DBSVickers Report - 15 Jan 2008

Jiutian Earnings visibility has reduced

Story: Together with the announcement of a further 24.5% stake acquisition in a new methanol plant to enhance integration, Jiutian also provides an operation update, indicating a weak 4Q07 owing to high methanol cost and slower ramp-up of its new DMF plant. Besides, our industry observation also suggests weak DMF prices since late 2007, which rings warning bells on our DMF price assumption.

Point: We have adjusted our earnings estimates down by 40%, 48%, and 23% for 2007, 2008 and 2009, respectively. This is to account for potential DMF price weakness, and slower than expected capacity ramp up at its new plant in 4Q 2007. Our 52% EPS CAGR estimate in FY07-09 is now based on more conservative DMF-methanol price spread assumption of RMB2800 per tonne, which is at the lower end in the past two years.

Relevance: Our TP is down to S$0.42, with reduced earnings estimates, and using a lower valuation metric of 12x FY08/09 earnings (vs. 15x previously) to reflect a more challenging operating outlook. Still, we believe that the potential earnings risk over volatile DMF prices have already been factored into our new earnings estimates, and we are maintaining BUY call on the counter. Future earnings catalyst could come from positive updates on its M&A activities.