Cost/Pricing
Though NBR price has fallen 9% from the high in Oct 2014, the YTD price
fall of only 2% is substantially behind that of latex (-34% YTD) and
butadiene (-31% YTD). Given that NBR is a substitute product of latex and a
product of butadiene, we see downside to NBR price. A weaker NBR price
will benefit Hartalega as NBR accounts for 50% of its production cost.
Assuming all else constant, every 10% fall in NBR price will lift its
bottomline by 4%.
Recall
back on 12 June 2013, Hartalega via its wholly owned subsidiary, Hartalega NGC
Sdn Bhd has entered into an agreement to purchase three plots of land in Sepang
measuring approximately 120 hectares for a total cash consideration of RM97m.
The rationale for this acquisition was to progressively expand Hartalega’s
production capacity, leveraging on new in-house developed technologies –
namely, Next Generation Integrated Glove Manufacturing Complex (NGC). NGC
was accorded as an entry point project status (EPP) under Malaysian
Government’s Economic Transformation Programme, thereby it was being recognized
as a high impact project under the Rubber National Key Economic Area.
We
also saw Hartalega’s continuous effort to preserve the environment by
constructing scrubber towers in NGC, maintaining high standards of
environmental compliance stipulated by Jabatan Alam Sekitar. Evidently, we
smell no ammonia neither chlorine throughout our visit at NGC.
We
also noted that the NGC has been equipped with ample stand-by utilities such as
electricity, natural gas and water resources to withstand sudden disruptions
and rationing.
Cost/Pricing
1) Enhancing its production process
不過，達證券對賀特佳管理層相信新產能將獲丁腈手套強勁需求吸納，不會爆發價格戰問題談話有所質疑，相信隨著供應鏈競爭日趨激烈，可能對賺益帶來壓力，股票潛在漲勢可能受抑。
http://biz.sinchew.com.my/node/110277 Feb.2015 - FY2015
Growth/Stategy
(AMResearch April.2015 - FY2016)
CIMB research house expects the average selling price to drop by 2 to 3% more, while Hartalega’s financial year 2016 (FY16) and FY17 net profit margins to come in between 18% and 20%, which concurs with its view that margin pressure was inevitable given its premium pricing.
“Hartalega’s expansion into natural rubber gloves segment and emerging countries will also weigh on its margins."
However, it said Hartalega would incur higher capex of about RM300mil to RM400mil a year in the next two years, which would draw down its loan facility up to US$100mil (RM362.89) in the next three years.
http://www.thestar.com.my/Business/Business-News/2015/04/07/Hartalega-may-miss-target/?style=biz April.2015
(CIMB Research April.2015 - FY2016)
(RHBResearch April.2015 - FY2016)
“We expect sequential sales volume growth of about 5%-6% in 4QFY15 thanks to maiden contribution from five to six new NGC lines that have been coming on-stream progressively since January 2015. This coupled with the firmer 4QFY15 exchange rate of RM3.61/US$ (vs RM3.37/US$ in 3QFY15) suggests that top-line is likely to have grown 7%-10% on-quarter,” it said.
“Separately, we note that FY15 forex losses could widen further in the coming quarter (from RM5.1mil for 9MFY15) as the group recognises realised and unrealised forex losses on its hedging transactions,” it said.
Corporate exercise
(CIMB Research April.2015 - FY2016)
Share price
Alliance said the stock had rallied by 26% since the research house upgraded the stock to Buy on 2 Dec 2014. “The stock is now trading at 23x FY16F P/E, which is slightly more than 1SD above its 5-year mean P/E. At current share price, we believe the market has priced in NGC’s earnings prospects.
“We are downgrading our rating on the stock to Hold, as our RM8.45 target price has been achieved,” it said.
http://www.theedgemarkets.com/my/article/alliancedbs-research-downgrades-hartalega-hold-target-rm845 April.2015 - FY2016
Bear case
(Maybank Dec.2014 - FY2015)
Research firm analyst Tan Kee Hoong opined that Hartalega is facing rising competition as the other glovemakers are moving into the nitrile glove segment while noting the the profit margin which the company enjoyed may not be sustainable.
