Lotte Chemical Pakistan Limited (PSX: LOTCHEM) is a manufacturer and supplier of Purified Terephthalic Acid (PTA). The company was incorporated in Pakistan in 1998. LOTCHEM is the core supplier of the domestic Polyester and PTA industries besides exporting to Asia and the Middle East region. Its parent company LOTTE is Korea’s one of the largest conglomerates with over 20 businesses in 30 countries across the globe.
Pattern of Shareholding
As of December 31, 2023, LOTCHEM has an outstanding share capital of 1.5 billion shares which are held by 14,861 shareholders. LOTTE Chemical Corporation is the largest shareholder of LOTCHEM with 75.01 percent shares followed by the local general public holding 10.28 percent shares. The remaining shares are held by other categories of shareholders.
Financial Performance (2019-2023)
Except for a year-on-year drop in 2020 and 2023, LOTCHEM’s top line and bottom line ascended in all the years under consideration. The company’s margins which registered reasonable growth in 2019 drastically fell in 2020, only to get back on track in the subsequent two years. LOTCHEM’s margins reached their optimum level in 2022 followed by a drop in 2023. The detailed performance review of the period under consideration is given below.
In 2019, LOTCHEM’s topline grew by 5.47 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). The US-China trade war resulted in constricted demand for 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, the Pak Rupee depreciation also resulted in depressed economic activity. The company’s gross profit improved by 8.81 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 expenses inched up by 1.96 percent and 9 percent respectively in 2019 mainly on account of increased payroll expenses. Higher profit-related provisioning resulted in 15.86 percent taller than other expenses incurred by LOTCHEM in 2019. However, it was offset by a 138.64 percent year-on-year increase 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 costs registered a 12.28 percent rise in 2019 due to higher discount rates and higher interest on lease liability. Net profit progressed by 20.94 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 recorded 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 the lockdown imposed on account of the outbreak of COVID-19 across the globe took its toll on the PTA demand which followed a downward trajectory throughout 2020. International prices fell to a 20-year low level in 2020. The same was the case in the domestic market where demand arrest caused the company to shut down its plant for over 54 days in 2020. Production and sales volumes were also down by 14 percent and 12 percent respectively 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 67.10 percent year-on-year in 2020 with GP margin clocking in at 6.78 percent as against the GP margin of 13 percent recorded in the previous year. Administrative and distribution expenses grew by 35.22 percent and 2.88 percent respectively in 2020 in line with inflation. Other expenses fell by 63.30 percent in 2020 owing to low provisioning done for workers’ profit participation fund on account of low profitability. Other income grew by 15.70 percent in 2020 on the back of the discounting of GIDC provision. The company’s operating profit declined by 61 percent year-on-year in 2020 with OP margin marching down to 8.08 percent. Finance costs significantly dropped during 2020 on the back of net exchange gains earned during the year. The bottom line of LOTCHEM plunged by 60.35 percent year-on-year in 2020 to clock in at Rs. 2125 million with an NP margin of 5.45 percent and EPS of Rs.1.4.
The company made a massive topline growth of 72.37 percent year-on-year in 2021. During the year, PTA demand considerably improved as major global economies witnessed a 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 the 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 a robust 25 percent rise in demand to clock in at 776 KT. The production and sales volume of 520,047 tons and 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 enabled the company to achieve a GP margin of 11.29 percent with gross profit multiplying by 186.94 percent in 2021. Distribution expenses escalated by 12.15 percent in 2021 on account of higher payroll expenses as well as increased outward freight and handling charges. Conversely, administrative expenses fell by 14.16 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 provisioning done for workers’ profit participation and workers’ welfare fund on account of higher profitability. Other income shrank on account of the unwinding of GIDC provisions during the year. Despite the low discount rate during the year, the finance cost of LOTCHEM grew by 549.33 percent in 2021 due to exorbitant foreign exchange loss incurred during the year. This somehow diluted the bottom line growth which otherwise would’ve grown by a much greater percentage. LOTCHEM’s net profit enlarged by 118.45 percent in 2021 to clock in at Rs.4642 million with EPS of Rs.3.07 and NP margin of 6.91 percent.
