Broker's take: CGS-CIMB initiates 'add' on Jiutian Chemical with S$0.145 TP

CGS-CIMB has initiated coverage on Jiutian Chemical Group with an "add" recommendation and a target price of 14.5 Singapore cents. The research house expects the dimethylformamide (DMF) producer to book a record net profit in FY2020 amid "favourable industry dynamics".

In an initiation report published on Monday, analysts Lim Siew Khee, Ong Khang Chuen and Kenneth Tan forecast that the company's net profit will hit a record 199 million yuan (S$40.9 million) in FY2020, reversing from its previous net loss of 248 million yuan in FY2019.

They expect the company to net a profit of 230.5 million yuan in FY2021, assuming DMF is priced at 6,430 yuan per tonne.

Highlighting the fact that Jiutian is China's second-largest DMF producer, the analysts believe the company enjoys cost advantages over its peers as well as higher average selling prices (ASPs). As such, they think the group is well-positioned to capture rising demand for DMF, given the rapid industrialisation and urbanisation trend in Henan and neighbouring provinces.

This is due to the company's low-cost access to coal-based raw materials as well as "relative cost advantage" from production efficiency and cost-effective supply chain management, said the analysts.

Stronger ASPs are also on the cards for Jiutian, in their view. As at Jan 13, DMF asking price in southern China, tax inclusive, stands at 9,350 yuan per tonne, 68.5 per cent higher than last year, according to figures from Oilchem.net, an online platform for energy and chemical information in China.

They noted that DMF prices remain elevated in the year to date after a price hike in 2H FY2020, following the permanent closure of Zhejiang Communications Technology Company in May last year. This impacted industry supply as the company was previously the second-largest DMF player in China before Jiutian, with annual capacity 180,000 tonnes.

Other factors contributing to favourable industry dynamics for Jiutian include general improvements in the export market for China's manufacturers. Jiutian's management has observed that many export-oriented countries have seen their manufacturing capacity take a beating in FY2020 due to Covid-19 disruptions, which has in turn resulted in higher demand for DMF.

"We like Jiutian as it rides on a cyclical upturn in DMF pricing," said the analysts, who note that the counter's target price of 14.5 cents is pegged to 5.7 times FY2022 forward price-to-earnings, or a 20 per cent discount to China Sunsine.

"Potential catalysts include stronger-than-expected FY2020F results and stronger profit contribution from associate company Anyang JiuJiu, with management expecting resumption of operations in H1 FY2021F. Downside risks include sharp decline of DMF ASPs and higher raw material cost pressure."

Shares of Jiutian Chemical were trading 0.6 Singapore cent or 6 per cent higher at 10.6 cents as at the midday break on Monday.

Amendment note: An earlier version of this article did not credit all three analysts who co-authored the report. The article has been revised to reflect this.