Jiutian Chemical Group 1Q21 - UOB Kay Hian 2021-05-06: Strong Beat On Higher ASPs & Volume

JIUTIAN CHEMICAL GROUP LIMITED (SGX:C8R)

Jiutian Chemical Group 1Q21 - Strong Beat On Higher ASPs & Volume

Jiutian Chemical’s 1Q21 marked the second consecutive quarterly record high since its IPO in 2006. The group benefitted from positive operating leverage arising from increased volumes and product ASPs, which was led by an industry supply shortage and higher demand for end-products manufactured in China.
We believe feedstock ASPs could remain elevated for 2021, which would lead to the sustained gross profitability and solid free cash flow generation.
Maintain BUY with a higher target price of S$0.138.

Jiutian Chemical Group (SGX:C8R)’s 1Q21 results topped estimates on higher-than-expected ASPs of dimethylformamide (DMF) and methylamine (MA), as well as sales volume. 1Q21 net profit surged to RMB90.3m (1Q20: RMB2.9m, 4Q20: RMB86.2m), albeit on a low base y-o-y due to the first lockdown curbs from COVID-19, as the company benefitted from positive operating leverage.
The strong set of results came amid the seasonally slow quarter, with utilisation rates at elevated levels despite having a two-week closure for Chinese New Year.

Revenue of RMB439.3m (+32% y-o-y, +8.9% q-o-q) was mainly lifted by higher selling prices for DMF and MA, which grew 98% y-o-y and 38% y-o-y to RMB9,344/tonne and RMB9,272/tonne, respectively.
Additionally, total sales volume jumped 47.6% y-o-y (-21% q-o-q) on the back of higher factory utilisation rates of 69% and 100% for DMF and MA (1Q20: 56% for DMF, 89% for MA; 4Q20: 88% for DMF, 90% for MA). Correspondingly, gross margin expanded to 31.5% (+24.6ppt y-o-y, +0.8ppt q-o-q), which bolstered net margin to a higher 20.6% (+19.1ppt y-o-y, -0.8% q-o-q).

DMF and MA prices have been holding at an elevated level since May-Jun 20, exhibiting the strong industrial recovery in China, which coincided with the permanent closure of the world’s second-largest DMF producer, Zhejiang Jiangshan Chemical.
China’s economy remains in recovery mode following the pandemic, with demand for consumer end-products staying high across a diverse range of industries including textile, chemical, agriculture, automotive, pharmaceutical, agrochemical and electronics. This in turn drives volume and prices up for the chemical feedstock that Jiutian produces.

Averaging 12% in 2016-19, Jiutian Chemical's adjusted gross margin is expected to more than double to 30.1% in 2021 due to better ASPs of DMF and MA. This is despite higher raw material cost assumption of 12%, given that Jiutian Chemical’s feedstock is primarily a derivative of crude oil.

Along with the strong operating leverage that will catapult earnings trajectory, Jiutian Chemical's free cash flow (FCF) generation is expected to remain enviable across 2021.
Our estimates suggest a continued rise in Jiutian Chemical's FCF to RMB410m for 2021 (2020: RMB115m, 2019: RMB58m). This will help improve Jiutian Chemical’s balance sheet significantly, with net cash rising from RMB110m (1.1 cents) in 2020 to an estimated RMB507m (5.0 cents) in 2021.

We have tweaked our 2021 revenue estimate by 9.8% from RMB1,408m to RMB1,546m, to account for the higher-than-expected feedstock ASPs in 1Q. Our DMF ASP assumption in 2021 has been raised 7.4% to RMB7,736/tonne, after incorporating 1Q21’s RMB9,344/tonne.
Accordingly, our 2021 net profit estimate for Jiutian Chemical is raised 14.3% from RMB256.2m to RMB293.0m.

Maintain BUY on Jiutian Chemical with a higher target price of S$0.138.
We have maintained our valuation peg at 5x 2021F P/E, or -1 standard deviation of its historical 13-year average, which we believe may be conservative given the longer-than-expected time period that DMF prices have been sustained at. Jiutian Chemical's share price currently trades at 3.5x 2021F P/E.
See

Clement Ho UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-05-06

SGX Stock Analyst Report BUY MAINTAIN BUY 0.138 UP 0.128