Jiutian Chemical Group - UOB Kay Hian 2022-04-05: High ASPs To Remain Firm As Supply Remains Limited

JIUTIAN CHEMICAL GROUP LIMITED (SGX:C8R)

Jiutian Chemical Group - High ASPs To Remain Firm As Supply Remains Limited

We are seeing a widening of gross profitability from high product ASPs and a slower rise in raw material prices. We do not expect any significant new production capacity for dimethylformamide and methylamine due to environmental concerns remaining at the forefront of the Chinese government’s agenda, while ample supply of methanol will put a cap on feedstock costs.
Maintain BUY call on Jiutian Chemical with higher target price after re-basing our valuation year from 2021 to 2022.

According to CEIC Data, the average price for dimethylformamide (DMF) recorded a 74.5% y-o-y spike in 2M22 to RMB16,350/tonne (2M21: RMB9,370/tonne). This compares with our initial estimate of RMB10,500/tonne in 2022 for Jiutian Chemical (SGX:C8R). Historically, ASPs are typically the lowest in the first quarter, before trending up the rest of the year.
No new capacity in the foreseeable future. China’s manufacturing industry continues to see a DMF supply shortfall as applications for new capacity remain on hold without any follow-ups by the Chinese government as environmental concerns remain at the forefront of policies. We continue to maintain our view that any significant new increase in DMF supply will be capped, and this will support prices in 2022 and 2023. Even if the Chinese government gives approval for new supply, it would still require a minimum of 9-12 months for trials and further approvals, before the new capacity can come on-stream to the market.
Widening gross margins also coming from ample supply of methanol. Methanol prices have been kept low because of ample supply. Relative to DMF’s 74.5% y-o-y spike, average methanol price in 2M22 saw an increase of just 11.1% to RMB2,893/tonne, according to CEIC Data. This implies a widening spread in gross profitability for Jiutian Chemical, and we expect 1Q22 financials to reflect a significant scale-up in gross margin and operating leverage.

Jiutian Chemical’s 2021 net profit of RMB310.3m (2020: RMB174m) significantly exceeded street estimates due to the elevated product ASPs. Operating cash flow of RMB655.8m was a no impact of China’s lockdown on Jiutian Chemical’s operations, which are primarily situated in Henan, Zhengzhou. Its customer base stems mainly from Henan, the surrounding provinces adjacent to Henan, namely Hebei, Shaanxi, Shanxi, Hubei, Shandong, and Anhui, and provinces in the Yangtze Delta Region, namely, Jiangsu and Zhejiang.

We have revised our 2022 and 2023 DMF price assumptions by 4.8% and 10.0% respectively to RMB11,000/tonne for both years, from 2.3x 2022F P/E as attractive.
See
Catalysts:
- Better-than-expected product mix between DMF and methylamine.
- Higher-than-expected factory utilisation rates.

Clement Ho UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-04-05

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