Limited industry supply is elevating prices for Jiutian Chemical Group’s products, and the squeeze could benefit the company well into next year, says UOB Kay Hian Research analyst Clement Ho.

In a May 11 note, Ho is maintaining “buy” on Jiutian with a higher target price of 18 cents from 16.8 cents previously. The new target price represents an upside of 81.8%.

Jiutian’s 1QFY2022 strong net profit of RMB201.1 million ($41.52 million), up 122.7% y-o-y, came from higher revenue of RMB772.3 million, up 75.8% y-o-y, as average selling prices (ASPs) for dimethylformamide (DMF) and methylamine (MA) remained elevated.

Ho notes a “stark improvement” in 1QFY2022 financials. Operating cash flow in 1QFY2022 reversed into positive territory at RMB29.4 million, compared to negative RMB73.2 million this time last year.

This is despite a build-up of inventories arising from movement restrictions for delivery of finished goods, he adds.

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The strong set of results came amid the seasonally slow quarter, as well as lower production volume in January due to Covid-19 related restrictions affecting logistics.

Jiutian has declared an interim distribution per share (DPS) of 0.75 cents, 114% higher than 0.35 cents in 1QFY2021.

“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,” writes Ho.

Prices of DMF and MA spiked to RMB16,166/tonne (up 73% y-o-y) and RMB20,055/tonne (up 116% y-o-y) respectively.

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DMF and MA prices have been holding at elevated levels since May-June 2020. This is due to the surge in demand for products from downstream users, such as electric vehicle batteries, electronics, pharmaceutical and animal feed, says Ho.

In addition, 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.

The elevated ASPs are sustainable, says Ho. “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 nine to 12 months for trials and further approvals, before the new capacity can come on-stream to the market.”

Ho also points to a 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, he adds.

“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, and we expect 2022 financials to reflect a significant scaleup in gross margin and operating leverage,” writes Ho.

Meanwhile, CGS-CIMB Research analysts Kenneth Tan and Ong Khang Chuen are maintaining “add” on Jiutian with a raised target price of 17 cents, up from 15 cents previously. This is lower than UOBKH’s 18 cents target price.

“Barring any significant worsening of Covid-19 resurgence in China, Jiutian anticipates its production operations to remain smooth, and product prices to remain stable for the remainder of FY2022F,” write Tan and Ong in a May 5 note.

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They add: “We note that input costs have also come off its peak in March. Methanol is at RMB2,300/tonne (down 10% m-o-m) and coal is at RMB1,200/tonne (down 25% m-o-m), and hence believe near-term profit spreads should still be favourable for Jiutian,” write the analysts.

Tan and Ong also note that Jiutian has “significant” net cash of RMB718 million (approximately 80% of its current market cap) as at end-1QFY2022, “which should support higher FY2022F dividends and potentially share buybacks”.

As at 10.17am, shares in Jiutian Chemical are trading 0.1 cent lower, or 1% down, at 9.9 cents

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