- RE-ITERATE BUY Entry – 0.084 Target – 0.105 Stop Loss – 0.075
- Jiutian is the second largest Dimethylformamide (DMF) producer in China, with a total annual capacity of 150,000 tons of DMF and methylamine (MA). Both these chemicals are important ingredients in industries as diverse as consumer goods, petrochemicals, electronics, pharmaceuticals and fertilisers. In addition, it now produces chemicals for fast growing sectors such as batteries that are used in electric vehicles.
- FY2021 net profit +79% YoY. JIUC reported a 79% YoY surge in net profit to RMB310mn, even when taking into account a RMB126mn impairment related to an associated company, Anyang Jiujiu Chemical Technology. This was on the back of strong average selling prices (ASP) of Dimethylformamide (DMF) and Methylamine. JIUC was able to achieve an ASP of RMB12,127 per tonne for DMF and RMB11,837 per tonne for Methylamine, an increase of 103% YoY and 57% YoY respectively. Overall sales volume increased 9-11% YoY.
- Tight market riding on strong demand. Driven by the exceptionally high average selling prices, China DMF sector also recorded historically high profits which are estimated to be more than RMB7,000/tonne. The widening spread was mainly due to the relatively low cost of raw materials such as methanol and synthetic ammonia (trough-to-peak: up 55%) and the strong demand from Southeast Asia. The effective capacity of China’s domestic DMF capacity in FY21 was 900,000 tonnes and the capacity utilisation rate averaged at 80%. In 2H21, market leader Hualu Hengsheng (600426 CH) had 150,000 tonnes of capacity overhaul, resulting in a shortage of DMF supply.
- FY22 outlook remains upbeat. COVID-19 pandemic is expected to end in 2022 as the majority becomes vaccinated. With potential treatment pills released and the adoption of herd immunity policy, most countries will be fully opened by 2H22. The full normalisation of production activities will support demand for DMF and related products. Meanwhile, the domestic capacity will not see a substantial ramp-up this year. Therefore, the supply and demand dynamics will remain relatively tight. The raw material costs have little room to grow as methanol import is expected to resume to a normal level of 13mn tonnes, and the domestic methanol capacity is expected to be 70mn tonnes. Meanwhile, the domestic methanol demand is expected to be around 83mn tonnes.
- Cheap valuations and higher dividends later. JIUC currently trades at only 2.7x FY2021 P/E. If we exclude the one-off impairment, JIUC will be trading at 1.9x FY2021 Core P/E. Assuming DMF prices of RMB10,000 per tonne in FY2022, which we believe is a very conservative assumption when compared to the current market price and the RMB12,127 ASP achieved in FY2021, JIUC will still be trading at only 3.8x FY2022F P/E. We understand that the S$0.0012 final dividend has not fully accounted for the stellar performance in FY2021 given the delay in cash transfer and we still expect that the company to be able to pay out at least S$0.011 based on a 25% payout ratio of its FY2021 net profit of RMB 310mn.
Jiutian’s FY2021 Key financial highlights