3 Cheap Chinese Chemicals
Potential quality and certain deep value in Chinese specialty chemicals
Chemicals have been a rage recently in Fintwit. Everybody and his grandma is calling the bottom. Indeed, the industry has been in the longest slump in memory, for almost 4 years already, and stock prices are lower than they had been in a decade or more for some companies.
I noticed the situation with chemicals early this year. In the ‘Framework for Screening and Selection’ section of my Chemicals Intro article (which covers the basics of the industry, and the largest companies and economic drivers within each segment) I wrote:
The main opportunity offered by chemicals is to position countercyclically in segments where the cycle is undergoing its negative portion, as prices tend to discount the most terrible catastrophes. When the cycle turns (a question of when, not if), the stocks of the surviving companies tend to rerate violently, aided by the compound effect of earnings and multiple expansion. The challenge is to select the companies that have the highest likelihood of surviving the cycle unscathed.
But in this case, I’m writing about more actionable ideas.
As part of the general research on chemicals, I started looking at literally hundreds of nano, micro and small caps globally in the industry. I found a lot of very cheap names (not surprising), with good quality components, shareholder returns and balance sheets (surprising). Their margins are good, they are growing, they pay very high dividends, and they have a lot of excess cash and no debt.
This article presents three of those companies, all located in China Mainland. And I can already hear you saying ‘China China China!’ like that beautiful Trump 2016 video. But remember what I wrote above: growing, good margins, good positioning in their markets, loads of cash, and paying MSD to HSD dividends.
In future weeks, I will publish other work I’ve been doing on small cap chemicals, and a large detailed primer on early stage petrochemicals (olefins and polyolefins), arguably the worst hit segment in the industry.
Let’s get into it and 恭喜发财！
Disclaimer: The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. I own shares of all of these companies
Teaser
Note: When I comment multiples about earnings or dividends yields, these are before netting cash from EV. That is, if I say a company has a P/E of 5x, and net cash is 60% of market cap, then the net-cash P/E is 2x, but I still say 5x.
Lee & Man Chemical ($0746.HK)
Integrated player in chlorine, fluoropolymers, and fluorochemicals. 10 year revenue CAGR 6/10% depending on cycle position. NTM dividend yield 7.5%. TTM P/E around 7x, but price to 2018-2025 average earnings is 4x. Current EBIT margin in down-cycle is 15%, previous average 25%.
China Sunsine Chemical ($QES.SGX)
Leader (20/30% market share) of global rubber chemicals (automotive industry downstream), growing at 10%+ CAGR since early 2000s, mid-teens EBIT margins, dividend+repurchase yield of 4/6%, net cash is 70% of market cap (no plans to distribute, mostly in Mainland).
Infinity Development Holdings - ($0640.HK)
Supplier of adhesives to footwear industry, probably 10% market share global, mid-teens EBIT margins, and growing at 5% CAGR for 20+ years. Trades at 5x P/E, dividend yield 10%, and 60% of market cap is net cash (no plans to distribute though).
Other articles on chemicals and China
Lee & Man Chemical - 理文化工 ($0746.HK)
Product lines
Lee & Man Chemical originated as the caustic soda and chlorine-derivatives manufacturer for Lee & Man Paper ($2314.HK). Since its humble chlor-alkali origins, the company has been consistently moving downstream to more specialty chemicals.
Paper manufacturing requires a lot of caustic soda and the company started there. But the chlor-alkali process which yields caustic soda, also yields chlorine and hydrogen, so the company moved into hydrogen peroxide (also used in paper), and chloromethanes (precursor of fluoro-refrigerants). Interestingly, the company did not go into PVC (a classical route from chlorine).
From chloromethanes, the company expanded towards several fluor chemical lines. Most fluorochemicals require hydrogen fluoride. The company already had hydrogen from chlor-alkali, and the company’s area (Jiangxi, Jiangsu) is also home to large fluorospar deposits. So the company started producing several refrigerants (fluoroethanes).
From there, the next step was a series of fluoropolymers, mainly PTFE (also known as teflon), and PVDF (used in coatings and batteries), diversifying from the refrigerants market.
The company’s latest segment have been cyclic carbonates used as electrolyte additives in the lithium-battery industry, mainly VC, FEC (which is also part of the fluor line). The segment has only recently (1H25) started generating meaningful revenues (CNY 10 million).
