Jiutian Chemical Group - CGS-CIMB Research 2021-10-18: Dimethylformamide (DMF) Prices Reach Record Highs

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JIUTIAN CHEMICAL GROUP LIMITED (SGX:C8R)

Jiutian Chemical Group - Dimethylformamide (DMF) Prices Reach Record Highs

• DMF prices continued their strong uptrend in 3Q21F, reaching a record high of RMB18.2k/ton last week. ASP gains should offset raw material cost hikes.
• Despite lower volumes (impact from Henan floods and plant maintenance) in 3Q21F, we expect Jiutian Chemical (SGX:C8R) to post net profit growth of 11% y-o-y to RMB58m.
• Reiterate ADD rating on Jiutian Chemical with unchanged target price based on 5.7x CY22F P/E.

Dimethylformamide (DMF) prices reach new highs

• Dimethylformamide (DMF) prices have continued their uptrend in recent months. According to 100ppi.com, DMF prices averaged ~Rmb14.5k/ton (inclusive of 13% value added tax) in Sep 2021, almost double that of last year. DMF prices further surged to a record high of RMB18.2k/ton in the latest quotation seen this week. We believe that the strong ASPs are mainly due to
  1. higher input costs,
  2. lower industry supply in the near term with ongoing plant maintenance of major players (likely to last till end-Oct), and
  3. power curbs impacting production of some industry players.
• Meanwhile, end-products continued to see sustained strong demand. We expect DMF prices to remain elevated in Oct, before easing slightly towards end-FY21F as supply normalises.

Stronger ASPs should offset higher input costs

• Key raw materials, including methanol, ammonia and coal, have all seen prices profit per ton of ~Rmb3.8k/ton (+14% h-o-h, +28% y-o-y) in 2H21F. Accordingly, we raise our FY21F net profit estimate by 6% to RMB312m (+80% y-o-y).

Jiutian Chemical's 3Q21F earnings preview: lower output offset by stronger DMF prices

• We forecast Jiutian Chemical recording output in 3Q21F, as ASP hikes outpaced that of raw materials.

Coal prices should stay elevated in the near-term

• We believe that strong DMF prices observed in 3Q21F can also be partly attributable to surging coal prices. According to CEIC, the monthly average common coal prices stood at RMB613/ton in Sep 2021, +41% y-o-y and +8% m-o-m. As China enters the winter season (Nov – Mar), we expect coal prices to remain elevated in the near-term due to increased demand for heating. Tougher environmental regulations and safety inspections could also result in tight supply over the near-term.
• We believe that Jiutian Chemical will be able to pass on the higher costs to its customers, which should contribute in part to profit spread expansion in 3Q21F. That said, Jiutian Chemical’s key associate Jiulong, which produces coal-based chemicals, should still be in a loss-making position given the higher input prices. We expect 3Q21F associate losses at ~Rmb4m.

Reiterate ADD on Jiutian Chemical with an unchanged target price

• We reiterate ADD rating on Jiutian Chemical with an cash of RMB184m (~25% of current market cap).
• 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 continued uptrend in DMF ASPs and higher dividend payout.
• Downside risks include a sharp decline in its DMF ASPs and higher raw material cost pressures.

ONG Khang Chuen CFA CGS-CIMB Research | Kenneth TAN CGS-CIMB Research | https://www.cgs-cimb.com 2021-10-18

SGX Stock Analyst Report ADD MAINTAIN ADD 0.140 SAME 0.140