CGS-CIMB Research has initiated coverage on Jiutian Chemical Group with an “add” call and a target price of 14.5 cents, as the brokerage sees the company riding on the dimethylformamide (DMF) cyclical upswing.
The target price, according to analysts Lim Siew Khee, Ong Khang Chuen and Kenneth Tan, is pegged to 5.7 times FY2022 price-to-earnings (P/E), and at a 20% discount to SGX-listed peer China Sunsine.
According to Jiutian’s management, the company is currently China’s second-largest DMF producer, with an annual production capacity of 150,000 tonnes as at 3QFY2020.
“As the only significant producer of DMF in Henan Province, Jiutian is well-positioned to capture rising demand for DMF given the rapid industrialisation and urbanisation trend in Henan and neighbouring provinces,” say analysts Lim Siew Khee, Ong Khang Chuen and Kenneth Tan in a Jan 15 report.
“We believe Jiutian also enjoys a cost advantage over other local DMF producers given its low-cost access to coal-based raw materials, production efficiency and cost-effective supply chain management,” they add.
The analysts also see stronger average selling prices (ASPs) riding on favourable industry dynamics for the company.
SEE: Jiutian Chemical Group reports surge in 3Q earnings of $10.5 mil due to stronger demand
This is due to export-oriented countries seeing their manufacturing capacity taking a beating in FY2020 due to Covid-19, which has led to general improvements in the export market for China’s manufacturers, and in turn, higher demand for DMF.
Industry supply for DMF was also impacted by the permanent closure of Zhejiang Jiangshan Chemical, which was previously the second-largest DMF player in China in May 2020, due to urban planning initiatives by the Chinese government.
The closure has resulted in a rise in DMF prices in 2HFY2020.
Prices have remained elevated year-to-date (y-t-d) in 2021.
As at Jan 13, asking prices for DMF in Southern China stands at RMB9,350 ($1,918.07), representing a 68.5% increase y-o-y and 14.0% growth y-t-d, according to Oilchem.net, an online platform for energy and chemical information in China.
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On this, the analysts expect Jiutian to book record profits for FY2020 on the back of elevated DMF ASPs at RMB6,000 per tonne or +34% y-o-y, and lower raw material prices (at -9% y-o-y).
“We forecast Jiutian to report record net profit of RMB199 million in FY2020 (FY2019 net loss: RMB248 million). Our RMB230.5 million net profit forecast for FY2021 implies ASP assumption of RMB6,430 for DMF (+7.5% y-o-y),” they predict.
“We like Jiutian as it rides on a cyclical upturn in DMF pricing… Potential catalysts include stronger-than-expected FY2020 results and stronger profit contribution from associate company Anyang JiuJiu, with management expecting resumption of operations in 1HFY2021. Downside risks include sharp decline of DMF ASPs and higher raw material cost pressure,” they add.
As at 12.12pm, shares in Jiutian are trading 0.6 cent higher or 6% up at 10.6 cents.
