Lotte Chemical Pakistan Limited

Lotte Chemical Pakistan Limited (PSX: LOTCHEM) was established in 1998. It principally manufactures and sells Pure Terephthalic Acid (PTA) used in producing Polyester fiber, Polyester filament yarn, Polyester film and Polythylene Terephthalate (PET). Thus, it makes LOTCHEM stand at the core of polyester chain in Pakistan.

Shareholding Pattern

Lotte Chemical Pakistan Limited is majorly owned by its associated company; Lotte Chemical Corporation holding 75 percent of the shares. Lotte Chemical Corporation as the name suggests is also a manufacturer of chemicals, and has its headquarters in South Korea. Individuals own around 15 percent of the company’s shares while 8 percent is shown under the ‘others’ category. Directors, CEO, their spouses and minor children have negligible share.

Historical operational performance

Post CY11, the company’s profits remained negative for a period of four years before it entered a period of profitability again. Topline, on the other hand maintained growth with the exception of CY12 and CY15 when it declined.

In CY15 the company experienced the biggest decrease in its revenue by 29 percent. This was due to a number of reasons. Firstly, the company was only able to sell in the local market. This was owing to low industry margins and greater competition in the region. During CY15 the local polyester industry was marked by high tax rates, high energy prices and staggering textile exports which did not allow the company’s margins to take off since its product finds its utility in these industries. Production was also lower due to ‘reduction in plant operating rates’.

During FY16 Lotte Chemical Pakistan managed to grow its topline by close to 3 percent. Again, the company was only able to sell in the domestic market; however, its production grew with the plant availability for the year standing at 97 percent. Moreover, it was able to get the Government of Pakistan to increase the PTA tariff level to 5 percent (previously 4 percent) for the purpose of ‘fair and competitive regional tariff protection’. With the India government imposing considerable anti-dumping duties, the suppliers from China, Taiwan, Indonesia, etc diverted their focus to Pakistan. With the higher tariff imposition, it provided the thrust to increase demand. This allowed margins to improve significantly.

Lotte Chemical Pakistan managed to continue its growth momentum and experienced a year on year increase in net revenue by 6.5 percent. This was due to the continued benefit derived from anti dumping duties as well as improved power supply. The latter allowed higher demand; urbanization made way for greater consumption of fast moving consumer goods. Moreover, internationally, the price of PTA increased beyond $700/MT, which had an average price of $655/MT. With this, profit margins remained on the growth trajectory.

In CY18, the company’s topline grew by a whopping 55 percent on the back of higher demand coming from downstream polyester industry. The continuous availability of power supply meant higher production which in turn meant higher demand for raw material (PTA). Costs, although increased but was offset by a higher increase in revenue, thus allowing gross and operating margins to reach a double digit figure.

Growth in topline was subdued in CY19, standing at 5.5 percent. Demand for PTA in the local polyester industry was lower, with the industry contracting by 12 percent. This was due to changes in the Finance Bill 2019. Volumes, as well as production was lower during CY19, yet the company managed to post higher revenue. This was possible due to higher price of PTA as a consequence of currency devaluation. Apart from better prices, other income also provided support to the bottomline, doubling from Rs514 million in CY18 to Rs1228 million in CY19. This primarily came from interest earnings.

Quarterly results and future outlook

While prices internationally for PTA remained bearish, they increased towards the end of the quarter as demand came from the downstream polyester industry. The nine months ended of CY19 saw net revenue increasing year on year by 13 percent. However, it was accompanied by a corresponding rise in costs thus gross margins remained flat. A significant change was seen in other income which came from short term fixed deposits. Thus operating margins improved. Finance cost also reduced notably which allowed net margins to increase. The decrease in finance cost came from net exchange gain.

With the ongoing pandemic, the company expects that the demand maybe lower in the polyester chain. Moreover, with new capacity additions in the region, there could be a situation of oversupply which could drive prices down. However, with the government’s efforts to boost exports, it may cause higher demand coming from the downstream sectors. In addition, with the reforms brought about by the current government, the country’s rating of ease of doing business has improved which could attract higher foreign direct investment.