KGI Securities views Jiutian Chemical Group as an “excellent short term trading opportunity” after it reported a RMB32.6 million ($6.4 million) profit in 2Q20, even as revenue declined 6.6% y-o-y.
This was in stark contrast to a year ago, when it recorded a RMB 7 million loss. Analyst Joel Ng said the stellar performance was mainly due to lower raw material prices, resulting in a 140% y-o-y increase in gross profit.
“We see Jiutian as a good trading opportunity over the next 3 months, riding on strong tailwinds of favourable supply-demand of its chemical products,” he says.
Gross profit increased by RMB31.2 million mainly due to a 20.5% decrease in purchase price per ton of Methanol, one of the key raw materials, resulting in lower costs of production for dimethylformamide (DMF) and methylamine in 2Q20.
As a result, gross profit margins increased from 8% in 2Q2019 to 19% in 2Q20, and profit before tax increased by RMB46.5 million compared to a loss before tax of RMB4.7 million in the same
Ng does not have a formal rating on Jiutian, but estimates a fair value of at least 6.8 cents, based on 8x earnings per share (EPS) of RMB 4.320 cents, or 0.86 Singapore cents.
He thinks this level of earnings is possible as 2H20 will likely be more favourable than 2Q20, as it rides on higher average selling prices (ASP) and lower raw material costs.
In a company update released on August 24, Ng noted the price of dimethylformamide (DMF) has surged more than 30% since mid-June, when DMF was trading below RMB4,800 per ton.
A key reason is that another major manufacturer of DMF in China had to close its plant due to government policy, which would mean a loss of 160,000 tons per year supply.
In addition to higher utilisation and ASP in 2H20, the group is also set to benefit further from the drop in raw material costs. The price of methanol, one of the key ingredients for the production of DMF and Methylamine, has been on a downtrend, due partly to lower crude oil prices.
As such, Ng thinks Jiutian’s 2020/2021 earnings can be sustained at around RMB79-83million based on a 15% gross profit margin and 6.5% net profit margin.
These levels of margins were achieved in 2017 when ASP rose from RMB4,000 per ton to RMB 6,000 per ton. KGI’s full-year estimates are still below the annualised 2Q20 earnings of RMB 32.7 million, and based on management’s comments, they view the operating environment to be conducive for the rest of the year.
The analyst said the company “rides the perfect operating environment of higher ASPs, lower raw material costs, and higher utilisation rates going into the second half of 2020”, but warns of risks should the ASP of its two main products, DMF and methylamine decline.
As at 1.51pm, shares of Jiutian Chemical were trading at 5.6 cents, 21.74% higher than its last close of 4.6 cents.