Jiutian Chemical Group - UOB Kay Hian 2021-02-24: 4Q20 Results Missed Expectations; ASPs To Remain Elevated


Jiutian Chemical Group - 4Q20: Results Missed Expectations; ASPs To Remain Elevated

  • Jiutian Chemical's 4Q20 net profit of RMB86.2m (4Q19: RMB237.6m loss, +66% q-o-q) brought 2020 earnings to a record RMB173.7m (2019: RMB248.4m loss), mainly propelled by elevated selling prices for the fine chemicals which Jiutian Chemical produces, arising from:
    1. the structural shift in global manufacturing back to China, and
    2. permanent closure of its competitor.
  • We believe feedstock ASPs would remain elevated for 2021.
  • Maintain BUY with a lower target price of S$0.128.

Jiutian Chemical's record earnings since IPO.

  • Jiutian Chemical (SGX:C8R)’s 4Q20 results came in below our estimates by 13% due to higher-than-expected raw material costs. Earnings of RMB86.2m (4Q19: RMB237.6m loss) brought 2020 net profit to RMB173.7m (2019: RMB248.4m loss), a quarterly and full-year record since its IPO in May 06. See Jiutian Chemical's announcements.
  • The upswing was led by positive operating leverage, driven by higher selling prices of the fine chemicals that Jiutian Chemical produces, particularly dimethylformamide (DMF) and dimethylamine (DMA).

Boosted by significant operating leverage.

  • On the back of higher feedstock ASPs, Jiutian Chemical's 4Q20 revenue rose to RMB403.5m (+89% y-o-y, +51% q-o-q). For the year, utilisation rate at the DMF plant was at 56% (2019: 62%), as management shifted production mix to other products to maximise profitability.
  • Additionally, the slower pace of increase for its key raw material, methanol, resulted in the expansion in 4Q20 gross margin to 30.7% (4Q19: 6.3%, 3Q20: 31.4%).

Elevated ASPs sustainable.

  • DMF price averaged RMB5,983/ton in 2020 (2019: RMB4,462/tonne), on the back of:
    1. the strong industrial recovery in China as other manufacturing countries across the globe went into pandemic lockdowns, and
    2. the permanent closure of the world’s second-largest DMF producer, Zhejiang Jiangshan Chemical, in May 20.
  • Management also cited rising demand from new users stemming from the lithium battery and semiconductor sectors in China, although insignificant currently.

Spike in gross margin.

  • Averaging 12% in 2016-19, Jiutian Chemical's adjusted gross margin is expected to more than double to 31-27% in 2021-22 due to better ASP.
  • As Jiutian Chemical’s feedstocks are primarily derivatives of crude oil, we expect raw material costs to rise 12%, in tandem with the estimated growth forecast for crude oil prices by our commodities team.

Solid FCF generation.

  • Along with the strong operating leverage that will catapult earnings trajectory, free cash flow (FCF) generation is expected to remain enviable across 2021-22.
  • Our estimates suggest FCF of RMB392.3m and RMB268.6m for Jiutian Chemical in 2021-22 respectively. This will help improve Jiutian Chemical’s balance sheet significantly, with net cash increasing from RMB110m (1.1 cents) in 2020 to an estimated RMB489m (4.9 cents) in 2021 and RMB758m (8 cents) in 2022.

Earnings revision

  • We have lowered our Jiutian Chemical's 2021 and 2022 net profit estimates by 29% and 31% to RMB256.2m and RMB306.9m respectively. This is mainly due to lesser operating leverage achieved on the back of the higher crude prices.
  • Our DMF ASP assumption in 2021 is maintained at RMB7,200/tonne, as we believe the current environment in China could be sustained.

Jiutian Chemical - Recommendation

Clement Ho UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-02-24
SGX Stock Analyst Report BUY MAINTAIN BUY 0.128 DOWN 0.180