DBS do not expect the 2nd DMF plant to contribute to revenue and a similar loss in 4Q08 for the group is highly likely. As such, they cut their FY08 net profit estimate by 72% to RMB10m. In their view, the deteriorating global economy and slowdown in domestic growth would drag demand for DMF and exacerbate the oversupply situation. They now expect the oversupply of DMF to persist into '09 instead of a recovery through industry consolidation. On the back of such bearish outlook, they trim their ASP and sales volume assumptions and slash their FY09 sales and profit by 37% and 56% respectively.
Given the lacklustre DMF market, their fair value on Jiutian is reduced to $0.03 from $0.15, based on 4x revised FY09 earnings (vs 9x previously).
For re-rating, Jiutian will need to deliver a few consecutive quarters of improving results. The formalization of Yong Mei’s investment into Jiutian’s methanol project and plans for asset injection into Jiutian could also be key catalysts for Jiutian.
Jiutian reported a net loss of RMB3.2m for 3Q08. This is slightly better than expected. The loss is largely due to:
- Shutdown of the Group's second DMF plant in Anyang Jiuyang resulted in RMB9.2m of unabsorbed factory costs (comprising largely depreciation of the plant and fixed wages) incurred in 3Q08 and included in the administrative expenses;
- The one-off expense of RMB2.1m in relation to a back-charge of value-added tax imposed by the tax authority over a dispute on the treatment of third party logistic costs for the delivery of goods to customers in FY06 and FY07;
- Higher business activities from operation of the storage and distribution facility in Changzhou and the operation of the second DMF plant in Anyang Jiuyang;
- Pre-operating expenses (comprising largely of amortization of land use rights, land taxes and wages) incurred for the new 250,000 tonnes methanol plant in Anyang Jiulong under construction of RMB2.7m;
- Higher one-off professional fees incurred by the Group on projects undertaken and;(f) Higher finance costs arising from increase in bank loans and interest rates to finance the expansion plans and working capital.
Jiutian said that the first DMF plant of 30k tpa capacity in Anyang Jiutian operated below capacity as it faced shortages in the supply of key raw materials, namely water gas and steam which resulted in lower production of a key feedstock, methanol which in turned affected the production volumes for methylamine and DMF.
Average selling price of DMF was RMB6,673/tonne in 3Q08 whilst ASP of methanol was RMB3,078 /tonne in 3Q08. In line with the previous quarter's guidance, the second DMF plant is expected to operate well below its operational capacity until the Group completes construction of its 250k tpa tonne methanol facility in Anyang Jiulong, which is scheduled for completion by 1Q09.
With the anticipated completion of the methanol facility, Jiutian will be able to fully integrate its operations and will be better equipped to control its operating costs. Its results could start improving from 1Q09 or 2Q09 onwards, so I recommend a Accumulate on the stock.