Despite that, he believes Hartalega will continue to maintain its sales growth supported by higher demand and capacity expansion.
http://www.theborneopost.com/2015/01/16/hartalega-to-build-more-gloves-manufacturing-plants-to-increase-production-output-one-more-deck/#ixzz3OyT9MQSz Jan.2015 - FY2015
In a filing with Bursa Malaysia, the manufacturer, retailer and wholesaler of latex and nitrile gloves said the stronger dollar had mitigated the effect of lower average selling price from declining raw material prices and a more competitive selling price.
http://www.thestar.com.my/Business/Business-News/2015/05/06/Hartalega-posts-net-profit--declares-dividend/?style=biz May.2015 - FY2016
Production lines
In the meantime, Tan said Hartalega is going to start manufacturing gloves from its first two production lines at its NGC beginning January instead of the earlier planned timeframe of December last year due to weather-related issues.
He noted the company will gradually start two new production lines each month.
He believes that at the rate which Hartalega is progressing for the commission of new production lines, the company’s two manufacturing plants at NGC will be fully operational with 12 production lines each by January next year (2016). 2 lines per month, increase of production by January 2016 = 45,000 pieces x 24 hours x 365 days x 24 lines = 9.5billion pieces
http://www.theborneopost.com/2015/01/16/hartalega-to-build-more-gloves-manufacturing-plants-to-increase-production-output-one-more-deck/#ixzz3OyT9MQSz Jan.2015 - FY2015
马银行分析员认为，公司的新产能增加手套产量，而新销量应可吸收投产所需开销。他指出，最新厂房生产的手套，有半数已脱售，其余半数料由现有客户认购，所以不会有供应过剩的烦恼。
公司现财年首9个月营收持平，但销量稳定增长8%，显示平均售价降低，其中丁腈（nitrile）手套年增6.1%。乳胶手套销量增14%。
公司现财年首9个月营收持平，但销量稳定增长8%，显示平均售价降低，其中丁腈（nitrile）手套年增6.1%。乳胶手套销量增14%。
http://www.nanyang.com/node/681499?tid=462 Feb.2015 - FY2015
Progress at Hartalega’s Next Generation Complex (NGC) had been brisk, with six out of the 24 production lines (from Plants #1 and #2) having already started commercial production as at end-March 2015. In a note today, the research house said as such, Hartalega’s management was confident that the first two NGC plants are on track to be fully operational by Jan/Feb 2016.
http://www.theedgemarkets.com/my/article/alliancedbs-research-downgrades-hartalega-hold-target-rm845 April.2015 - FY2016
第一和第二廠房已在今年1月投運，比預期遲了兩個月，豐隆說，問題出在水電供應，而非建築工程。目前，這兩座廠房各有3條生產線，接下來該公司計劃每月為不同廠房增設一條新生產線。
第三賀特佳和第四廠房正展開地面清理工程，將在兩個月內開始建築工程。
製造中心竣工後，將有6座廠房，每座廠房設有12條生產線，常年總產能達285億隻手套，超越該公司瓜拉雪蘭莪廠房的140億隻。該公司每條生產線每小時產能達4萬5千800隻，超越手套業平均水平。
(In a note today, the research house said that currently, Plant 1 and Plant 2 were running with three production lines each and we were guided that every month, one production line will be added on every plant.
“We understand that Hartalega just commenced earthworks for Plant 3 and Plant 4.
“We also learnt that speed of production line now improved to 45,800 pcs per hour per line, consistently higher that industry’s average.)http://biz.sinchew.com.my/node/113046?tid=18 April.2015 - FY2016
The first line at NGC was slated to be commissioned in
January 2014 but was delayed to 3Q 2014 following the
need for additional land preparation works and difficulties in
obtaining certain approvals. This was dragged out until
November 2014, and was further delayed for two months to
January 2015, due to a postponement in cabling works by
Tenaga.
