High average selling prices (ASPs), slower rise in raw material costs make for a widening of gross profitability for Jiutian Chemical Group, says UOB Kay Hian Research analyst Clement Ho.
Jiutian is a producer of chemicals such as dimethylformamide (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.
In an April 5 note, Ho is maintaining “buy” on Jiutian with a raised target price of 16.8 cents, up from 13.8 cents previously. The new target price represents an 86.7% upside.
Product ASPs will continue to trend upwards in 1Q2022, says Ho. “The average price for DMF recorded a 74.5% y-o-y spike in 2M2022 to RMB16,350 ($3,485.43)/tonne. This compares with our initial estimate of RMB10,500/tonne in 2022 for Jiutian.”
Historically, ASPs are typically the lowest in the first quarter, before trending up the rest of the year, adds Ho.
That said, there is no new capacity in the foreseeable future without any follow-ups by the Chinese government as environmental concerns remain at the forefront of policies.
“We continue to maintain our view that any significant new increase in DMF supply will be capped, and this will support prices in 2022 and 2023. Even if the Chinese government gives approval for new supply, it would still require a minimum of 9-12 months for trials and further approvals, before the new capacity can come on-stream to the market,” writes Ho.
As a result, Ho predicts widening gross margins for Jiutian, also brought on by low prices and ample supplies of methanol. Relative to DMF’s 74.5% y-o-y spike, average methanol price in 2M2022 saw an increase of just 11.1% to RMB2,893/tonne.
“This implies a widening spread in gross profitability for Jiutian, and we expect 1QFY2022 financials to reflect a significant scale-up in gross margin and operating leverage,” writes Ho.
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Averaging 19.3% in 2017-21, adjusted gross margin is expected to improve to 33.9% in 2022, says Ho, due mainly to higher product ASPs. This is despite higher growth in raw material cost assumptions of 2% in 2022, based on the forward curve on crude oil futures.
Jiutian has also seen a “stark improvement” in 2021 financials, and the company is not seeing any slowdown, writes Ho. “Jiutian’s 2021 net profit of RMB310.3 million significantly exceeded street estimates due to the elevated product ASPs. Operating cash flow of RMB655.8 million was a marked improvement over RMB129 million in 2020, while free cash flow was also healthy at RMB633.5 million as capex was minimal at RMB22.3 million.”
Furthermore, Jiutian’s balance sheet swung from an accumulated loss position (since 2009) of RMB199.0 million in 2020 to RMB43.5 million at end-2021. “This places the company in a better position to access credit facilities and also pay dividends going forward,” says Ho.
There is currently no impact of China’s lockdown on Jiutian’s operations, which are primarily situated in Henan, Zhengzhou, says Ho.
Its customer base stems mainly from Henan, the surrounding provinces adjacent to Henan, namely Hebei, Shaanxi, Shanxi, Hubei, Shandong, and Anhui, and provinces in the Yangtze Delta Region, namely, Jiangsu and Zhejiang, he adds.
As at 11.44am, shares in Jiutian Chemical are trading 0.1 cent higher, or 1.1% up, at 9.2 cents.
