• Jiutian Chemical is the world’s second-largest DMF producer and is benefiting from the favourable industry dynamics this year, which have boosted ASPs.
• Product margins widened in 3Q20, resulting in a 21.4x y-o-y jump in net profit. Jiutian Chemical remains hopeful that current trends can continue through to end-2020.
• Bloomberg consensus forecasts Jiutian Chemical's 4Q20F net profit of Rmb127m (+144% q-o-q). Jiutian Chemical currently trades at 3.4x/2.1x P/E for FY20/21F.

About Jiutian Chemical Group

• Established in 2004 (and subsequently listed on the SGX in 2006), Jiutian Chemical Group (SGX:C8R) is currently the world’s second-largest manufacturer of dimethylformamide (DMF), with a total annual capacity of 150,000 tonnes. It also produces methylamine (including MMA, DMA and TMA), sodium hydrosulfite, consumable carbon dioxide, Oxygen 18 and deuterium-depleted water.
• Jiutian Chemical's business is divided into 3 main divisions:
  1. DMF division producing DMF as its main product and methylamine as a secondary product. Jiutian Chemical has an annual production capacity of 150,000 tonnes for DMF and up to 150,000 tonnes of methylamine (depending on how much DMA is processed and sold as DMF).
  2. Sodium hydrosulfite (SH) division (through Anyang JiuJiu Chemical Technology Co., Ltd, a 74%-owned associate company) producing sodium hydrosulfite. The facilities under this division have the capability to produce 140,000 tonnes of sodium hydrosulfite annually but are currently mothballed.
  3. Gas and Oxygen 18 division (through Henan Herunsheng Isotope Technology Co., Ltd, a 45%-owned subsidiary) producing consumable carbon dioxide, Oxygen 18 and deuterium-depleted water. The construction of the main production facilities has already been substantially completed with trial production ongoing, according to Jiutian Chemical’s FY19 annual report.
• DMF is largely used as a key feedstock in the production of polyurethane (PU), which is used for the manufacturing of consumer goods such as leather products, footwear soles, cushions and furniture. DMF is also used as a universal solvent in the production of petrochemical products in the petrochemical industry, acrylic fibre in the textile industry, antibiotics in the pharmaceutical industry, etc.
• Meanwhile, key applications for methylamine include the production of agriculture chemicals, medicine, fuel and synthetic resin as well as the production of the solvent used for chemical fibres, activating agents, photography, etc.
• Jiutian Chemical mainly serves local customers in Henan and surrounding provinces adjacent to Henan, including Hebei, Shaanxi, Hubei, Shandong and Anhui. As at 1H20, sales were entirely from China, with customers comprising manufacturers of downstream products that use methylamine and DMF as well as trading intermediaries that distribute these chemicals to their manufacturing clients.

Competitive Advantages

• Jiutian Chemical is located in Henan Province and is the only significant DMF producer in the province (within 500km from the plant), according to its annual report. Jiutian Chemical believes that it is well positioned to take advantage of the rapid industrialisation and urbanisation in Henan and neighbouring provinces, which is in turn driving the demand for chemicals, such as DMF and methylamine.
• Henan also offers significantly lower costs of labour, land and raw materials as compared to provinces located on the eastern and southern coasts of China, according to Jiutian Chemical. In addition, Henan is a well-connected transport hub, with its capital Zhengzhou having one of the largest railway terminals within China, which helps to reduce transportation costs of its products.
• Jiutian Chemical believes that it enjoys a cost advantage over other PRC DMF producers as it can secure low-cost access to the coal-based raw materials used in its manufacturing process. According to management, Jiutian Chemical’s relative cost advantage also comes from its production efficiency and cost-effective supply chain management, including direct piping-in of raw materials from main suppliers.

