A new acquisition
China Sun has signed an agreement to acquire a corn starch facility in Liaoning.
We view this development positively and increase our FY08E/09E core earnings
to RMB440mn (+8%) and RMB510mn (+23%) respectively. We reiterate our Buy
recommendation with a raised price objective from S$0.88 to S$0.99.
Corn starch capacity to increase 70%
China Sun is spending RMB300mn on the new purchase, which includes a former
state-owned corn starch facility (50,000tpa) that will be upgraded to 300,000tpa.
The new plant has its own railway track and power plant, which will help lower
operating costs. We expect the plant to start operation in early 2008 and reach
full utilization in 12 months. Part of the new capacity (est. 100,000tpa) will be
used for China Sun’s new corn sweetener plant and improve product margins.
More plans in the pipeline
Management indicated that the acquisition meets its internal hurdle ROI of 25%
and will be funded internally with its RMB1.2bn existing cash. We also believe it
is considering additional downstream projects, e.g. corn sweeteners, that should
further enhance earnings growth.
Improving corn price environment
US corn prices dipped 20% over the last month amid reports on potential increase
in corn supply. PRC corn prices also declined, but only slightly by 2-3%, over the
same period. China Sun’s share price has rebounded by 20% over the last week
but still trades attractively at 7x FY08E core earnings. There could be further
earnings upgrade if the company announces new downstream projects and/or
achieves lower than expected corn costs.
? Estimates (Dec)
(CNY) 2005A 2006A 2007E 2