3Q07: ASP in moderate pressure
Jiutian’s 3Q07 revenue came in at Rmb56m, representing an 11.6% yoy decline,
and its net profit fell 27.0% yoy to Rmb14m. The drop in revenue was primarily
the result of falling average selling price (ASP) of Jiutian’s major products, and
an around 7-12 days reduction in effective production caused by maintenance
shutdown of facilities in July. The more severe contraction in net profit was
because that Jiutian has started to pay income tax since the end of FY.
Weak ASP – temporary for 3Q07, already recovered. The ASP of Jiutian’s
major product, DMF, went down by 10% to Rmb5,880 per tonne in 3Q07 from
Rmb6,487 per tonne in 3Q06. The decline in price was due in a large part to the
temporarily over-supply of DMF relative to MDI, which together with DMF, are
two key raw materials in the production of PU. The shortfall in MDI was in turn
a result of the maintenance shutdown of the 120 kilo tonne production line in
September for about 16 days by Yantai Wanhua (600309 CH), a leading MDI
provider in China. The ASP has already recovered to around Rmb6,100 per
tonne, similar to that for 2Q07.
DMF price under moderate pressure for near-term. According to the
management, the market for Jiutian’s downstream products, PU, is growing at
a rate of 20%. While the market for DMF is witnessing a powerful capacity
expansion recently. Jiutian enlarged its annual capacity by 120 kilo tonnes in
4Q07, and one of its major competitor, Shandong Hualu Hengsheng (600426
CH), launched an additional 80 kilo tonnes production line in July 2007. We are
thus concerned about that the DMF sector might suffer from over-capacity in the
near-term, and believe this to be a main reason that ASP of DMF retreated from
its peak of Rmb6,400-6500 to Rmb6,100 at current stage.
Valuation. We cut earnings forecasts for FY07 and FY08 by 17.7% and 17.9%
to Rmb97.5m and Rmb143.0m respectively to reflect the impact of lower ASP.
Our DCF fair price is also cut to S$0.606 (from S$0.64), maintain BUY.
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