Lotte Chemical Pakistan Limited

Lotte Chemical Pakistan Limited (PSX: LOTCHEM) is a manufacturer and supplier of Purified Teraphthalic Acid (PTA). The company was incorporated in Pakistan in 1998. With its state-of-the-art manufacturing capacity located at Port Qasim, Karachi, LOTCHEM has the capacity to deliver over 500,000 tons of PTA annually. LOTCHEM is the core supplier of the domestic Polyester and PTA industries besides exporting to Asia and Middle-east region. It was incorporated in Pakistan in 1998. Its parent company LOTTE is Korea’s one of the largest conglomerate with over 20 businesses in 30 countries across the globe.

Pattern of Shareholding

As of December 31, 2022, LOTCHEM has an outstanding share capital of 1.5 billion shares which are held by 15,655 shareholders. LOTTE Chemical Corporation, with an ownership over 75.01 percent shares, is the largest shareholder of LOTCHEM followed by local general public holding 9.97 percent shares. The remaining shares are held by other categories of shareholders.

Financial Performance (2018-2022)

There is nothing that could stop LOTCHEM’s topline and bottomline from expanding in the last few years except in 2020. The company’s margins which registered reasonable growth in 2019 drastically fell in 2020, only to get back on the track in the subsequent year. 2023 witnessed LOTCHEM’s margins reaching its optimum level. The detailed performance review of each of the years under consideration is given below.

In 2019, LOTCHEM’s topline grew by 5 percent year-on-year. The company’s sales and production volumes dropped by 3 percent and 6 percent respectively in 2019 (see the graph of production & sales volume). US-China trade war resulted in constricted demand of PTA in the global market. Domestically, the demand showed improvement during the 1HCY19; however the introduction of tax reforms in the budget resulted in lackluster economic activity in the country and the overall industry volumes declined by 12 percent year-on-year to clock in at 690 KT. Moreover, Pak Rupee depreciation also resulted in depressed economic activity. The company’s gross profit improved by 9 percent year-on-year in 2019 with GP margin picking up from 12.86 percent in 2018 to 13.27 percent in 2019 on account of increased prices. Distribution and administrative expense inched up by 2 percent and 9 percent respectively in 2019 mainly on account of increased payroll expense. Higher profit related provisioning resulted in 16 percent taller other expense incurred by LOTCHEM in 2019, however, it was offset by 139 percent year-on-year in other income primarily on account of higher interest income. Operating profit improved by 18 percent year-on-year in 2019 with OP margin climbing up from 11.94 percent in 2018 to 13.36 percent in 2019. Finance cost registered 12 percent rise in 2019 due to higher discount rate and higher interest on lease liability. Net profit progressed by 21 percent year-on-year in 2019 to clock in at Rs.5360.37 million with EPS of Rs.3.54 versus EPS of Rs.2.93 in 2018. NP margin also picked up from 7.72 percent in 2018 to 8.85 percent in 2019.

The decelerated economic activity due to lockdown imposed on account of the outbreak of COVID-19 across the globe took its toll on the PTA demand which showed a downward trajectory throughout 2020 with international prices falling to a 20-year low level. Same was the case in the domestic market where demand arrest caused the company to shut down its plant for over 54 days during 2020. Production and sales volumes were also 14 percent and 12 percent lesser respectively than that in 2019. The overall domestic demand also eroded by 10 percent in 2020 to clock in at 621 KT. LOTCHEM’s gross profit fell by 67 percent year-on-year with GP margin clocking in at 6.8 percent against 13 percent in the previous year. Administrative and distribution expense grew by 35 percent and 3 percent respectively in 2020 in line with inflation; however, other expense fell owing to low workers’ profit participation fund on account of low profitability. Other income grew on the back of discounting of GIDC provision, however, OP margin dropped from 13 percent in 2019 to 8 percent in 2020. The company’s operating profit declined by 61 percent year-on-year in 2020 with OP margin marching down to 8.08 percent. Finance cost significantly dropped during 2020 on the back of net exchange gain earned during the year. The bottomline of LOTCHEM plunged by 60 percent year-on-year in 2020 to clock in at Rs. 2125 million with NP margin of 5.45 percent and EPS of Rs.1.4.