Industry Overview

• According to Jiutian Chemical, many export-oriented countries have seen their manufacturing capacity taking a beating this year due to COVID-19 disruptions. This has resulted in a general improvement in the export market for China’s manufacturers and in turn higher demand for DMF.
• At the same time, industry supply was impacted by the permanent closure of Zhejiang Jiangshan Chemical (previously the second-largest DMF and methylamine player in China with annual capacity of 180k tonnes) in May 2020 due to urban planning initiatives by the Chinese government. As a result, Jiutian Chemical is now the second-largest DMF producer in the world, second only to Shandong Hualu Hengsheng Chemical (annual capacity of 300,000 tonnes).
• According to CEIC database, DMF prices have been consistently rising since Apr 2020, with prices in China increasing from Rmb4,610/tonne in Apr to Rmb8,020/tonne in Oct. Meanwhile, prices of methanol have been trending lower.
• As of Oct, methanol prices in China stood at Rmb1,850/tonne (-10.2% y-o-y).

Jiutian Chemical's Financials

Revenue, margin and profitability

• Jiutian Chemical benefited from higher average selling prices driven by tightening industry supply as environmental regulations resulted in production stoppages in FY17 and FY18. However, challenging market conditions and political uncertainties from the Sino-US trade war negatively impacted ASPs and sales volumes of Jiutian Chemical in FY19.
• In 2020, the favourable demand-supply dynamics caused a strong uptick in DMF ASPs. Despite a 20-day production halt for routine maintenance, Jiutian Chemical was able to achieve 8.8% y-o-y revenue growth in 3Q20.
• While ASPs trended upwards, raw material prices (including methanol) have fallen, allowing Jiutian Chemical to achieve margin expansion this year. In 3Q20, Jiutian Chemical’s GPM rose to 31% (3Q19: 8%). Profitability margins were at a five-year high as of 3Q20, with operating profit margin at 28.8% and net profit margin at 19.5%. The higher ASPs and margin expansion led to a 21.4x y-o-y increase in net profit during the quarter to Rmb51.9m (3Q19: Rmb2.4m).

Cash flow

• Operational cash flow improved from FY15 to FY19, helped by stronger operating margins. Despite the stronger margins in 9M20, operational cash flow was negative due to a significant increase in trade receivables. Average capital expenditures between FY15 and FY19 were Rmb20.6m per year (c.2% of annual revenue).
• Between FY15 and FY19, Jiutian Chemical was able to achieve positive free cash flow for 3 out of the 5 years.

Balance sheet

• Jiutian Chemical remains in a net debt position. As of end-3Q20, Jiutian Chemical had a net gearing level of 19%, with Rmb412m in short-term bank borrowings and Rmb340m in cash and cash equivalents.
• Jiutian Chemical has not issued dividends over the past 5 years.

Management Outlook

• According to remarks in the 3Q20 results announcement, Jiutian Chemical continues to see favourable operating margins for its main products. Barring any significant resurgence of COVID-19 in China, Jiutian Chemical is hopeful that the operating environment will remain conducive for the rest of 2020.
• With its plants fully serviced in Sep 2020, Jiutian Chemical plans to continue to operate its DMF/MA plants efficiently and raise its utilisation rates to take advantage of the current trends.
• Apart from its DMF/MA plants, Jiutian Chemical also plans to resume operations at its Sodium hydrosulfite (SH) plant by 1H2021, with one line producing SH and 3 other intermediate products as built, as seen from the Group’s 3Q20 update. Furthermore, discussions are at advance stages to modify the second line with a potential JV partner for other more profitable products, according to the 3Q20 update.
• With a stronger balance sheet post the recent completion of its share placement and strong earnings in 9M20, Jiutian Chemical also announced plans to explore potential acquisition targets in synergistic and high growth sectors, including the possibility of downward integration and plant expansion, where the market demand for its products is expected to be strong and sustainable, according to the company.

Bloomberg Consensus

• According to Bloomberg consensus forecasts, Jiutian Chemical could record net profit of Rmb214m for FY20F, implying net profit of Rmb127m for 4Q20F (+144% q-o-q). Consensus also projects further net profit growth to Rmb361m (+69% y-o-y) in FY21F.
• Jiutian Chemical's share price of S$0.077 on 16 Dec translates into a P/E ratio of 3.4x/2.1x for FY20/21F, according to Bloomberg consensus estimates.

Source: CGS-CIMB Research - 16 Dec 2020