Jiutian Chemical Group - CGS-CIMB Research 2021-08-12: Strong ASPs Offset By Rising Costs

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JIUTIAN CHEMICAL GROUP LIMITED (SGX:C8R)

Jiutian Chemical Group - Strong ASPs Offset By Rising Costs

• Jiutian Chemical's 2Q21 net profit was RMB70m (-22% q-o-q, +115% y-o-y), slightly below expectations due to higher raw material costs and associate losses.
• Jiutian Chemical could benefit from higher DMF prices in 3Q21F, but production volumes may be impacted by the severe flooding in Henan Province in Jul.
• Reiterate ADD with a lower target price of S$0.14.

Jiutian Chemical's 2Q21 hurt by higher raw material costs

• Jiutian Chemical (SGX:C8R) reported 2Q21 net profit of RMB70m (-22% q-o-q, +115% y-o-y), bringing 1H21 net profit to RMB160.5m (+351% y-o-y), slightly below expectations at 51.3% of our full-year forecast, as 2H is seasonally weaker. 2Q21 revenue grew to RMB448m (+2% q-o-q, +62% y-o-y), helped by stronger ASPs and sales volumes of both dimethylformamide (DMF) and methylamine (MA).
• The weaker performance q-o-q was attributable to
  • weaker GPM due to higher raw material costs, especially for methanol, as well as
  • larger share of losses from associates which suffered from higher coal prices.

Stronger DMF prices in Jul and Aug…

• According to 100ppi.com, DMF prices spiked in mid-Jul 2021, and prices are currently at RMB14k/tonne (inclusive of 13% value-added tax), up from average of ~Rmb11k/tonne in 2Q21. We believe this could be due to continued strength in downstream demand, while industry supply was tighter as key manufacturers curb output in view of higher temperatures in summer.
• Meanwhile, prices for its raw materials to make DMF have so far trended relatively stable vs 2Q21. We expect DMF prices to remain elevated in 3Q21F, before easing slightly towards end-FY21F as supply normalises.

… but expect weaker production volumes in 3Q21F

• We expect weaker production volumes in 3Q21F, due to
  1. 10 days of lower output in Jul as Jiutian was disrupted by the severe flood that hit Henan Province, as well as
  2. the group’s annual 20-day plant maintenance to be carried out in Aug/Sep.
• Due to lower volume assumptions, we lower our FY21F EPS forecast for Jiutian Chemical by 5.8%.

Reiterate ADD with a lower target price of S$0.14

• Maintain ADD on Jiutian Chemical as we expect it to continue enjoying strong earnings in 2H21F riding on the strong MA/DMF prices. With our lower EPS forecasts, our target price for Jiutian Chemical declines slightly to S$0.14, still pegged to 5.7x CY22F P/E (20% discount to SGX-listed peer China Sunsine (SGX:QES)).
• See
  • Jiutian Chemical's Share Price,
  • Jiutian Chemical's Target Price,
  • Jiutian Chemical's Analyst Reports,
  • Jiutian Chemical's Dividend History,
  • Jiutian Chemical's Announcements,
  • Jiutian Chemical's Latest News.
• Potential re-rating catalysts include a continued uptrend in DMF ASPs and higher dividend payout.
• Downside risks include a sharp decline of its DMF ASPs and higher raw material cost pressure.

ONG Khang Chuen CFA CGS-CIMB Research | Kenneth TAN CGS-CIMB Research | https://www.cgs-cimb.com 2021-08-12

SGX Stock Analyst Report ADD MAINTAIN ADD 0.14 DOWN 0.150