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JS Securities Limited – JS Research (November 17, 2022)

Karachi, November 17, 2022 (PPI-OT): LOTCHEM: Local demand likely to remain stable

Lotte Chemical Pakistan Limited (LOTCHEM) held its Corporate Briefing session yesterday where management discussed financial results and future outlook. To recall, EPS for 3QCY22 clocked in at Rs1.79, -3% QoQ.

Management addressed concerns regarding potential interruption in production. As LOTCHEM is a supplier to the textile industry, it is among the prioritized sectors to receive gas supply. The company has also not faced any issues regarding opening of LCs for import of raw materials so far.

Despite lower volumes in 3Q, management remains comfortable on demand outlook. Management estimates market demand of PTA at 750,000 tons/annum, vis-a-vis LOTCHEM’s annual capacity of 500,000 tons/annum.

PAT drops 3% QoQ due to lower margins

Lotte Chemical Pakistan Limited (LOTCHEM) held its Corporate Briefing session yesterday where management discussed financial results and future outlook. To recall, EPS for 3QCY22 clocked in at Rs1.79 as against Rs1.84 during previous quarter. Net sales for 3QCY22 clocked in at Rs29.6bn, stable on a QoQ basis, despite 11% drop in international Purified Terephthalic Acid (PTA) prices and a drop in volumes during the quarter as the impact was offset by significant devaluation of PKR against US$. Total sales volume for the quarter clocked in at 126KT, down 4% QoQ, operating at a capacity utilization of 101%. Gross margin dropped to 16% from 20% while tax charges declined 43% QoQ due to absence of super tax.

Lower crude oil prices keep core delta intact

PTA prices faced downward pressure during the quarter, down 11% QoQ owing to poor global demand amid recession fears, lockdowns in China and inventory build-up in the polyester chain resulting in a decline in export orders. Paraxylene (PX) prices faced similar pressure, down 14% QoQ closely tracking declining crude oil prices (down 12% QoQ) which has witnessed a volatile price trend since the Russia-Ukraine war. With downward pressure on both ends, PTA-PX core delta trended higher during the quarter to US$178/ton, up 7% QoQ.

Production remains unhindered

Contrary to the issues being faced by other industries, LOTCHEM stands at a relatively comfortable spot where as per the management the company’s gas supply is expected to remain high in the priority list amid countrywide shortage as the company broadly supplies PTA to the textile sector. Moreover, being an import dependent business where the company heavily relies on procurement of is primary raw material PX mainly from Middle East, LC’s for imports have not yet faced any delays or issues so far and the process is expected to continue smoothly as well due to the importance of the company in the PTA and textile industry.

Volumes to remain intact despite shrinking PTA market

Demand for PTA is expected to face pressure in the coming quarters amid declining demand from the textile sector. Capacity utilization in the global PTA market has already declined to 80% during 3QCY22 as compared to 90% during previous quarter, which the management views to shrink further during 4QCY22. With total PTA market demand of 750KT and with LOTCHEM being the sole producer in the market with a capacity of 500KT (rest of the demand met through imports), management remains optimistic on volumes as any dent in local demand is likely to eat away surplus demand while the company is expected to maintain its market share.

In terms of core delta, PTA prices are likely to remain under pressure amid the global slowdown in demand and resulting decline in export orders, however, higher uptick in demand post lifting of lockdown in China may prove to be crucial in determining the upcoming price trend. PX prices, which bear a strong correlation to crude oil prices, are in turn expected to track movement in the said.

Acquisition process underway

In June-2022, the company released a notice on PSX informing about the consideration of LOTTE Chemical Corporation (75% stakeholder in LOTCHEM) to divest it’s stake in the company as part of a portfolio optimizing strategy. Since the announcement the company had received 3 intents from potential acquirers namely Asiapak Investments Ltd, ICI Pakistan Ltd and Novatex Ltd. The process is underway with due diligence completed.