CGS-CIMB Research analysts Ong Kang Chuen and Kenneth Tan have continued to maintain their “buy” call and target price of 14 cents on Jiutian Chemical as prices of dimethylformamide (DMF), a solvent that Jiutian produces, continue their climb.
Ong and Tan note that according to 100ppi.com, DMF prices averaged about RMB14,500 ($3,048) per tonne in Sep 2021, almost double that of last year, and DMF prices further surged to a record high of RMB18,200 per tonne in the latest quotation seen this week.
They believe that the strong average selling price (ASP) is mainly due to higher input costs, lower industry supply in the near term with ongoing plant maintenance of major players (likely to last till end-October), and power curbs impacting production of some industry players.
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Meanwhile, they think that end-products continued to see sustained strong demand and as such, Ong and Tan expect DMF prices to remain elevated in October, before easing slightly towards end-FY2021 as supply normalises.
While key raw materials, including methanol, ammonia and coal, have all seen prices edge
upwards in the past quarter, the analysts believe that ASPs should outpace the gains in cost prices, and that Jiutian will record a better profit spread per volume output.
According to database CEIC, coal prices climbed to RMB 613 per ton, 8% higher m-o-m and 41% higher y-o-y, while methanol prices reached about RMB2,600/ton, 58% higher y-o-y in Aug 2021.
They forecast Jiutian to record gross profit of about RMB 3800 per ton, which is 14% higher h-o-h and 28% higher y-o-y in 2HFY2021. As such, their profit forecasts for FY2021 are raised by 6% to RMB312m, an 80% y-o-y jump.
Moving forward, Ong and Tan expect Jiutian to record a 3QFY2021F net profit of RMB58million, which is 18% lower q-o-q, but 11% higher y-o-y. Revenue is expected to come in at RMB285million, 36% lower q-o-q, and 7% higher y-o-y, with lower sales volumes offset by strong DMF prices.
“3Q volumes are seasonally weaker due to the need to carry out annual plant maintenance (20-25 days impact), while Jiutian suffered about 10 additional days of disruption in Jul 2021 from a severe flood that hit Henan Province,” the analysts highlight.
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They conclude by saying that potential re-rating catalysts include continued uptrend in DMF
ASPs and higher dividend payout, while downside risks include a sharp decline in its DMF ASPs and higher raw material cost pressures.
As at 3.10pm, shares of Jiutian were trading at 8.8 cents, with a FY2021 price to book ratio of 0.98 and
