Excerpts from KGI report

Analyst: Joel Ng

• Jiutian Chemical reported a strong set of 2Q20. Earnings turned around from a loss of RMB7.0mn in 2Q19, to a profit of RMB 32.6mn in 2Q20, even as revenues declined 6% YoY.

The stellar performance was mainly due to lower raw material prices, resulting in a 140% YoY increase in gross profit.


Jiutian Chemical

Share price: 
4.9 c

Fair value: 
At least 6.8 c

"We see Jiutian as a good trading opportunity over the next 3 months, riding on strong tailwinds of favourable supply demand of its chemical products."
-- KGI report

• Although we do not have a formal rating on Jiutian, we estimate a fair value of at least 6.8 Sing cents, based on 8x EPS of RMB 4.320 cents, or 0.86 Sing cents.

We think this level of earnings is possible as 2H20 will likely be more favourable than 2Q20, as it rides on higher Average Selling Prices (ASP) and lower raw material costs.


Elevator pitch. Jiutian Chemical Group has been listed on the SGX since May 2006. It opened its second dimethylformamide (DMF)/methylamine facility capable of producing 120,000 tons in 2H17, making it the largest producer of such products in China.

Stock price 

4.9 c

52-week range

0.8 – 5 c

Market cap

S$89 m

PE (ttm)

7 x

Dividend yield 

--

1-year return

208%

Shares outstanding

1.82 b

Source: Yahoo!

Jiutian’s strategic location in China’s coal belt provides the group cost advantages to secure coal-based raw materials used in the manufacture of its chemical products.

HNEC, which indirectly owns 27.6% of Jiutian, is one of Henan’s largest SOE.

Performance U-turn. Gross profit increased by RMB 31.2 mn mainly due to a 20.5% decrease in purchase price per ton of methanol, one of the key raw materials, resulting in lower costs of production for DMF and Methylamine in 2Q20.

As a result, gross profit margins increased from 8% in 2Q2019 to 19% in 2Q20, and profit before tax increased by RMB 46.5mn compared to a loss before tax of RMB 4.7mn in the prior year period.

Higher utilisation going into 2H20. The group reported a drop of capacity utilisation from 75% to 56% in 2Q20.

However, the company issued a clarification on 20 August 2020 that the 56% utilisation rate refers to the average over the 3 months in 2Q20, and that it was in line with demand situation at the start of the economic re-opening in China, from the depths of the Covid-19 outbreak.

Utilisation rate has since been raised in response to the rising demand for its products.

Booming ASP. The price of DMF has surged more than 30% since mid-June when DMF was trading below RMB 4,800 per ton.

A key reason is that another major manufacturer of DMF in China had to close its plant due to government policy, which would mean a loss of 160,000 tons/year supply.


Lower raw material prices. In addition to higher utilisation and ASP in 2H20, the group is also set to benefit further from the drop in raw material costs.

The price of methanol, one of the key ingredients for the production of DMF and Methylamine, has been on a downtrend, due partly to lower crude oil prices (see page 2 for the charts on ASP and price of methanol).

JoelNg919"Valuation & Action: We see Jiutian as an excellent short-term trading opportunity as it rides the perfect operating environment of higher ASPs, lower raw material costs, and higher utilisation rates going into the second half of 2020.

"We think a fair value of 6.8 Sing cents is not unreasonable, based on 8x full-year earnings of 0.86 Sing cents."

-- Joel Ng, 
KGI analyst

Two-year forecasts. Based on current DMF and methylamine prices, Jiutian’s 2020/2021F earnings can sustain at around RMB 79-83mn based on a 15% gross profit margin and 6.5% net profit margin.

These levels of margins were achieved in 2017 when ASP rose from RMB 4,000 per ton to RMB 6,000 per ton.

We also assumed that its associated companies are able to breakeven this year.

Our full-year estimates are still below the annualised 2Q20 earnings of RMB 32.7mn, and based on management’s comments, they view the operating environment to be conducive for the rest of the year.

Risks: Decline in ASP of its two main products, DMF and methylamine, is a key risk to earnings.


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