Markets and margins
The company’s margins have been high for a chemical producer, even when most of its lines were commoditized products. It is unclear whether the margins from 2010-2022 period will return. I analyzed pure-play competitors in each of the markets that the company participates in (the company does not publish segment profitability) and found that the margin challenges comes from fluoropolymers mainly, in which construction is an important downstream driver. I do not expect margin recovery, but it could happen, eventually.
Starting with caustic soda, the most commoditized product. L&M is insignificant at the national level (1% or less of production), but is a larger player in Jiangsu and Jiangxi (23% of production). Most companies in the industry are doing pretty bad (Shanghai Chlor Alkali 上海氯碱化工, Xinjiang Zhongtai 中泰化学) but they are more invested in PVC, which is in shambles. However, L&M is not participating in PVC. When reporting the caustic soda line separately (烧碱) gross margins are close to 40/50% and have been stable for caustic soda.
Moving to chloromethanes, my belief is that most of the company’s sales actually occur inside of the company, as consumption, but I am not entirely certain of this. I was not able to find separate chloromethanes segment profitability from fluorochemical competitors (Shandong Jinling, Zhejiang Juhua, Luxi Chemical, and Dongyue Group).
Therefore, let’s talk fluorochemicals as the driver of downstream demand for chloromethanes. Here we need to divide between refrigerants and fluoropolymers.
Refrigerants (R152a, CFC-113) are doing well in China, because the country is removing older capacity to reduce environmental pollution. Fluorocarbons containing chlorine (like CFC-113 but not R152a) have a high global warming potential. L&M is one of the only companies in China authorized to produce CFC-113, mainly as a precursor for other refrigerants. These products are also in higher demand because of policies around appliances, which need refrigerants. L&M has also recently developed a proprietary method for manufacturing R152a that does not require foreign IP and royalties, potentially cementing some margin gap with other competitors.
Fluoropolymers (PTFE, PVDF) are doing very badly, and I believe this is the main driver behind the company’s lower margins since 2022. The reason, in my opinion, is lower demand from construction plus environmental challenges, as the most sold fluoropolymer is PTFE (teflon, 60% of all fluoropolymers), 50% of which demand comes from electrical insulation, and the rest from consumer products (like teflon pans or Goretex shoes) which are coming under larger scrutiny and anti-PFAS regulation (Wikipedia). PVDF, the second largest fluoropolymer, is also used for coatings and piping mostly, also construction-led (Wikipedia).
So, what am I expecting in terms of margins? No improvement, as that would probably require better margins in caustic soda (50% of revenues) and fluoropolymers.
However, I do not believe there should be significant further deterioration, considering that caustic soda prices are already in decade low levels (and margins are ok nonetheless), and that refrigeration is a more regulated industry.
Balance sheet, capital allocation and management
The company does not have significant cash reserves, as the other names discussed in this article. However, it has little debt at CNY 500 million gross, CNY 300 million net, which is less than half a year of net income.
The company has not stated how much it plans to invest in CAPEX going forward, but after investing in battery-related cyclic carbonates (VC, FEC) in 2023/24, it is planning to expand its fluoropolymer lines. One source cites CNY 500 million as the investment, again, not super high. The plant would focus on CTFE, another high-end fluoromonomer (polymer is PCTFE) used in coatings and films.
One important point around capital allocation is that the dividend is currently about 50% of net income, allowing for both capital returns, and investments without leveraging.
In terms of management, the company is owned and controlled by Lee Man Yan (65% of the company, plus I think 10% from his mother), CEO of the company. His mother is Chairman of the company. The company’s CEO-owner is part of the Consultative Committee in Jiangxi, and one of the non-Executive Directors was a member of the National Consultative Committee. These are important organs of consultation between government and industry.
Valuation
As of Friday August 18th, $0746.HK traded at HKD 5.2 per share. The company recently released 1H25 figures with earnings per share of HKD 0.39. Even assuming that 2H25 figures are worse (I have some suspicions around caustic soda prices being higher in the first half of the year) and come back to 2H24 levels (HKD 0.3 per share) we would still be talking of HKD 0.7 for the year, or a 7x P/E. With a dividend payout ratio of 50%, this is a dividend yield of 6.5%. In addition we need to consider revenue growth levels, inclusive of the recent slump, of 8% CAGR since the GFC, and the fact that EBIT margins for HKD 0.7 in EPS are 18/20%, versus an average of 25/30% in the 2010-2022 period.
