• Benefiting from robust downstream demand, DMF prices have continued on a strong uptrend year-to-date to RMB11,000/ton (+40% year-to-date, +120% y-o-y).
• We forecast a record quarter for Jiutian Chemical in 1Q21F, with core net profit of RMB78.5m ( > 28-fold increase y-o-y) as ASP hikes outpace raw material cost increases.
• Maintain ADD on Jiutian Chemical with an unchanged target price of S$0.135 (5.7x FY22F P/E).

Strong DMF Price Uptrend Continues

• Dimethylformamide (DMF) prices have continued on a strong uptrend year-to-date – asking price (inclusive of 13% value added tax) in China stands at RMB11,000/ton (+40% year-to-date, +120% y-o-y) according to 100ppi.com, an online platform for commodity prices in China. We attribute the strength to
  1. robust downstream demand,
  2. raw material price increases, and
  3. expect DMF prices to remain elevated in 2Q21F.
• China’s industrial output rose 35.1% in 2M21, and Jiutian Chemical (SGX:C8R) 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 ~15% q-o-q in 1Q21.

Capacity Expansion Plans to Capture Growth From Fast-growing Sectors

• In view of the favourable operating environment, Jiutian Chemical is in the process of finalising an expansion plan comprising a new 100kt MA plant adjacent to its current production facility, which could raise its MA output by 83%. Upon securing the necessary approvals, we estimate that it could take between 1.5 to 2 years for the new plant to commence operations.
• We estimate capex requirement to be in the range of RMB250m-300m, which could be funded by Jiutian Chemical’s net cash of RMB110m (as of end-FY20), supplemented by its cash generation in FY21-22F. We have yet to factor in the capacity expansion plan into our forecasts.
• Jiutian Chemical’s DMF/MA products are used in a wide variety of industries (including those listed below). In our view, with the planned capacity expansion, Jiutian Chemical is positioning itself to benefit from secular industry tailwinds below:

Semiconductors:

• Demand for semiconductors is expected to remain strong on the back of rising demand for consumer electronic products. The gradual adoption of 5G technologies and artificial intelligence (AI) should further bolster chip demand. In addition, China intends to step up support for its domestic semiconductor industry as part of the 14th Five Year Plan (2021–2025), as the nation aims to raise its self-sufficiency in integrated circuits (IC).

Electric vehicle batteries:

• As the world’s largest electric China’s target of requiring all new car sales to be either fully-electric or hybrid by 2035.

Agriculture:

• The Chinese Government will be foreign uncertainties. This could positively impact demand for animal feed and agro chemicals.

1Q21F Preview for Jiutian Chemical: 28-fold Y-o-y Jump in Core Net Profit

• We expect another quarter of record profits for Jiutian Chemical in 1Q21F, with core net mainly due to ASP increases. We also expect a sequential expansion in Jiutian Chemical’s profit spread, as ASP hikes in 1Q outpace raw material cost increases.

Reiterate ADD and Target Price of S$0.135

• Reiterate ADD as we expect Jiutian Chemical to enjoy strong earnings in 1H21F riding on the cyclical uptrend of MA/DMF prices.
• Valuations are attractive, in our view, as Jiutian Chemical trades at P/E (20% discount to SGX-listed peer China Sunsine (SGX:QES)).
• Potential catalysts include continued uptrend and higher raw material cost pressures.

Source: CGS-CIMB Research - 12 Apr 2021