KGI Research analyst Joel Ng has initiated “outperform” on China-based chemical company, Jiutian Chemical, with a target price of 14.5 cents.
The target price, says Ng, is based on 7 times price-to-earnings (P/E) to its FY2022 earnings per share (EPS) of RMB10.3 cents.
The company made a turnaround in 2020, where it made net profit of RMB173 million ($35.9 million) for the FY, reversing from losses of RMB279 million in FY2019. The company is now the second-largest dimethylformamide (DMF) producer in China after one of its largest competitors ceased operations in 2020.
DMF is a key ingredient used in consumer goods, pharmaceutical, agrochemical products and in the electronics sectors.
Jiutian, for the 1QFY2021 ended March, began the year on a “strong footing”.
Revenue rose 120% y-o-y to RMB439 million while net profit surged 3,150% y-o-y to RMB90 million.
SEE:Jiutian Chemical group off to 'a flying start' for FY21, says CGS-CIMB
The company also announced an interim dividend of 0.35 cent per share, the first time since 2008.
As such, Ng has assumed a full-year dividend of 0.84 cent per share for the FY2021 and 0.63 cent per share for the FY2022-FY2023, based on a 30% payout ratio, translating to an implied yield of 9% for the FY2021 and 7% for the FY2022-FY2023.
To Ng, he remains positive on Jiutian Chemical following strong DMF prices driven by China’s economy recovery.
DMF prices are currently trading at around RMB11,000 per tonne.
He also sees Jiutian’s capacity expansion being the key driver to help meet rising demand and maximise utilisation of the existing DMF capacity.
The expansion plan is expected to take two years to complete and become fully operational.
Capex for the plan is in the range of RMB250 million to RMB300 million, which Jiutian has the ability to fund.
“Confirmation of this project is likely in the next few months, and as a conservative measure, we have not factored this into our three-year financial forecast,” says Ng.
Ng has also identified new demand drivers as catalysts to higher results for the company.
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Beyond DMF, Jiutian also produces monomethylamine (MMA), a versatile building block used in various applications such as for lithium batteries.
“Lithium batteries are witnessing strong demand due to the accelerating adoption of electric vehicles (EV) around the world,” he writes.
On this, Ng says he expects the company to post “record earnings” in the FY2021 driven by favourable industry supply and demand dynamics.
As at 12.24pm, shares in Jiutian are trading 0.4 cent higher or 4.2% up at 10 cents, or 1.1 times P/B, according to KGI’s estimates.