China Sunsine Chemical - 尚舜化工 ($QES.SGX)
China Sunsine (yes Sunsine, not Sunshine!) is a Singapore listed company, but its operations are in Mainland China, more specifically in Heze, Shandong.
The company is a piece of Chinese history all along. Heze is the mythological birthplace of legendary emperors Yao and Shun almost 5 thousand years ago! The company’s current Chairman and largest shareholder has been with the company since 1977 (the reform had not even started) and bought the company from the state or commune in the 1990s SOE reform period.
Sunsine’s market is rubber accelerators, anti-oxidants, and other chemicals added to rubber during the vulcanization process to improve or change its characteristics. It claims to be the largest producer of accelerators in the world, with a 23% market shares, and 35% market share in China.
Revenues, margins and markets
When we observe the company’s history, revenue has basically been basically explained by capacity expansion. The company presented large jumps in capacity in 2011/13, 2014, and then 2020 and 2022. The figures are actually one in one between 2024 (at CNY 3.6B of revenues and 254k tons of capacity) and 2009 (at CNY 600M at 75k tons of capacity).
There has obviously been pricing gains, and also a qualitative step jump in gross margins (about 20% pre-2013 and 25% post-2013) which may have to do with the mix (higher insoluble sulphur and anti-oxidants).
All of the company’s production is in China, approximately half of which is sold domestically, and the rest exported. Almost all of its exports go to ‘Rest of Asia’, which I would believe is mainly Thailand, the second largest producer of tires (China being the first). Talking of tires, 70% of rubber globally is used for tire production. The company does not mention which kinds of accelerators it manufactures, or its end markets, but does talk of vehicles sales on its (scant) MD&As, and of tires on its materials, so I would guess it is the main driver of demand (pun intended).
About tariffs, the cost of the accelerators is less than 2% of the cost of a tire, so the company’s impact on tariffs is probably very small even if production was outsourced from China. Further, China produces 70% of the world’s rubber chemicals, so it would be hard to materially decouple.
Moving to margins, the driver is gross margins. These have been fairly stable, even considering substantial growth and sometimes revenue volatility. The only exceptions are 2012-13, 2020 and today.
During 2012-13, the industry had seen overcapacity, which impacted gross margins, and operating leverage on EBIT margins. The Chairman of the company wrote in 2013 (could be yesterday): ‘the PRC domestic economy was undergoing a structural adjustment and industrial upgrading phase. Overcapacity, intense competition, downward pressure on pricing and lower profit margin were major concerns across most industries.’ Then, in 2013-14, demand grew again and margins recovered.
COVID goes without saying, considering that 70% of rubber demand comes from tires that go into vehicles. 2023/24 is similar to 2012-13. Overcapacity has impacted margins again. This will eventually also wear out via demand expansion, as China’s vehicle manufacturing expands. So far into 1H25 results, released literally this week, margins are stable. The fact that the company owns 35% of the market in China, and almost 25% globally, means that it is a price setter at least in the margin.
Balance sheet, capital allocation and management
Sunsine has a lot of cash, CNY 2.5 billion, or 70% of its market cap (SGD 650 million ~ CNY 3.65 billion). The company has negligible liabilities (CNY 500 million, all working capital, versus CNY 1 billion in receivables and CNY 300 million in inventories).
According to the AGM questions, there are no plans to return that cash to shareholders any time soon, and the cash is located in China. The company could use up to CNY 1 billion in expansion (the recent figures from the 1H25 presentation show CNY 600 million in current projects, which nonetheless are 1.5 years of net income) The auditor has specifically certified that the cash exists. Still, the company has a dividend payout ratio of about 40% of earnings. The dividend has quadrupled since 2016 (split-adjusted).
Management has been with the company since forever, and also owns it. The Chairman joined the company when it was established, IN 1977! meaning just one year after Mao’s death (no private property, so he’s there since the communal property times!). Then he bought the company in the 1990s, probably during the smaller SOE privatization era. He still owns 60% of the company. The Vice-Chairman shares his surname, although there’s no mention of relation, and has been with the company since 1998. The General Manager since 1995. All of the executive managers have been with the company 10/15/20 years, even though many of them have only recently risen to prominent positions (2022/23/24).
