1Q22: Achieved High ASPs On Limited Industry Supply
Jiutian’s 1Q22 strong net profit of Rmb201.1m (+122.7% yoy) came from higher revenue
of Rmb772.3m (+75.8% yoy), as ASPs for DMF and MA remained elevated. The industry
supply shortage is expected to keep feedstock ASPs high for 2022 and 2023, which
would lead to positive operating leverage and solid free cashflow generation for Jiutian.
Maintain BUY with a higher target price of S$0.18 (from S$0.168), after raising our
forward assumptions for product ASPs.
RESULTS
• Stark improvement in 1Q22 financials. Jiutian Chemical Group’s (Jiutian) 2021 net profit
of Rmb201.1m (+122.7% yoy) was attributable to higher revenue of Rmb772.3m (+75.8%
yoy), which came mainly from elevated product ASPs. Operating cash flow in 1Q22 reversed
into positive territory at Rmb29.4m (1Q21: negative Rmb73.2m), despite a build-up of
inventories arising from movement restrictions for delivery of finished goods. The strong set
of results came amid the seasonally slow quarter, as well as lower production volume in Jan
22 due to COVID-19 related restrictions affecting logistics. An interim DPS of 0.75 S cents
was declared, 114% higher than 0.35 S cents in 1Q21.
• Product ASPs remained elevated. Prices of dimethylformamide (DMF) and methylamine
(MA) spiked to Rmb16,166/tonne (+73% yoy) and Rmb20,055/tonne (+116% yoy)
respectively. DMF and MA prices have been holding at elevated levels since May-Jun 20.
This is due to the surge in demand for products from downstream users (eg electric vehicle
batteries, electronics, pharmaceutical and animal feeds). Also, supply remains capped as
applications for new capacity in the industry remain on hold without any follow-ups by the
Chinese government, with environmental concerns remaining at the forefront of policies.
STOCK IMPACT
• Elevated ASPs sustainable. 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
• Continued rise in gross margin. Averaging 15% in 2016-20, gross margin is expected to
more than double to 33.9% in 2022 due to better ASPs of DMF and MA. This is despite a
higher raw material cost assumption of 12%, which is conservative given that methanol
prices have been kept in check due to ample supply. This implies a widening spread in gross
profitability for Jiutian Chemical, and we expect 2022 financials to reflect a significant scaleup in gross margin and operating leverage.
EARNINGS REVISION/RISK
• We have lifted our 2022-24 revenue estimates by 8.1% across the three years after revising
our assumptions for DMF prices in 2022-24 from Rmb11,000/tonne to Rmb12,000/tonne.
• Accordingly, 2022-24 net profit estimates were lifted by an average 32.2% to Rmb519.5m,
Rmb507.2m and Rmb519.6m, from Rmb392.9, Rmb381.0 and Rmb395.4m respectively.
VALUATION/RECOMMENDATION
• Maintain BUY with a higher target price of S$0.18. The target price is pegged to 3.5x
2022F PE, or -1SD of its historical 10-year average. We deem its current valuation at 1.9x
2022F PE as attractive, and believe share price is supported by an estimated 2022F
dividend yield of 15.7%.
SHARE PRICE CATALYST
• Higher-than-expected DMF prices and factory utilisation rates.
• Dividend payment upon reversal of retained losses.