Lotte Chemical Pakistan Limited

Lotte Chemical Pakistan Limited (PSX: LOTCHEM) manufactures and sells Pure Telephthalic Acid (PTA) that is used in producing Polyester fiber, Polyester filament yarn, Polyester film and Polythylene Terephthalate (PET). The company was established in 1998.

Shareholding pattern

As at December 31, 2021, 75 percent shares are owned by the associated companies, undertakings and related parties. This category solely includes Lotte Chemical Corporation. The local general public owns over 12 percent shares, followed by almost 10 percent in “others”. The directors, CEO, their spouses and minor children own less than 1 percent share in the company, while the remaining 3 percent shares are with the rest of the shareholder categories.

Historical operational performance

The company has witnessed some years of contracting topline, while profit margins, in the last six years, reached a peak in CY19, declined the following year, before rising again in FY21.

In CY18, revenue increased by 55 percent to reach Rs 57.4 billion in value terms. This was largely attributed to higher average PTA price per tonne. In addition, cost of production fell to 87 percent of revenue, compared to nearly 97 percent of revenue in the previous year, thus, gross margin improved significantly to 12.9 percent for the year. With some support from other income as well, the impact of higher revenue also trickled to the bottomline that saw a net margin of 7.7 percent while bottomline stood at its highest thus far at Rs 4.4 billion.

Growth revenue in CY19 was relatively subdued at 5.5 percent. However, in value terms it reached its highest thus far of Rs 60.5 billion. This was despite a decrease in volumes. The higher revenue was a result of a higher average PTA price per tonne due to currency devaluation against the US dollar. With a marginal reduction in cost of production to 86.7 percent of revenue, gross margin also improved only slightly to 13.27 percent. Other income, on the other hand, grew to Rs 1.2 billion from Rs 514 million in the previous year, thus, increasing net margin to 8.8 percent while net profit at Rs 5.36 billion was at an all-time high. Other income rose notably on the back of bank deposits due to increase in average cash surplus levels.

In CY20, revenue fell drastically by 35.6 percent with a 14 percent reduction in production and 12 percent decrease in sales volumes. This was attributed to the outbreak of the Covid-19 pandemic that resulted in plant operations being shut for nearly two months in the second quarter of the period as demand reduced. Additionally, PTA prices also decreased. As a result, gross margin almost halved year on year to 6.8 percent. But with a considerable decrease in finance and taxation expense along with a rise in other income to Rs 1.4 billion, coming from interest income and discounting of GIDC provision, the decrease in net margin was somewhat curtailed at 5.45 percent.

In CY21, topline grew incredibly by over 72 percent to reach its highest of Rs 67 billion. During the period, the company also witnessed the largest growth in production by 25 percent and 21 percent in sales volumes. The higher revenue also reflected in improved gross margin that was recorded at 11.3 percent. However, the rise in net margin was not as pronounced at 6.9 percent due to a reduction in other income that had been providing significant support to the bottomline in the last two years specifically. Moreover, finance and taxation expense were also higher than usual. Finance expense escalated primarily due to a net exchange loss of Rs 732 million. However, in value terms, bottomline stood at its second-highest since CY11, at Rs 4.6 billion.

Quarterly results and future outlook

Revenue in the first quarter of CY22 was higher by 38 percent year on year. However, production and sales volumes, both were lower year on year by 15 percent and 13 percent, respectively. Production was impacted due to planned overhaul of the plant in February and March 2022 while sales volume was impacted due to lower product availability. Despite this, revenue improved due to a rise in PTA prices. This was attributed to bullish trend in the upstream markets. In the local market, the industry saw a strong demand due to peak season. Moreover, demand was also encouraged due to anti-dumping duty on PSF imports from Taiwan, Indonesia, and Thailand.

On the other hand, cost of production was lower year on year at over 80 percent of revenue, compared to close to 85 percent in the same period last year. Thus, gross margin was higher at 19.7 percent versus 15.4 percent in 1QCY21. This also reflected in the net margin that was also higher at 12.9 percent compared to 11 percent in 1QCY21.

The second quarter is to benefit from higher consumption in the PET sector due to the month of Ramadan. In addition, the polyester domestic market is also expected to perform well due to demand coming from the textile sector.