Xiang Ping.

Sinostar is one of the largest producers and suppliers of downstream petrochemical products within the 400km radius of production facilities within the Dongming Petrochem Industrial Zone in Dongming County of Shandong Province, PRC. Located within the Zhongyuan Oilfield – one of the PRC’s largest oil fields, rich in energy resources and connected by a comprehensive logistics network, distributing to the nearby Shandong, Henan, Anhui, Shanxi, Shaanxi, Hebei, Hubei and Zhejiang.

 

Product Analysis

LPG : A type of liquified petroleum gas used a source of fuel by households and industrial manufacturers. Primarily sold to household through LPG distributors.

Propylene : A compound extracted from LPG sold to other petrochemical producers to produce chemical intermediates such as polypropylene and vinyl (infrastructure plastic).

Polypropylene : A major derivative of propylene – a thermoplastic polymer which is resistant to chemicals and heat. Mainly sold to plastic manufacturers to produce plastic products such as flexible packaging, rigid packaging, automotive and consumer products.

Transport and Logistic : Delivering liquefied petroleum gas and petrochemical related products to its end consumers. Reducing their reliance on third party service provider.

 

Product outlook

+ve China premier highlighted China will continue its healthy growth trajectory by 6.5% a year. This relatively bullish outlook along with continuous population growth in China fuel a stable demand for Sinostar’s consumers products which is highly reliant on the consumer growth.

+ve/-ve S&P Global Plats China Oil Analytics forecasts LPG demand growth in 2017 will increase at a slower rate of 10%, well below 2016’s 24%.

+ve/-ve long-term strategic affiliation with the Shandong Dongming Petrochem Holdings Group, one of the largest privately-owned crude oil refiners in the PRC, ensures a secure and steady supply of heavy oil and raw LPG. Affiliation also ensures that the heavy oil and raw LPG supplied is of a consistent quality. However, supplier concentration risks also ensure.

 

Source : http://www.indexmundi.com/commodities/?com…
-ve The price of locally produced LPG in China has been experiencing a downward pressure from the cheaper imported LPG, on top of the fall in global price of LPG, which may undercut the margin of local producers.

-ve Government’s effort to tackle environmental issue by curbing industrial pollution and promoting sustainable growth may result in unfavourable policies which may increase the company’s ACOS (Average Cost Of Sales)

 

Future Expansion

Over the past five years Sinostar has been putting more weight on LPG and propylene business, while dropping the less profitable derivatives business. The sale of its subsidiary, Dongming Runchang, to Heze LongDing Investment Limited (“HLDIL”) in 2013 provides Sinostar to have substantial amount of cash to fund its Gas Separation business. This is further proven by recent acquisition of Dongming Changsun Transport Company in late 2016 along with its Ganyu subsidiary. This acquisition allows them to have lower COGS which helps them to offset the continuous fall in ASP(Average Sellling Price).

In the near future, management is expecting a greater demand for its product, especially propylene and polypropylene, hence , they are currently planning to expand its polypropylene production capacity to more than 50000 tonnes a year. Ideally this will be funded by the cash that they have accumulated over the years.

 

Macro Trends

-ve
Trump’s administration announcement for the US to pull out of the Paris climate accord put China as the next in line to lead the world in the war against environmental issue and global warming. This will give additional pressure for China to pass eco friendly bills. This threatens waste generating industry such as petrochemical, in which Sinostar operates in, with an increase in ACOS.

-ve
China’s vision to be the centre of free trade may increase size of trade balance of the country. This creates possibility of increase in imported LPG, weighing greater downward pressure on the locally produced LPG. Sinostar may be faced with a challenge to maintain its already diminishing profit margin from LPG sales.

+ve
Recent development of cheaper drilling technique may forces OPEC to continue its production cut to reduce glut. This falls in oil price may help factories to cut their COP as many of these plants use oil as their main source of energy.

 

Important Stock Information

While the company’s financials look very impressive, note that the company’s growth numbers are from a low base. Given a similar numerical increase in revenue/net income in FY17, growth % will be reduced.

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