Jiutian Chemical Group - CGS-CIMB Research 2021-01-15: Riding On DMF Cyclical Upswing; Initiate Coverage With ADD


Jiutian Chemical Group - Riding On DMF Cyclical Upswing; Initiate Coverage With ADD

  • Jiutian Chemical is China’s second-largest DMF producer and is benefiting from favourable industry dynamics in FY20 which have boosted ASPs.
  • We expect Jiutian Chemical to report record net profit of RMB199m in FY20F on the back of elevated DMF ASPs and lower raw material prices.
  • We initiate coverage on Jiutian Chemical with an ADD rating as it rides on a cyclical upturn in DMF pricing. Our target price of S$0.145 is based on 5.7x FY22F P/E.

World’s second-largest DMF producer

  • Established in 2004 (and subsequently listed on the SGX in 2006), Jiutian Chemical Group (SGX:C8R) is currently China’s second-largest dimethylformamide (DMF) producer according to the company, with annual production capacity of 150,000 tonnes as at 3Q20.
  • As the only significant producer of DMF in Henan Province, Jiutian Chemical is well positioned to capture rising demand for DMF given the rapid industrialisation and urbanisation trend in Henan and neighbouring provinces. We believe Jiutian Chemical also enjoys a cost advantage over other local DMF producers given its low-cost access to coal-based raw materials, production efficiency and cost-effective supply chain management.
  • See PDF report below for further details on Jiutian Chemical's competitive advantages and SWOT analysis.

Stronger ASPs riding on favourable industry dynamics

  • According to Jiutian Chemical, many export-oriented countries have seen their manufacturing capacity take a beating in FY20 due to COVID-19 disruptions. This has resulted in general improvements in the export market for China’s manufacturers and in turn, higher demand for DMF.
  • Meanwhile, industry supply for DMF was impacted by the permanent closure of Zhejiang Jiangshan Chemical (previously the second-largest DMF player in China with annual capacity 180k tonnes) in May 2020, a result of urban planning initiatives by the Chinese government. This resulted in a rise in DMF prices in 2H20, and prices remains elevated year-to-date in 2021.
  • As of 13 Jan 2021, DMF asking price (inclusive of 13% value added tax) in Southern China stands at RMB9,350 (+14.0% year-to-date, +68.5% y-o-y) according to Oilchem.net, an online platform for energy and chemical information in China.

Expecting record profits for FY20F

  • On the back of elevated DMF ASP (RMB6,000/tonne, or +34% y-o-y) and lower raw material prices (-9.0% y-o-y), we forecast Jiutian Chemical to report record net profit of RMB199m in FY20F (FY19 net loss: RMB248m). Our RMB230.5m net profit forecast for FY21F implies ASP assumption of RMB6,430 for DMF (+7.5% y-o-y).
  • Jiutian Chemical is currently in a net debt position. As of end-3Q20, Jiutian Chemical had a net gearing level of 19%, with RMB412m in short-term bank borrowings and RMB340m in cash and cash equivalents. As we expect strong cash flow generation for Jiutian Chemical in FY20/21F, we forecast Jiutian Chemical to return to net cash position of RMB74.5m by end-FY21F.
  • See PDF report below for further details on Jiutian Chemical's financials.

Initiate coverage on Jiutian Chemical with ADD rating and target price of S$0.145

LIM Siew Khee CGS-CIMB Research | ONG Khang Chuen CFA CGS-CIMB Research | Kenneth TAN CGS-CIMB Research | https://www.cgs-cimb.com 2021-01-15
SGX Stock Analyst Report ADD INITIATE ADD 0.145 SAME 0.145