Broker's take: UOB Kay Hian initiates coverage on Jiutian Chemical with 'buy'

UOB Kay Hian initiated coverage on chemical producer Jiutian Chemical Group with a "buy" rating, and a target price of 16 Singapore cents, in a research note published on Tuesday.

Jiutian shares traded at 10 cents per share, up 0.3 cent or 3 per cent from the previous close, as at 3.57pm on Wednesday.

In the research note, analyst Clement Ho said that investors may have overlooked Jiutian's earnings potential, given the upswing in average selling price of one of its products, dimethylformamide (DMF), and depressed costs of major raw materials.

Jiutian, which is located in Henan, China, produces chemicals such as DMF and methylamine.

"There has been exceptional demand for DMF, on the back of the strong industrial recovery in China following pandemic lockdowns," the analyst said. He noted that DMF has a wide range of applications including being used in the production of polyurethane, and pharmaceutical and agricultural chemical products.

On the supply front, the analyst said that Jiutian is now the second-largest producer of DMF in the world, after the closure of a production facility in Zhejiang in May this year, which removed 180,000 tonnes in annual capacity from the global supply.

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The removal of DMF production capacity may disrupt the equilibrium and cause tighter supply. This, coupled with high demand, can cause an upward squeeze on average selling prices, the analyst said.

According to the brokerage, average selling prices for DMF rose from 4,512 yuan (S$918) per tonne in Q2 to 5,927 yuan per tonne in Q3 2020. Spot prices for DMF as at Nov 3, 2020 was around 11,950 yuan per tonne.

The brokerage believes that demand and prices for industrial products manufactured in China look sustainable, as other manufacturing nations are still suffering from Covid-19.

It said that Jiutian's earnings hit an inflection point in Q2 2020, when it reported a net profit, turning around from a loss for the year-ago period. This was mainly from the lower price of methanol, its primary raw material, the analyst said. He added that it is likely for methanol costs to remain low on the back of a weak oil price environment, providing a significant boost to earnings.

The analyst also noted that investors could have a boost in confidence from Jiutian's recent share placement, which was undertaken mainly by a new base of institutional shareholders.