We note that construction of Plants 1 and 2 (total of 24
lines) as well as the supporting facilities have now been
completed and the first production line had begun
commercial production on 9 January 2015. As of the date of our visit, five lines are in commercial
production – three at Plant 1 and two at Plant 2 – while the
sixth (at Plant 2) was in the midst of being commissioned.
Similar to its construction plan for Plants 1 and 2, Hartalega
will build Plants 3 and 4 simultaneously. Construction
works are anticipated to start in April 2015.The first of these new 24 lines at Plants 3 and 4 is
scheduled to begin operations in early 2016 – just as the
first two plants are completely commissioned. That said, the group maintains the flexibility of slowing
down the commissioning of its production lines to
accommodate market demand and trend.
Note that all the production lines at NGC are interchangeable between nitrile and natural rubber gloves.
Management has currently apportioned 80%-90% of the installed capacity for the production of nitrile gloves while the other 10%-20% will be for natural rubber and specialty gloves.
Note that all the production lines at NGC are interchangeable between nitrile and natural rubber gloves.
Management has currently apportioned 80%-90% of the installed capacity for the production of nitrile gloves while the other 10%-20% will be for natural rubber and specialty gloves.
Hartalega’s highly automated lines are projected to run at
average speeds of 45k pcs/hr, producing 4.7bil pcs per
plant p.a. (The six plants from NGC will add 28.5bil pcs p.a.
to its current capacity of 14bil pcs at Bestari Jaya).
During our visit, however, we noticed that the lines were running at average speeds of 45.5k pcs/hr.
Nonetheless, rejection rates have remained low, reflecting Hartalega’s technological prowess and high overall equipment effectiveness (OEE) of 83%.
During our visit, however, we noticed that the lines were running at average speeds of 45.5k pcs/hr.
Nonetheless, rejection rates have remained low, reflecting Hartalega’s technological prowess and high overall equipment effectiveness (OEE) of 83%.
(AMResearch April.2015 - FY2016)
(AMResearch April.2015 - FY2016)
Hartalega’s new plant NGC has started commercial production (2 lines) in early
Jan 2015 (2-month delay from the initial target). We understand that its 3rd, 4th,
5th and 6th lines have started running while line 7 is coming up. The company
aims to commission two production lines per month and complete the first two
plants of 12 lines each by 1QCY16. This will raise its production capacity from
15bn/annum in FY15 to 21.8bn/annum in FY16. We note that Hartalega has
orders secured for most of the new capacity.
To defend its market share, the group hopes to complete NGC by 2020 instead
of 2022. Upon the completion of the whole NGC, Hartalega’s production
capacity will increase from about 15bn pieces/annum in FY15 to 42bn/annum.
Due to the accelerated expansion plan, Hartalega will incur higher capex of about RM300m-400m/year in the next two years. Considering this, the company will draw down up to US$100m of its loan facility in the next three years. This could raise slightly its interest expense and depreciation cost, which will weigh on its bottomline in the near term.
Due to the accelerated expansion plan, Hartalega will incur higher capex of about RM300m-400m/year in the next two years. Considering this, the company will draw down up to US$100m of its loan facility in the next three years. This could raise slightly its interest expense and depreciation cost, which will weigh on its bottomline in the near term.
(CIMB Research April.2015 - FY2016)
Construction works, which was
started in 2013, has become fruitful in January 2015 when two out of six plants
has started commissioning. The two plants, Plant 1 and Plant 2, currently up
and running with 3 lines on each plant and progressively, one line will be
added on each plant every month.
Each
plant will have 12 production lines, which translates into 72 lines in total when
NCG is fully commissioned. This in turn gives Hartalega an additional 28.5bn
pcs annual capacity, on top of 14bn pcs they currently have in Bestari Jaya,
thereby bringing the total annual capacity to 42.5bn pcs per
annum. We understand that Hartalega is in the midst of shutting down Plant 1 in
Bestari Jaya due to its inefficiency of old machineries, whereby production output from 10 lines
in Plant 1 Bestari Jaya is equivalent to 1.5 lines in NGC.
