As dimethylformamide (DMF) prices continue on a strong uptrend year-to-date (y-t-d), CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan estimate that Jiutian Chemical Group will post a “record quarter” in 1QFY2021.
More specifically, Ong and Tan forecast that Jiutian’s core net profit for the quarter will see more than a 28-fold surge to RMB78.5 million ($16.1 million).
“Despite 1Q being a seasonally-weaker quarter due to the Chinese New Year, we understand that plant utilisation remained high amid robust orders. We forecast Jiutian achieving revenue of RMB431 million (+7% q-o-q, +116% y-o-y), mainly due to average selling price (ASP) increases,” they write in an April 12 report.
“We also expect a sequential expansion in Jiutian’s profit spread, as ASP hikes in 1Q outpace raw material cost increases,” they add.
SEE:Continue to 'add' Jiutian Chemical Group on higher ASP: CGS-CIMB
According to 100ppi.com, an online platform for commodity prices in China, the asking price for DMF now stands at RMB11,000 ($2,251.95) per tonne, representing a 120% growth y-o-y, and 40% growth y-t-d.
“We attribute the strength to robust downstream demand, and raw material price increases, and expect DMF prices to remain elevated in 2QFY2021,” write the pair.
“China’s industrial output rose 35.1% in February 2021, and Jiutian notes healthy incoming orders, especially from PU leather, semiconductor, electric vehicle, animal feed and pharma industries. Meanwhile, the price of methanol, a key raw material, has also trended higher by around 15% q-o-q in 1QFY2021.”
With these factors in mind, Ong and Tan have kept their earnings estimates unchanged. They have also maintained “add” on the counter with an unchanged target price of 13.5 cents pegged to 5.7 times FY2022 P/E. The estimate represents a 20% discount to SGX-listeed peer, China Sunsine, say Ong and Tan.
“We expect Jiutian to enjoy strong earnings in 1HFY2021 riding on the cyclical uptrend of MA/DMF prices. Valuations are attractive, in our view, as Jiutian trades at 3.9 times FY2022 price-to-earnings (P/E), backed by net cash of RMB110 million as of end-FY2020 (representing 11.6% of current market cap).”
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“Potential catalysts include continued uptrend in DMF ASPs and stronger profit contributions from associate company Anyang JiuJiu, with management expecting a resumption of operations in 1HFY2021 Downside risks include a sharp decline in DMF ASPs and higher raw material cost pressures,” they say.
Shares in Jiutian closed 0.2 cent lower or 2.0% down at 10 cents on April 13.
