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

JIUTIAN CHEMICAL GROUP LIMITED (SGX:C8R)

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.

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.

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.

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.

We like Jiutian Chemical as it rides on a cyclical upturn in DMF pricing. Initiate coverage with an ADD rating and target price of S$0.145, pegged to 5.7x FY22F P/E (20% discount to SGX-listed peer China Sunsine Chemical (SGX:QES)). See Jiutian Chemical Share Price; Jiutian Chemical Target Price; Jiutian Chemical Analyst Reports; Jiutian Chemical Dividend History; Jiutian Chemical Announcements; Jiutian Chemical Latest News.
We believe a 20% discount vs. China Sunsine for its P/E multiple is justifiable, given
1. Jiutian’s smaller market cap, and
2. relatively higher volatility in underlying chemical ASPs.
See PDF report below for comparison of Jiutian Chemical with its peers including China Sunsine Chemical, Shandong Hualu Hengsheng Chemical, and Lotte Chemical Group.
Potential catalysts to Jiutian Chemical's share price include stronger-than-expected FY20F results and stronger profit contribution from associate company Anyang JiuJiu, with management expecting resumption of operations in 1H21F.
Downside risks include sharp decline of DMF ASPs and higher raw material cost pressure.
See 21-page PDF report below for complete analysis on Jiutian Chemical Group (SGX:C8R).

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

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