Originally, each line in NGC was
designed with capacity to produce 45,000 pcs rubber gloves per hour. However,
we learnt that actual production speed at NCG currently stands at 45,800 pcs, setting a new highest
standard of production speed in the rubber industry. We believe this is in-line with NGC’s strategy
to reduce its dependency on manual labour by 24%, thanks to greater
efficiency derived from greater economies of scale.
We understand that Hartalega
just commenced earthworks for Plant 3 and Plant 4, in which the land will be
ready for construction works in approximately two months.
Apart
from Plant 1 and Plant 2, part of the workers quarters has also been completed.
In total, 10 dormitories will be built whereby each dormitory can accommodate
about 600 workers. We were told that the workers quarters will have facilities
like canteen, laundry, mini cinema and Hartalega also provide transportation
for workers to/from workplace. At the time of our visit, the two completed
dormitories have yet to receive the certificate of fitness (CF) from regulatory
body.
We
also saw Hartalega’s continuous effort to preserve the environment by
constructing scrubber towers in NGC, maintaining high standards of
environmental compliance stipulated by Jabatan Alam Sekitar. Evidently, we
smell no ammonia neither chlorine throughout our visit at NGC. 
We
also noted that the NGC has been equipped with ample stand-by utilities such as
electricity, natural gas and water resources to withstand sudden disruptions
and rationing.
Hartalega has ramped up its capex, and
expects to commit up to MYR1.5bn for their Next Generation Complex
(NGC) between FY15 and FY17, which represents 70% of the initial
NGC forecast spend of MYR2.15bn vs the previous capex budget of
35% for the same duration. We expect this to bring forward their capacity
expansion plans and our analysis forecasts a larger earnings
contribution from FY17 onwards. Management expects the NGC to add
a total of 28.5bn pieces of gloves capacity by FY20.
(RHBResearch April.2015 - FY2016)
Its revenue for the quarter stood higher at RM305.1 million from RM280.3 million a year earlier. The increase in revenue was attributable to the start-up of the group’s Next Generation Integrated Glove Manufacturing Complex (NGC) facilities in December last year, it said. Hartalega said to date, there are eight production lines operating in the NGC, equivalent to an additional capacity of 2.9 billion pieces of gloves per annum.
The group said operating profit margin was impacted by lower average selling price as a result of declining raw material costs and more competitive selling price. It was also impacted by the start-up cost of NGC.
http://www.theedgemarkets.com/my/article/hartalega-4q-profit-higher-rm55m-declares-3-sen-dividend May.2015 - FY2016
Hartalega said to date, there are eight production lines operating in the NGC, equivalent to an additional capacity of 2.9 billion pieces of gloves per annum.
http://www.theedgemarkets.com/my/article/hartalega-4q-profit-higher-rm55m-pays-3-sen-dividend May.2015 - FY2016
NGC has made its maiden contribution – sold about 180m pcs in FY15 – and sequentially sales improved from RM286m in 3Q15 to RM305m in 4Q15.
Since commissioning in January 2015, NGC currently has 8 lines and two lines will be added progressively each month. Hartalega already decommissioned 10 lines in Plant 1, bringing total production lines to 55 as at March 15.
Management hinted that CAPEX will continue to be high for the next three as they are expediting commissioning of the plants in three phases. CAPEX and depreciation for FY15 was RM417m and RM45.8m respectively.
(Hong Leong June.2015 - FY2016)
Consequently, management has guided that
Hartalega would need to draw down MYR100m-400m of a credit facility
in FY16 to ease cash flow for the firm. Our depreciation assumption has
also increased by 1-13% for FY16-17.
(RHBResearch April.2015 - FY2016)
Its revenue for the quarter stood higher at RM305.1 million from RM280.3 million a year earlier. The increase in revenue was attributable to the start-up of the group’s Next Generation Integrated Glove Manufacturing Complex (NGC) facilities in December last year, it said. Hartalega said to date, there are eight production lines operating in the NGC, equivalent to an additional capacity of 2.9 billion pieces of gloves per annum.