Valuation
Whatever you think about the world, there will be more cars in the future, and they can run on lithium or gas, or nuclear batteries, but they will have rubber tires, and China Sunsine is in 25% of all tires. Vehicles might not be the fastest growing market in the world, but it has runway (pun intended), specially in the EMs.
The company’s impressive margins even during market downturns indicate that a lot of producers are unprofitable before China Sunsine even sneezes. The company’s balance sheet is a fortress.
And it trades at CNY 3.5 billion while generating CNY 400/650 million in net income per year, and paying about 40% of that in dividends, or a dividend yield between 4/6%.
Infinity Development Holdings - 星谦发展 - $0640.HK
Infinity Development has been discussed more on Fintwit by DaBao.
The company is a large manufacturer of footwear adhesives, with factories in China Mainland (1990), Vietnam (1997, then expanded in Vietnam), and Indonesia.
As we can see below, it has grown at a CAGR of about 7.5% since 2010, albeit only 2% since 2019 (trade war started). Further, it has maintained pretty high margins, gross of 30%+ and operating of 10%+, currently at 17%.
The growth is understandable. Footwear, and particularly footwear in China and SEA, have been growth industries for decades. Only by maintaining the share of a few manufacturers, the company could grow a lot.
What’s more challenging is understanding the margins. They seem too high for a simple and commoditized product, and a company that is not the largest, in a market where even the largest are not that big. The market is relatively fragmented, with the three largest competitors owning 25% of global production. These are Nan Pao Resins (南宝树脂, Taiwan), Henkel AG (Germany), and Great Eastern Resins (大东树脂, Taiwan). The company is probably the fourth largest company in the market, under the brand ZhongBu 中部树脂 (Guangdong BoLi prospectus). One report says that the global market was approximately CNY 9 billion (it values the Chinese market, which is 2/3 of the global, at CNY 5/6 billion).
DaBao has commented that he believes the margins are sustained because of the tight coupling needed between Infinity and the footwear manufacturers. Each model requires a specific type of adhesive, with sometimes changed needed batch by batch. Although I cannot attest to that idea, I have found some sustaining data for it. For example, the company mentions that it has 100 technicians on-site providing services to the clients. That’s 25% of its employee base (interim report). It also works with few but large customers, mentioning 5-customer concentration of 45% on its annual report.
A second reassuring factor is that competitors have similar margins. Citing the BoLi prospectus again, the table below shows the gross margins for five competitors, the last being Infinity, and the one above it being Nan Pao (probably largest in market). In total three companies out of five have 30%+ gross margins.
Indeed, Nan Pao below has 3x as much revenue as Infinity, and yet margins are pretty similar. The revenues below are TWD 23 billion ~ CNY 5.5 billion, but on its latest report, only about half of Nan Pao’s revenues came from adhesives, and of that a part might not be footwear, although footwear is probably the largest part.
Finally, in terms of exposure to tariffs, the company generates 60% of revenues in Vietnam, with China being only the same size as Indonesia in revenues (15%). I was not able to determine if this means customer location or also production location, which could make a difference on tariffs. Still, given it is probably a microscopic component of costs, I do not think adhesives are a big candidate for reshoring.
Capital allocation, balance sheet and management
The company’s balance sheet is probably half of the attractive. As of 1H25, the company held cash and deposits for HKD 320 million (48% of market cap), against HKD 30 million in debts. The cash is denominated in USD, and therefore already out of China or Vietnam.
I have not been able to find reports of plans to provide that capital to shareholders, but CAPEX requirements should not be very high after the company ends the current buildout of a factory in Indonesia (for which the equipment has already been bought and therefore netted of cash).
The company’s CEO, Chairman and Founder is the same person (also owning 75% of the shares). The General Manager (in charge of daily operations) has been with the company since 2001.
Valuation
Infinity Holdings trades at a market cap of HKD 660 million but has HKD 320 million in cash, has generated profits of HKD 56 million in 1H25 (10% earnings yield in 6 months), and pays an interim dividend of HKD 0.05 (or 9% annualized on a stock price of HKD 1.1). In addition, I think it can grow at least LSD, in my opinion.