Chemical manufacturer Jiutian Chemical Group overshot earnings expectations in 3QFY2020, driven by the shutdown of a competitor, says UOB Kay Hian analyst Clement Ho in a Nov 12 note. Ho is maintaining his ‘buy’ call on the company with a raised target price of 18 cents from 16 cents.
“3QFY2020 net profit of RMB51.9 million (+2,038% y-o-y, +59% q-o-q) overshot our estimate of RMB38.8 million, due mainly to higher-than-expected DMF average selling price (ASP),” says Ho. Dimethylformamide (DMF) ASP increased to RMB6,195/tonne, notes Ho.
On the back of higher DMF ASP of RMB6,195/tonne (+36.4% y-o-y, +37.3% q-o-q), 3QFY2020 revenue rose to RMB267.0 million (+8.8% y-o-y) but slipped 3.4% q-o-q due to a lower utilisation rate of 44% (3QFY2019: 49%, 2QFY2020: 56%) for Anyang Jiutian DMF plant arising from the scheduled maintenance shutdown of 20 days in September.
Jiutian is a producer of chemicals such as DMF and sodium hydrosulfite. It is also involved in the processing and sale of consumable carbon dioxide and oxygen. The group sells its products wholly in China to manufacturers of downstream products that use methanol, methylamine and DMF.
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As China continues its rapid recovery from Covid-19 lockdowns, analysts are seeing strong demand for DMF. “While spot DMF prices are seeing some softening since our stock initiation, they are expected to stay elevated due to sustainable demand,” he adds.
3QFY2020 gross margin expanded to 31.4% (3QFY2019: 7.7%, 2Q FY2020: 19.4%) on higher product prices and lower cost for methanol, a major raw material for DMF, due to depressed crude oil prices.
This translated into positive operating leverage for Jiutian, which recorded a spike in net margin to 19.5% (3QFY2019: negative; 2QFY2020: +11.8%), says Ho.
“While spot prices for DMF have softened to RMB9,350/tonne as at Nov 11, it remains 34% above our initial estimate of RMB7,000/tonne for 2021,” says Ho.
Management cited the surge in demand for DMF was driven by strong growth in the local and export markets for its end-products, as well as rising demand from users in the lithium batteries and semiconductor sectors in China.
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The demand for industrial products manufactured in China looks set to continue as other manufacturing nations are still suffering from Covid-19, says Ho. Additionally, Zhejiang Jiangshan Chemical, the second-largest DMF producer in the world, shut its production facility in May, pulling out 180,000 tonnes of annual capacity. This resulted in a supply shortage for DMF and catapulted Jiutian into the second spot with its annual capacity of 150,000 tonnes of DMF.
“We raise our 2020 revenue estimate by 5.6% from RMB1,076.6 million to RMB1,137.4 milion to account for the higher-than-expected 3QFY2020 results. This lifts our 2020 net profit forecast by 16.6% to RMB213.7 million (2019: RMB225.8 million loss),” writes Ho.
“We raise our 2021 DMF ASP assumption by 2.9% from RMB7,000/tonne to RMB7,200/tonne. This raised our 2021 revenue estimate by 2.3% to RMB1,531.4 million. Adjusted gross margin is also expected to improve 4.7ppt y-o-y to 37% as a result of higher product prices, translating into a stronger operating leverage for Jiutian. As a result, our 2021 net profit estimate is higher at RMB357.2 million (+23.3%),” he adds.
As at 2.15pm, shares in Jiutian Chemical are trading at 0.2 cents higher, or 2.41% up, at 8.5 cents.