The group said operating profit margin was impacted by lower average selling price as a result of declining raw material costs and more competitive selling price. It was also impacted by the start-up cost of NGC.
http://www.theedgemarkets.com/my/article/hartalega-4q-profit-higher-rm55m-declares-3-sen-dividend May.2015 - FY2016
Hartalega said to date, there are eight production lines operating in the NGC, equivalent to an additional capacity of 2.9 billion pieces of gloves per annum.
http://www.theedgemarkets.com/my/article/hartalega-4q-profit-higher-rm55m-pays-3-sen-dividend May.2015 - FY2016
NGC has made its maiden contribution – sold about 180m pcs in FY15 – and sequentially sales improved from RM286m in 3Q15 to RM305m in 4Q15.
Since commissioning in January 2015, NGC currently has 8 lines and two lines will be added progressively each month. Hartalega already decommissioned 10 lines in Plant 1, bringing total production lines to 55 as at March 15.
Management hinted that CAPEX will continue to be high for the next three as they are expediting commissioning of the plants in three phases. CAPEX and depreciation for FY15 was RM417m and RM45.8m respectively.
(Hong Leong June.2015 - FY2016)
Given the availability of new capacity from NGC, the group has
decided to decommission its 10 lines (600mil installed
capacity) at Plant 1 at Batang Berjuntai (RM3.1mil write-off
booked in 4QFY15) and convert the site into a warehouse. The
plant was mainly involved in the latex gloves production.
(AMResearch May.2015 - FY2016)
(AMResearch May.2015 - FY2016)
Cost/Pricing
Management expects a 70% improvement in its productivity once the NGC is completed.
(AMResearch April.2015 - FY2016)
During our tour of the site, we also noted management’s
various efforts to reduce its cost per glove (3QFY15:
6.62sen) and sustain its margins, namely:-
While most of the machineries (e.g. stripping and
packaging) and operating systems were similar to its
most recent and advanced plant (Plant 6 at Bestari
Jaya), Hartalega had tweaked its production lines to
improve the consistency and reliability of the lines. A few additional features were also incorporated at
the packing department, which resulted in logistical
cost savings for its customers.
2) Sensible site layout
The various infrastructures on site were also built to ensure cost effectiveness and efficiency (smoother workflow transition between the departments). For example, the storage tanks for the raw materials (i.e. nitrile latex) are placed towards the back of the site while the warehouses were located in the front to facilitate the loading of finished goods onto containers for transport to the ports. At the time of our visit, five containers were present. The production lines were placed in between those two buildings.
The quality control (QC) department is also now directly linked to both the production lines and warehouses to ensure that the workers can better monitor the products and respond immediately to any issues which may arise. Additionally, the shared facilities (i.e. water/affluent treatment plant and chlorine scrubber towers) are positioned in between the two plants to cater to these two plants.
These environmental preservation mechanisms are in line with Hartalega’s emphasis on environmental protection and profit maximisation. As recognition of its efforts, the group has been admitted into Bursa Malaysia’s FTSE 4Good Index.
2) Sensible site layout
The various infrastructures on site were also built to ensure cost effectiveness and efficiency (smoother workflow transition between the departments). For example, the storage tanks for the raw materials (i.e. nitrile latex) are placed towards the back of the site while the warehouses were located in the front to facilitate the loading of finished goods onto containers for transport to the ports. At the time of our visit, five containers were present. The production lines were placed in between those two buildings.
The quality control (QC) department is also now directly linked to both the production lines and warehouses to ensure that the workers can better monitor the products and respond immediately to any issues which may arise. Additionally, the shared facilities (i.e. water/affluent treatment plant and chlorine scrubber towers) are positioned in between the two plants to cater to these two plants.
These environmental preservation mechanisms are in line with Hartalega’s emphasis on environmental protection and profit maximisation. As recognition of its efforts, the group has been admitted into Bursa Malaysia’s FTSE 4Good Index.
