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Morning Call about Lotte Pakistan PTA Limited – Arif Habib Limited

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by November 30, 2011 Brokerage

Karachi: Persisting weak margins are eroding profitability further

With the continual fall in the PTA primary margins, Arif Habib Limited is revising downwards Arif Habib Limited’s earnings estimates and thus Arif Habib Limited’s target price to PKR 12.7/share for Lotte Pakistan PTA Limited (LOTPTA).

According to Arif Habib Limited, earlier Arif Habib Limited had a contention that the prices may remain downward sticky going forward where up until 3QCY11 Arif Habib Limited’s doubts weighted on, however just passed third quarter primary margins took a steep decline of 33% to average around USD132/ton in 4QCY11 to date. This steep decline is on account of slowdown in polyester demand in China, aggressive capacity expansion in the region and Px supply constraints. Therefore considering this price momentum, Arif Habib Limited’s primary margin assumptions have dropped to USD 160/ton and USD 150/ton in CY12 and CY13, respectively causing 18% and 27% lower earnings estimates.

Earnings RevisionCY11CY12CY13
Margins (Current) 266160150
Margins (Previous) 276220200
EPS – PKR (Current)
EPS – PKR (Previous)
Source: AHL Research   

Polyester demand slowing down

With ongoing sovereign debt crisis taking its toll on EU and US (by far the largest Chinese export market for apparels) aggregate demand, Arif Habib Limited suspects Chinese exports to remain sluggish going forward, which in Arif Habib Limited’s opinion will keep PTA margins depressed. Arif Habib Limited’s fears mainly emanate from declining operating rates of Polyester industry, down to 70-80% in the current quarter against 100% in 3QCY11.

with aggressive capacity expansion creating oversupply

Asian PTA Industry has been going through a major expansionary phase whereby 14.5mn tons of new PTA capacity would be added till CY13. This expansionary cycle is expected to peak in CY12 with a capacity addition of 7.5mn tons alone in CY12. This aggressive expansion coupled with crisis like situation in Chinese Polyester sector is likely to keep PTA demand and margins under pressure.

while a temporary relief from regional capacity shutdown, for LOTPTA

As per ICIS, dampening PTA demand and southward looking margins have caused quite a few players to reschedule their turnaround early or shutdown their operations for an indefinite period. This is likely to affect around 6.4mn tons which is around 15% of Asia’s total capacity. Lower PTA production in China may improve PTA margins, which may be positive for LOTPTA as its pricing mirrors the pricing trend in China.


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