IMS Research penned a review on Lotte Chemical Pakistan Ltd. The experts believe that subdued PTA demand & low PTA-PX spread to hit profits.
Due to lower export volumes, local PTA demand will likely remain subdued in the near term. However, inflation easing off in export markets in the medium term should improve the demand outlook for PTA. We have assumed PTA-PX spreads for CY24, to average at c. US$110/ton on the back of weak PTA consumer demand in China and elevated PX prices amidst lower PX-Naptha spreads and oil prices.
Sell maintained – TP remains unchanged.
Following the revision of our EPS estimates, we maintain our Sell stance to 3.28/3.96 for CY24f/25f (previously PKR3.76/4.32). Our target price and stance remain unchanged, underpinned by (i) subdued PTA demand in the near term, (ii) a narrowing premium on Asian PTA prices, and (iii) escalating gas prices that are likely to shrink margins. While easing import restrictions has provided some respite, rising gas prices and a diminishing premium on PTA prices amidst weak demand should lead to a decline in LOTCHEM’s earnings in the near term.
PTA demand remains weak, but a rebound is imminent
Demand from the upstream Textile Industry remains impacted amidst lower-than-average export volumes during CY23. Due to elevated inflation within export markets, export demand will likely continue to remain dim. However, as inflation eases in export regions by 2HCY24, an improvement in textile exports is imminent, which in turn should alleviate the demand for PTA. We, therefore, expect PTA sales volumes to improve to 411/431-kilo tons in CY24f/25f. Although 1HCY23 performance was impacted by low textile demand and supply chain disruptions amidst restrictions on the import of PX, an improved local economic climate and easing inflation in export markets should increase demand in the medium term.
Premium on International PTA prices to normalize
Weak consumer demand and oversupplied PTA market with different suppliers in local Chinese Industry are likely to exert downward pressure on PTA prices, given that China accounts for a significant 57% of total global demand. Amidst lower international PTA prices and subdued local PTA demand from the textile sector, LOTCHEM is expected to revert to its long-term premium of 7%. In our base case scenario, we have assumed a premium of 7% on international PTA prices, and every 1% increase in premium over international PTA prices beyond 7% would have a positive earnings impact of PKR0.37/sh.
Higher gas prices to exacerbate cost woes
Higher gas prices should lead to a decline in gross margins. To highlight, LOTCHEM requires approximately 4mmbtu/ton of PTA. That being said, any further hike in gas prices should lead to a further decline in the company’s gross margins. In our base case, we have assumed an annualized gas price increase of 5% in Jan’24 and Jul’24. However, any gas price increase higher than this should lead to lower earnings than our base case estimate. For every PKR100/mmbtu increase in gas rate would have a negative earnings impact of PKR0.05/sh. With weak demand in sight, LOTCHEM may be unable to pass on the high cost-pressure in form of higher premium on Asian PTA prices. That being said, gross margins will likely remain under pressure in the short-term.