Jiutian Chemical Group - KGI Securities 2022-05-17: Expecting Another Record Year In FY22

JIUTIAN CHEMICAL GROUP LIMITED (SGX:C8R)

Jiutian Chemical Group - Expecting Another Record Year In FY22

Jiutian Chemical (SGX:C8R) reported a record-high profit in 1Q22, mainly driven by the surge in the average selling prices (ASP). The ASP of DMF and methylamine jumped by 73.0% y-o-y and 116.3% y-o-y respectively during the period.
Global energy prices surged in 1Q22, driven by the Russia-Ukraine conflicts and then ensuing sanctions on Russia. Higher energy prices provided solid support for chemical prices. However, China’s zero-COVID policy resulted in supply chain disruptions, dragging down sales volumes.

2H22 chemicals sector is expected to remain stable. China’s expansionary monetary and fiscal policy will uphold the rebound of economic growth.
Jiutian Chemical's FY22F PATMI forecaste were adjusted upward by 183.2% to RMB541mil due mainly to the jump in average selling prices of the product mix and the prolonged duration of the upcycle. Based on a reasonable P/E of 4.5x and the FY22F ESP of RMB0.27, we maintained our OUTPERFORM rating for Jiutian Chemical and raised our target price for Jiutian Chemical to S$0.245, implying an upside of 150% from the last closing price of S$0.098.

Jiutian Chemical continued to deliver strong earnings in 1Q22 due mainly to the jump in average selling prices of both DMF and methylamine. However, the respective sales volume of DMF and methylamine dropped by 26% y-o-y and 20 % y-o-y due mainly to the government-imposed lockdown measures in Anyang City. The China domestic average DMF price surged by 78% y-o-y to RMB16,000/tonne.

During the period, geopolitical risks surged to an unprecedented level after World War II owing to the military conflicts between Russia and Ukraine. The ensuing sanctions on Russia sent global energy prices to a decade high. Both Brent and WTI stayed elevated at above US$100/bbl.
Meanwhile, coal prices remained buoyant. The thermal coal price averaged at RMB817/tonne, up 16% y-o-y in 1Q22. The skyrocketing energy prices provided solid support for chemical prices as chemical products are derivatives of crude oil and coal.

The Omicron outbreak in China’s major cities has triggered the most draconian subsequent lockdowns for nearly two months. The supply chain disruptions such as production halts and logistics interruptions drag the trade flows/volumes. However, these benefit chemical prices as the mark-ups of transportation and raw materials costs result in the uptick in quotes.
Based on last two years track record, the gain in the ASP is much more than the loss in sales volumes.

In the near term, China will continue to persist in its zero-COVID policy which stifles economic growth. However, China started to carry out the counter-cycle monetary policies by lowering the loan prime rate and required rate of reserve in 1Q22. Meanwhile, the National Development and Reform Commission is drafting a US$2.3tn infrastructure plan.
Moving forward, the expansionary fiscal and monetary policies will uphold the rebound of the domestic economy in 2H22.
Chemical prices performance is cyclical. Here we take the trend of raw chemical materials and products PPI as a proxy. The upcycle of the chemicals industry lags 12 months behind the expansionary cycle of the monetary stimulus:
- Monetary expansion: 4Q12 – 4Q13 (12 months), 4Q15 – 1Q17 (15 months), 4Q19 – 1Q21 (15 months)
- Chemicals sector upcycle: 4Q16 – 4Q18 (24 months), 4Q20 – current (15 months)
Meanwhile, the duration of the cycle tends to be longer as the pass-through of the liquidity injection extends momentum.

We revised upward our FY22F/23F revenue forecast for Jiutian Chemical by 77.4%/44.4% to RMB2,475mil/RMB1,950mil. Accordingly, FY22F/23F PATMI were adjusted upward by 183.2%/72.7% to RMB541mil/RMB320mil. The adjustments are due mainly to the jump in average selling prices of the product mix and the prolonged duration of the upcycle.
The average forward P/E of Jiutian Chemical’s peers listed in China is 7.4x, and the forward P/E of its peer listed in Singapore is 4.1x. Hence, based on a reasonable P/E of 4.5x and the FY22F ESP of RMB0.27, we maintained our OUTPERFORM rating on Jiutian Chemical and raised our target price for Jiutian Chemical to S$0.245, implying an upside of 150% from the last closing price of S$0.098.

Jiutian’s financial performance is comparable to the peers listed in Singapore and China. However, its current valuation is half of its peers’. As of 1Q22, Jiutian Chemical’s net cash was RMB718.1mil, equivalent to S$147.5mil, accounting for 75.7% of the current market cap. Recently, Jiutian Chemical declared an interim dividend of S$0.0075, implying a dividend yield of 7.6% as of the last closing price of S$0.098.
See
Risks: Decline in ASP of its two main products, DMF and methylamine, is a key risk to earnings.

Chen Guangzhi KGI Securities Research | https://www.kgieworld.sg/ 2022-05-17

SGX Stock Analyst Report OUTPERFORM MAINTAIN OUTPERFORM 0.245 UP 0.145