Key points of investment
Benefiting from increased sales, turnover increased slightly in the first half of the year. Century Sunshine (0509.HK) 2016 mid-term operating results: operating income of HK$1,236 million, up 2.7% year on year; basic EPS fell from 4.61 HK cents in the same period last year to 2.56 HK cents, with no dividends.
Exchange rate fluctuations are dragging down net profits. Compared with a slight decrease of 4.4% in gross profit, the company's net profit for the first half of the year fell 36.4% year on year. The main reason for this was exchange rate fluctuations. The value of the 2016H1 Singapore dollar increased, causing exchange losses on the company's postpaid notes listed in Singapore, totaling approximately HK$37.85 million. However, since the notes expire in 2018, there is no impact on the company's cash flow.
The fertilizer business bucked the trend, and endogenous epitaxial expansion expanded production capacity. The fertilizer business generated revenue of HK$682 million in the first half of the year, a year-on-year decrease of about 6.2%. This was mainly due to the downturn in the fertilizer market. Affected by the market, the average price of the company's products fell by about 13.4%. However, the company's sales in the first half of the year bucked the trend and increased by about 8.3%.
At the same time as sales are rising, the company is also actively expanding production capacity through “endogenous” and “extrapolation”.
Magnesium products became a growth point for the company's performance. Revenue from the magnesium products business was HK$424 million, an increase of 11.8% over the previous year. This was mainly due to a 43.2% increase in sales volume over the same period last year. The increase in sales of basic magnesium products led to a 4.2 percentage point decrease in the gross margin of the magnesium products business compared to the same period last year. With the company's investment in new production capacity, the total production capacity of magnesium products is expected to reach 175,000 tons in the future, and the market share is expected to exceed 30%.
Our opinion: The company currently has a two-wheel drive development pattern for the fertilizer business and the magnesium products business. In the second half of the year, it is expected that negative factors such as falling grain prices, excess upstream production capacity, and falling raw material prices will still affect the fertilizer market, and the fertilizer market will still run at the bottom. Benefiting from the rapid growth in downstream demand for magnesium alloys, the company's magnesium alloy business is expected to continue its good performance in the first half of the year and become the main growth point of the company's performance. Investors are advised to pay active attention.
Risk warning: Sales of fertilizer products fell short of expectations; market demand for magnesium products fell short of expectations.
