Tsaker Chemical Group

Tsaker (‘company’) is engaged in the manufacturing of 1) dye and agricultural intermediates (70% of revenues), 2) pigment intermediates (21%), and 3) battery materials (9%). It also has a small environmental technology consultancy unit, which it intends to spin off soon.

It has a prominent position in the first two segments, which contributes all of its profits. Though most of its revenues are generated in China (68% of revenues) and India (9%), it has an established sales network across the world with sales to Indonesia, Brazil, Germany, US, Japan, Taiwan, and Spain among others.

The relatively new battery materials segment earned gross profits only in 2021 as the production line achieved sufficient volume. Management intends to almost double capacity in this segment by the end of 2022.

The company is a steady and reasonably efficient performer reporting 2021 sales of 1.78b (FY20: 1.28b), ebitda of 438m (FY20: 318m), and net profits of 227m (FY20: 145m).

2021 results included the impact of new capacity in the battery materials unit – and though selling prices were up across the board, sales volumes were also up. The operating profit margin, however was below the average in recent years. Therefore 2021 earnings of 227m seems to us a conservative index of earning power.

The company operated with net borrowings of 107m rmb (net of cash and short-term liquid securities), which is minimal, and well covered by current assets and earning power.

The equity is backed by tangible assets of 1.88b rmb (including 586m in construction WIP for the battery capacity above). Normal earnings of 227m represents a return of nearly 18% on tangible assets excluding construction WIP. And earnings are likely to go up as this capacity comes on board through 2022.

The common stock currently sells for 1.15b, which is 5x conservative earnings, and at 61% of tangible equity.

Management has bought back stock around the current market price and paid reasonable dividends including occasional special dividends.

The current price appears to us to provide an adequate margin of safety on earnings and tangible assets - for a well-run and efficient company with an emphasis on R&D to develop new products for profitable growth.