LOTCHEM witnessed another year of favorable outcomes as its topline boasted year-on-year growth of 49.28 percent in 2022. However, 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. The 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, and 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 in a GP margin of 17.78 percent in 2022, never witnessed by the company before. Gross profit also registered a 135.12 percent rise in 2022. Distribution and admin expenses followed an overall inflationary trend; however other expenses grew extraordinarily on the back of greater provisioning done for workers’ profit participation and welfare fund owing to high profit registered during the year. Other income grew by 85.93 percent year-on-year in 2022 on the back of higher interest income on financial assets as a high discount rate helped LOTCHEM mint its financial assets during the year. LOTCHEM’s operating profit mounted by 137.28 percent in 2022 with OP margin reaching its optimum level of 17.66 percent. Finance costs 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 a net profit of Rs.10,118.47 million in 2022, up 117.98 percent year-on-year. EPS clocked in at Rs.6.68 while NP margin stood at 10 percent in 2022.
2023 was a challenging year for LOTCHEM as its topline eroded by 18.6 percent year-on-year. Due to weaker demand and unavailability of raw materials on account of import restrictions, the company had to shut down its plant twice during the year. Its production and sales volume plummeted by 30 percent and 34 percent respectively in 2024 (see the graph of production and sales volume). During the year, high energy costs, soaring inflation, elevated cost of borrowing as well a bleak politico-economic backdrop dented the industrial activity, resulting in low PTA demand even in the 2HCY23 which is considered to be the peak season for the textile industry. This resulted in 42.52 percent thinner gross profit recorded by the company during 2023 with GP margin falling down to 12.55 percent. Distribution and administrative expenses spiraled by 15.40 percent and 8.61 percent respectively during 2023 due to hiking inflation. The company booked lower provisioning for WWF and WPPF which curbed other expenses by 22.31 percent during 2023. Higher interest income on bank deposits drove up other income by 39.46 percent in 2023. Operating profit slipped by 37.62 percent year-on-year in 2023 with OP margin marching down to 13.54 percent. Finance cost fell by 21.20 percent year-on-year in 2023 due to lower exchange loss as local currency gained some stability. Net profit diminished by 49.82 percent year-on-year in 2023 to clock in at Rs.5077.654 million with EPS of Rs.3.35 and NP margin of 6.22 percent.
Recent Performance (9MCY24)
During 9MCY24, net sales of LOTCHEM grew by a staggering 43.2 percent year-on-year. The sales volume of LOTCHEM in the 3QCY24 clocked in at 104,484 tons, 27 percent higher when compared to 3QCY23 on account of lower downstream demand. Persistent high energy costs which dented the economic activity and the availability of cheaper imported alternatives didn’t allow the company to match its prices with the cost pressure. This resulted in a 48.97 percent dent in gross profit in 9MCY24 with GP margin drastically falling down from 15.86 percent in 9MCY23 to 5.65 percent in 9MCY24. Higher production and sales volume coupled with inflationary pressure resulted in a 30.75 percent and 17.55 percent hike in distribution expense and administrative expense respectively in 9MCY24. The company also incurred increased handling charges during the period due to higher export sales. Lower provisioning for WWF and WPPF resulted in 52.93 percent lower other expenses in 9MCY24. Other income also slid by 47.4 percent in 9MCY24 primarily due to lower income on TDRs. This was because the company significantly curtailed its short-term investments during the period to save up on finance costs by making lesser borrowings. Operating profit shrank by 52.37 percent in 9MCY24 with OP margin falling down to 5.6 percent from OP margin of 16.82 percent recorded in 9MCY23. Lower exchange loss and lesser borrowings resulted in 54.78 percent thinner finance cost in 9MCY24. LOTCHEM’s net profit dived by 45 percent to clock in at Rs.2661.597 million in 9MCY24 with EPS of Rs.1.76 and NP margin of 3 percent. This was against the EPS of Rs.3.2 and NP margin of 7.8 percent recorded during the same period last year.
Future Outlook
PTA off-take is expected to further tighten due to weak demand from the Textile and PET sectors on account of the energy crisis and also because the peak season of both Textile and PET industries has come to an end. This coupled with lower international PTA prices due to superfluous supply will constrict the margins of the industry. LOTCHEM operates on a non-cost model and its prices are linked to the international market, hence it can’t transfer the impact of gas price hikes to its customers. This will suppress the bottom line and margins of LOTCHEM.