3) Construction of a renewable energy complex
The area identified for the placement of its biomass
plant – including storage space for the palm kernel
and empty fruit bunches – was also pointed out to
us. This latest biomass plant is expected to contribute
22% of NGC’s energy requirements, and reduce the
NGC’s natural gas consumption by 17% as
compared to that for existing plants. Management is also exploring other alternative
energy sources to proactively reduce energy cost.
Overall, operating expenses are expected to reduce by
12% upon the completion of the NGC.
(AMResearch April.2015 - FY2016)
As such, we expect valuations of the rubber glove players
like Hartalega to remain inflated as investors seek a safe
haven from the weakening RM and GST-affected industries
(rubber gloves are zero-rated).
(AMResearch April.2015 - FY2016)
(RHB April.2015 - FY2016)
Competitors
(RHB April.2015 - FY2016)
(AMResearch April.2015 - FY2016)
Latex prices are at multi-year lows, trading at
MYR4.30/kg from a 5-year average of MYR6.36/kg, and we expect them to remain
subdued in the medium term due to an oversupply of rubber and a weaker global
automobile market. Likewise, nitrile prices are trading at multi-year lows at
USD0.89/kg from a 5-year average of MYR1.38/kg, and which we expect to stay
subdued due to lower oil prices. The strengthening of the USD benefits Hartalega as
>95% of its revenue is denominated in USD, while roughly 54% of their cost is
denominated in MYR. The recent fall in energy prices has led to cheaper utilities
input cost. Scheduled gas tariff hikes for 2015 were postponed by the Malaysian
government, while electricity tariffs were granted temporary relief (annualized 4%) in
Feb 2015.
(RHB April.2015 - FY2016)
Roughly 46% of Hartalega’s cost is quoted directly or
indirectly in USD, which primarily includes nitrile, latex and chemical expenses.
Although latex prices are usually quoted in MYR, the commodity itself, much like
other commodities, is sensitive to variations in the USD.
(RHB April.2015 - FY2016)
(RHB April.2015 - FY2016)
Competitors
(RHB April.2015 - FY2016)
Management
該公司董事經理關民亮通過文告說：“我們當季業績符合預期，外在因素持續對手套領域構成壓力，原料成本下滑以致手套平均售價走低，售價競爭激烈和電力和天然氣成本增長，皆對公司業務帶來影響。”
“儘管市場情況充滿挑戰，但我們仍有信心透過新世代整合手套製造中心（NGC）的產能拓展計劃來維持長期成長。”
关民亮说，市场对丁腈手套的需求强劲，因此，相信该集团未来前景亮丽。
http://www.investalks.com/forum/forum.php?mod=viewthread&tid=74&extra=&highlight=harta&page=103 Feb.2015 - FY2015不過，達證券對賀特佳管理層相信新產能將獲丁腈手套強勁需求吸納，不會爆發價格戰問題談話有所質疑，相信隨著供應鏈競爭日趨激烈，可能對賺益帶來壓力，股票潛在漲勢可能受抑。
http://biz.sinchew.com.my/node/110277 Feb.2015 - FY2015
Hartalega’s management was confident that the first two NGC plants are on track to be fully operational by Jan/Feb 2016.
http://www.theedgemarkets.com/my/article/alliancedbs-research-downgrades-hartalega-hold-target-rm845 April.2015 - FY2016
On prospects ahead, Hartalega managing director Kuan Mun Leong said when the NGC comes fully on-stream, the group will be able to strengthen its position given the significant increase in production capacity and improved capabilities.
“Taking a long-term perspective, prospects are bright for the group and we remain confident about growing our market share in the coming years ahead,” he said.
http://www.theedgemarkets.com/my/article/hartalega-4q-profit-higher-rm55m-declares-3-sen-dividend May.2015 - FY2016
On prospects ahead, Hartalega managing director Kuan Mun Leong said when the NGC comes fully on-stream, the group will be able to strengthen its position given the significant increase in production capacity and improved capabilities.
