Ahead of its full-year results in February, Jiutian Chemical Group may report a “blowout quarter”, say CGS-CIMB Research analysts Kenneth Tan and Ong Khang Chuen.
“We believe 4QFY2021F was the strongest quarter in Jiutian’s operating history, on the back of stronger profit spread from higher average selling prices (ASPs), and optimal utilisation of production capacity,” write the analysts.
In a Jan 19 note, Tan and Ong are maintaining “add” on Jiutian, with a raised target price of 15 Singapore cents, up from 14 Singapore cents previously. The new target price represents an upside of 82.9%.
Favourable market conditions boosted dimethylformamide (DMF) prices to a new high in 4Q2021. While prices tapered slightly to about RMB15,000 to RMB16,000 per tonne levels in November and December, down from RMB18,000/tonne in October due to tight market supply, they remain higher than the 3Q2021 average of RMB13,500/tonne.
In January, prices remain firm at approximately RMB16,700/tonne, given continued strong downstream demand pre-buying ahead of Chinese New Year, and concerns over tighter market supply due to Covid-19 disruptions in some provinces, write Tan and Ong.
Tan and Ong estimate 4QFY2021F core net profit at RMB129 million (up 127% q-o-q, and up 50% y-o-y, bringing FY2021F core net profit to a record RMB347 million (up 100% y-o-y). “Jiutian has strong free cash flow generation and net cash (RMB184 million as of end-1HFY2021), and we believe it can sustain dividends of at least 0.7 Singapore cents (20% dividend payout ratio) for FY2021, though dividend declaration is likely to happen in May, alongside 1QFY2022F results announcement.”
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Meanwhile, the analysts note that prices of Jiutian’s key raw materials (methanol, ammonia and coal) started to ease in November, following curbs implemented by China to ease its power crisis.
According to CEIC data, prices of coal in China stood at RMB714/tonne (down 2% m-o-m, up 57% y-o-y) in December, while methanol prices came in at approximately RMB2,600/tonne (down 6% m-o-m, up 21% y-o-y) during the same period. “We believe this helped Jiutian with a wider profit spread in 4QFY2021F; this trend is set to continue going into 1QFY2022F, as coal prices directly influence the cost of Jiutian’s key raw materials,” write Tan and Ong.
“We believe that DMF prices can remain elevated in 1HFY2022F, and we raise our FY2021-2023F earnings per share (EPS) estimates by 0.4-8.5% accordingly. Potential re-rating catalysts include stronger DMF ASPs, and a higher dividend payout in May. Downside risks include production disruptions and a sharp correction in DMF prices,” says Tan and Ong.
As at 2.03pm, shares in Jiutian Chemical are trading flat at 8.6 Singapore cents.
