As dimethylformamide (DMF) prices continue on a strong uptrend year-to-date (y-t-d), CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan estimate that Jiutian Chemical Group will post a &ldquo record quarter&rdquo in 1QFY2021.

 

More specifically, Ong and Tan forecast that Jiutian&rsquo s core net profit for the quarter will see more than a 28-fold surge to RMB78.5 million ($16.1 million).

&ldquo Despite 1Q being a seasonally-weaker quarter due to the Chinese New Year, we understand that plant utilisation remained high amid robust orders. We forecast Jiutian achieving revenue of RMB431 million (+7% q-o-q, +116% y-o-y), mainly due to average selling price (ASP) increases,&rdquo they write in an April 12 report.

 

&ldquo We also expect a sequential expansion in Jiutian&rsquo s profit spread, as ASP hikes in 1Q outpace raw material cost increases,&rdquo they add.

 

According to 100ppi.com, an online platform for commodity prices in China, the asking price for DMF now stands at RMB11,000 ($2,251.95) per tonne, representing a 120% growth y-o-y, and 40% growth y-t-d.

 

&ldquo We attribute the strength to robust downstream demand, and raw material price increases, and expect DMF prices to remain elevated in 2QFY2021,&rdquo write the pair.

 

&ldquo China&rsquo s industrial output rose 35.1% in February 2021, and Jiutian notes healthy incoming orders, especially from PU leather, semiconductor, electric vehicle, animal feed and pharma industries. Meanwhile, the price of methanol, a key raw material, has also trended higher by around 15% q-o-q in 1QFY2021.&rdquo

 

With these factors in mind, Ong and Tan have kept their earnings estimates unchanged. They have also maintained &ldquo add&rdquo on the counter with an unchanged target price of 13.5 cents pegged to 5.7 times FY2022 P/E. The estimate represents a 20% discount to SGX-listeed peer, China Sunsine, say Ong and Tan.

 

&ldquo We expect Jiutian to enjoy strong earnings in 1HFY2021 riding on the cyclical uptrend of MA/DMF prices. Valuations are attractive, in our view, as Jiutian trades at 3.9 times FY2022 price-to-earnings (P/E), backed by net cash of RMB110 million as of end-FY2020 (representing 11.6% of current market cap).&rdquo

 

&ldquo Potential catalysts include continued uptrend in DMF ASPs and stronger profit contributions from associate company Anyang JiuJiu, with management expecting a resumption of operations in 1HFY2021 Downside risks include a sharp decline in DMF ASPs and higher raw material cost pressures,&rdquo they say.