The misfortune that hit LOTCHEM in 2020 proved to be transitory as the company made a massive topline growth of 72 percent year-on-year in 2021. During the year, PTA demand considerably improved as major global economies witnessed resurgence post COVID-19. Global PTA prices also improved at the start of the year, however stagnated as COVID-19 cases reappeared in South East Asia and Indian continent. The prices also fell due to the set up of new PTA capacity in China which led to ample supply in the region. The domestic polymer industry posted robust 25 percent rise in demand to clock in at 776 KT. The production and sales volume of 520,047 tons 519,079 tons respectively achieved by the company in 2021 were the highest since the commencement of its operations in 1998. Production and sales volume boasted a year-on-year growth of 25 percent and 21 percent respectively in 2021. Resurgence in demand coupled with better prices in the domestic PTA market led the company achieve a GP margin of 11 percent during the year with gross profit multiplying by 187 percent in 2021. Distribution expense escalated by 12 percent in 2021 on account of higher payroll expense as well as increased outward freight and handling charges. Conversely, administrative expense fell by 14 percent in 2021 as the company didn’t make any charitable contributions during the year. Other expenses massively grew during the year owing to higher workers’ profit participation and workers’ welfare fund on account of greater profit. Other income shrank on account of unwinding of GIDC provision during the year. Despite low discount rate during the year, finance cost of LOTCHEM grew by 549 percent in 2021 due to exorbitant foreign exchange loss during the year. This somehow diluted the bottomline growth which otherwise would’ve grown by much greater proportion. LOTCHEM’s net profit enlarged by 118 percent in 2021 to clock in at Rs.4642 million with EPS of Rs.3.07 and NP margin of 6.9 percent.

LOTCHEM witnessed another year of favorable outcomes as its topline boasted year-on-year growth of 49 percent in 2022. However, the topline growth came on the heels of upward revisions in prices while its production and sales volume dropped by 9 percent and 10 percent respectively in 2022. Internationally, the demand grew initially; however, continual lockdowns imposed in China on account of COVID-19 squeezed the demand later on. Domestic market also witnessed robust growth in the 1HCY22 on account of post pandemic demand recovery and anti-dumping duty imposed on PSF imports from Taiwan, Thailand and Indonesia. However, the demand eroded in the latter half of the year due to curtailed utility supply, inland logistics disrupted due to devastating floods and high inflation. Overall domestic demand contracted by 6 percent in 2022 to clock in at 729 KT. Improved pricing culminated into a GP margin of 17.8 percent, never witnessed by the company before. Gross profit also witnessed 135 percent rise in 2022. Distribution and admin expense followed an overall inflationary trend; however other expense grew extraordinarily on the back of greater workers’ profit participation and welfare fund owing to high profits during the year. Other income grew by 86 percent year-on-year on the back of higher interest income on financial assets as high discount rate helped LOTCHEM mint its financial assets during the year. LOTCHEM’s operating profit mounted by 137 percent in 2022 with OP margin reaching its optimum level of 17.66 percent. Finance cost presented an ugly picture and grew by over 100 percent during 2022 on the back of significant exchange losses incurred by the company during the year. Then imposition of super tax also nibbled away some of the gains. Yet, the company was able to post net profit of Rs.10,118 million in 2022, up 118 percent year-on-year. EPS clocked in at Rs.6.68 while NP margin stood at 10 percent.

Recent Performance (9MCY23)

LOTCEHM faced a challenging year in 2023, with 22 percent year-on-year decline in its revenue during the first nine months of the year. The last time the company experienced a drop in its topline was in 2020. During 9MCY23, high energy cost, soaring inflation as well as bleak politico-economic backdrop dented the industrial activity, resulting in low PTA demand even in the 3QCY23 which is considered to be the peak season for the textile industry. Moreover, import restrictions imposed by the GoP resulted in shortages of raw materials, resulting in reduced production and plant shutdowns. This resulted in 33 percent thinner gross profit recorded by the company during 9MCY23 with GP margin falling down to 15.86 percent versus 18.63 percent during the same period last year. Distribution and administrative expense spiraled by 11 percent and 10 percent respectively during 9MCY23 due to hiking inflation. The company booked lower provisioning for WWF and WPPF which curbed other expense by 30 percent during 9MCY23. Higher interest income, indenting commission as well as gain on disposal of fixed assets during the period drove up other income by 32 percent during 9MCY23. Operating profit slipped by 29 percent year-on-year during 9MCY23 with OP margin marching down to 16.82 percent versus 18.51 percent during 9MCY22. Finance cost fell by 24 percent year-on-year during the period as a result of lower exchange loss as local currency gained some stability. Net profit diminished by 40 percent year-on-year during 9MCY23 to clock in at Rs.4840.278 million with EPS of Rs.3.2 versus EPS of Rs.5.35 during the same period last year. NP margin also weakened to clock in at 7.8 percent during 9MCY23 versus 10.2 percent during 9MCY22.

Future Outlook

PTA off-take is expected to further tighten due to weak demand from Textile and PET sector as inventories of raw materials and finished goods have piled up lately due to decline in export orders from Europe coupled with energy crisis and challenging socioeconomic environment in Pakistan which is forcing them to adopt a cautious approach in capacity utilization. This coupled with lower international PTA prices due to record high output from China will constrict the margins of the industry. LOTCHEM operates on non-cost model and its prices are linked to the international market, hence it can’t transfer the impact of gas price hike to its customers. Moreover, curtailed supply of utilities, inflationary pressure and exchange losses owing to sharp depreciation of Pak Rupee will also play their due role in suppressing the bottomline and margins of LOTCHEM.