In-depth: FA and TA review of Jiutian Chemical

Jiutian Chemical Group Limited (“Jiutian Chemical”) is engaged in the manufacture and production of dimethylformamide (“DMF”) and methylamine (“MA”). It is involved in the processing and sale of consumable carbon dioxide and oxygen. It operates through two business divisions: DMF division, which is engaged in producing DMF as its main product and MA as its secondary product, and Gas division, which is engaged in producing consumable carbon dioxide and oxygen.

Its facilities produce a total annual manufacturing capacity of over 150,000 tons of DMF and methylamine. Separately, it also owns a storage and distribution facility in Changzhou City, which handles approximately 40,000 tons of DMF annually.

Key Statistics

DMF & MA’s Operation for Jiutian Chemical

As of 3Q FY2020, Jiutian Chemical is the world’s second-largest DMF manufacturer. The total annual tonnage of all products available for sale for Jiutian Chemical to the open market amounts to 204,000 tons. For the total production capacity of MA, it stands at 150,0000 tons per year (“MMA+DMA+TMA”).

For DMF, it is a fine chemical which has a diversified range of applications such as being a feedstock in the production of polyurethane, pharmaceutical and agriculture chemical products, as well as a universal industrial solvent that can be used as an absorbing agent.

For MA, the chemical is used for making pharmaceuticals, insecticides, paint removers, surfactants, rubber chemicals.

Past Financial Performance

For FY2019, Jiutian Chemical’s revenue declined by 21.6% year-on-year and came in at S$203.6 million. The drop in revenue was due to the decrease in both selling price and sales volume of DMF and MF. As a result of challenging market condition, the average selling price of DMF and MF was 20% and 14% lower as compared to FY2018.

On top of the declining revenue, Jiutian Chemical suffered a huge loss in FY2019 of S$53.9 million, as compared to a profit after tax of S$4.2 million in FY2018. The substantial loss was a result of material impairment for the Group's associated company, Anyang Jiujiu Chemical Technology Co., Ltd's Sodium Hydrosulfite plant.

The performance of the Plant has been impacted by a combination of economic and industry factors including China-US trade war causing a general slowdown in China’s economy, resulting in weaker demand for Sodium Hydrosulfite; and strict industry-wide environmental control policies causing unplanned stoppages, resulting in low production volume and higher production cost.

Latest 3Q FY2020 Result Highlights

For Q3 FY2020, Jiutian Chemical’s revenue came in at RMB267.00 million, a quarter-on-quarter drop of 3.4% as compared to 2Q FY2020’s figure. The drop in revenue was due to the lower capacity utilisation rate for both DMF and MA’s plant, as the Group undertakes a 20-day shutdown in September 2020.

Despite the drop in utilisation rate, the higher average selling price, lower cost of sales, distribution and finance costs has allowed Jiutian Chemical to achieve a record level of profit after tax of RMB51.3 million in 3Q FY2020.

The average selling price of DMF surged by 37.3% quarter-on-quarter to RMB6,195 per tons on back of the recovery of China’s economy gathered speed in 3Q2020, resulting in stronger demand for DMF.

Recent Corporate Action: Private Placement

On 27th October 2020, Jiutian Chemical completed the private placement of 170 million new ordinary shares at S$0.0603 per share and the total amount raised from this private placement amounts to S$10.25 million. Majority of the placement shares are taken up by institutional investors and this signals their confidence on the long-term prospects of Jiutian Chemical.

The amount raised from the placement exercise will be used to strengthen the Group’s financial position and finance its general working capital which might include investments in asset enhancement and improvement.

Jiutian’s Non-Executive and Non-Independent Chairman, Han Lianguo, said, “We welcome the investors who took part in the Placement as shareholders in the Company, and thank them for supporting the Placement. We would also like to take this opportunity to thank all shareholders for riding with us through this challenging Covid-19 pandemic and persevering through to the current recovery in China’s economy. Going forward, the Group will be very focused in maximising returns from its current stable of assets, while constantly looking out for expansion and synergistic investment opportunities that are financially attractive and sustainable.”

Price Trends for DMF

From the graph above, we can see that the market price of industry grade DMF has been on a strong uptrend since July 2020. At the start of 2020, the average selling price stands at RMB 4810 per tons and hit a low of RMB 4610 per tons in April 2020 as the COVID-19 pandemic has caused China’s economic activities to grind to a halt, hence resulting in the decrease in demand for DMF.

However, the DMF market began to face with some shortage as Zhejiang Jiangshan Chemical, who was once the second-largest DMF producer in the world, shut its production facility in May 2020, pulling out 180,000 tons of annual capacity. This resulted in a supply shortage for DMF and catapulted Jiutian into the second spot with its annual capacity of 150,000 tons of DMF.

With Zhejiang Jiangshan Chemical pulling out, the average selling price of DMF has slowly crept from May 2020 onwards. Coupled with the resumption of economic activities in China, it reignites the demand for DMF. This translates into a sharp rise in the market price of DMF to RMB 8020 per tons in October 2020.

Total Addressable Market for DMF

According to a report by Research And Markets, the global market size for DMF is estimated to be at US$669.5 Million in 2020. The DMF market is expected to grow at a Compound Annual Growth Rate (“CAGR”) of 2.9% from 2020 to 2027 and reach a market size of US$820.6 million by 2027.

In particular, China, the world second-largest economy, is forecasted to have an DMF market size of US$168.3 million by 2027, with a CAGR of 5.5% through 2027.

With China’s market size of DMF is expected to grow faster than the benchmark, Jiutian Chemical could stand to benefit from this positive trend.

Technical Analysis for Jiutian Chemical

Based on the weekly chart for Jiutian Chemical, after a strong run-up from August till November, its share price suffered a strong sell down with high volume in the 2nd week of November. From there onwards, its share price has been on a slow downtrend as the volume is decreasing by the week.

This can be confirmed from the Moving average convergence divergence (“MACD”) histogram, which has turned red and is declining by the week. Furthermore, the impending crossover of the MACD might signals further weakness ahead. For the Relative Strength Index (“RSI”), it is currently at 59 and has fallen from the overbought region and is on a downtrend.

The next support will be S$0.066 and if the price continues to dip and reaches the 20 Day Moving Average, we might see a technical rebound in the share price.

Conclusion & Management Outlook

Despite the heavy losses incurred in FY2019, Jiutian Chemical's financial performance has taken a positive turn with profit being registered for its 9M FY2020 result. With the strong industry tailwinds, Jiutian Chemical should record a better financial performance for FY2020.

Jiutian Chemical’s Chairman, Han Lianguo, said, “We are pleased to see a continuing and significant rise in our quarterly net profits over the first nine months of FY2020. The strong results of 3Q2020, achieved despite a shorter operating quarter arising from a 20-day shutdown for routine maintenance in September 2020, are due to the continuing recovery of China’s economy, and a surge in demand for our main products of DMF and methylamine from downstream customers who in turn are experiencing strong growth in both local and export markets for their products.

We are also pleased to see a rising demand for our products from users in the lithium batteries and semiconductor sectors, which are experiencing strong and sustainable growth in China. Going forward, with our plants fully serviced in September 2020, we will focus on continuing to operate efficiently, and moving our utilisation rates higher to take advantage of the current favourable operating margins of our main products.”

Under ShareInvestor’s consensus, this company has a BUY recommendation with a mean target price of $0.160.

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