“Taking a long-term perspective, prospects are bright for the group and we remain confident about growing our market share in the coming years ahead,” he said.
http://www.theedgemarkets.com/my/article/hartalega-4q-profit-higher-rm55m-declares-3-sen-dividend May.2015 - FY2016
Management expects losses at the NGC plant to narrow in
1QFY3/16 and the plant to turn profitable from 2QFY3/16, as NGC-
led sales growth outpaces cost increase. Upon the full
commencement of NGC Plant 1 and 2 by 4QFY3/16, Hartalega’s
capacity will rise to 22b pcs p.a. (+57% from 3QFY3/15). We
maintain our FY3/16-17 earnings forecasts, introduce FY18.
(Maybank Research May.2015 - FY2016)
(Maybank Research May.2015 - FY2016)
賀特佳董事經理關民亮在文告中表示，銷售價格面對壓力，營運環境依舊充滿挑戰，對低平均售價對營業額和淨利影響感到憂慮，但集團穩居全球丁腈手套製造業龍頭地位，加上全球丁腈手套需求依舊強勁，有信心集團盈利賺益將持續高於領域平均。
“隨著NGC全面投產，將通過產能進一步強化我們的地位。以長期來看，集團前景依舊明亮，我們有信心在來年持續擴大市佔率，而董事部更樂觀下財政年將持續取得增長，並取得更好的表現。”
http://biz.sinchew.com.my/node/114826?tid=6 May.2015 - FY2016
Hartalega Holdings Bhd’s 14.14 million shares were transacted in an off-market deal on Thursday at an average price of RM7.67. The shares, which accounted for a 1.75% stake based on its paid-up of 808.015 million units, were traded at a 5.2% discount or 42 sen below Wednesday’s closing price of RM8.09.
http://www.thestar.com.my/Business/Business-News/2015/05/07/Hartalega-14m-shares-crossed-below-market-price/?style=biz May.2015 - FY2016
Hartalega’s managing director Kuan Mun Leong said market conditions continue to be demanding, particularly due to increased pressure from more competitive selling prices.
“Despite the challenging environment, what is important is that we are a resilient group with a pole position in the nitrile glove manufacturing segment. Furthermore, global demand for nitrile gloves remains strong, which certainly bodes well for us,” he said.
Kuan said when the NGC comes fully on-stream, he expected it to significantly increase its production capacity and scale up its capabilities.
http://www.thestar.com.my/Business/Business-News/2015/05/05/Hartalega-Q4-earnings-up/?style=biz May.2015 - FY2016
Management also shared that there is no oversupply concern and current environment remains favourable for rubber glove producers.
(Hong Leong June.2015 - FY2016)
Hartalega Holdings Bhd’s 14.14 million shares were transacted in an off-market deal on Thursday at an average price of RM7.67. The shares, which accounted for a 1.75% stake based on its paid-up of 808.015 million units, were traded at a 5.2% discount or 42 sen below Wednesday’s closing price of RM8.09.
http://www.thestar.com.my/Business/Business-News/2015/05/07/Hartalega-14m-shares-crossed-below-market-price/?style=biz May.2015 - FY2016
Hartalega’s managing director Kuan Mun Leong said market conditions continue to be demanding, particularly due to increased pressure from more competitive selling prices.
“Despite the challenging environment, what is important is that we are a resilient group with a pole position in the nitrile glove manufacturing segment. Furthermore, global demand for nitrile gloves remains strong, which certainly bodes well for us,” he said.
Kuan said when the NGC comes fully on-stream, he expected it to significantly increase its production capacity and scale up its capabilities.
http://www.thestar.com.my/Business/Business-News/2015/05/05/Hartalega-Q4-earnings-up/?style=biz May.2015 - FY2016
Management also shared that there is no oversupply concern and current environment remains favourable for rubber glove producers.
(Hong Leong June.2015 - FY2016)
Growth/Stategy
Encouraged by the strong global glove demand (overall,
+8% YoY and +15% for the nitrile segment), Hartalega will
be moving ahead with Phase 2 of its NGC project.
CIMB research house expects the average selling price to drop by 2 to 3% more, while Hartalega’s financial year 2016 (FY16) and FY17 net profit margins to come in between 18% and 20%, which concurs with its view that margin pressure was inevitable given its premium pricing.
“Hartalega’s expansion into natural rubber gloves segment and emerging countries will also weigh on its margins."
However, it said Hartalega would incur higher capex of about RM300mil to RM400mil a year in the next two years, which would draw down its loan facility up to US$100mil (RM362.89) in the next three years.
http://www.thestar.com.my/Business/Business-News/2015/04/07/Hartalega-may-miss-target/?style=biz April.2015
From our recent meeting with Hartalega’s management, we felt that the
operating environment in the next two years will be tougher due to increasing
competition. To protect market share, the group aims to complete its new NGC
two years earlier, which will raise capex/year. To fund the accelerated
expansion, Hartalega will draw down some of its credit facilities. The higher
interest expense and depreciation cost are expected to weigh on its bottomline
in the near term. We cut FY15-16 EPS to factor in mainly
(i) stronger US$ against RM
(ii) higher interest expense and
(iii) higher depreciation cost.
(CIMB Research April.2015 - FY2016)
(i) stronger US$ against RM
(ii) higher interest expense and
(iii) higher depreciation cost.
(CIMB Research April.2015 - FY2016)
During our meeting recently, we gather that
(i) The group is on track to complete its first two new plants in NGC by 1QCY16 and most of the capacity is gradually been taken up.
(ii) It is converting its Plant One to warehouse and will be decommissioning Plant Two in the near future as the lines are old and inefficient.
(iii) It is also expanding into specialty glove manufacturing which commands higher margins.
(iv) It expanded its OBM business into China and India to tap into the growing markets although margins are low.
(v) ASP is likely to continue to decline due to increasing competition. (margin pressure is inevitable given its premium pricing. Aside from competition, its expansion into natural rubber gloves segment and emerging countries will also weigh on its margins.)
(vi) It is likely to incur the bulk of the ESOS expense in FY16 for its proposed ESOS programme.
(i) The group is on track to complete its first two new plants in NGC by 1QCY16 and most of the capacity is gradually been taken up.
(ii) It is converting its Plant One to warehouse and will be decommissioning Plant Two in the near future as the lines are old and inefficient.
(iii) It is also expanding into specialty glove manufacturing which commands higher margins.
(iv) It expanded its OBM business into China and India to tap into the growing markets although margins are low.
(v) ASP is likely to continue to decline due to increasing competition. (margin pressure is inevitable given its premium pricing. Aside from competition, its expansion into natural rubber gloves segment and emerging countries will also weigh on its margins.)
(vi) It is likely to incur the bulk of the ESOS expense in FY16 for its proposed ESOS programme.
De-commissioning old plants. As Hartalega currently has more capacity in NGC, it is de-commissioning its oldest plant which has a capacity of 0.6bn/annum. It intends to convert this plant to a warehouse as the technology of this plant is outdated and would drag down the overall group’s production efficiency. Although it recently upgraded the production lines in Plant Two which produces 0.5bn gloves/annum in Bestari Jaya, it plans to tear down this plant in the near future due to the low efficiency of the plant as compared to the newer plants.
Planning to build plants to manufacture specialty gloves. Aside from the expansion in NGC, Hartalega also plans to build several plants which will eventually manufacture specialty gloves such as clean room gloves. Although specialty gloves are more costly to produce, its margins are >20% higher than medical gloves. To maximise its production efficiency, its NGC plants will focus on the manufacturing of medical gloves while these planned new plants in the future will produce only specialty gloves. Hartalega only manufactures a small quantity of specialty gloves currently.
OBM expanding in Australia, China and India. Hartalega’s original brand manufacturing business (OBM) business has a
strong foothold in South Australia. Its OBM gloves are marketed under its
in-house brand called “GloveOn” which replaced the old brand “Pharmatex”
since 26 July 2014. It is currently the top rubber glove brand in South Australia.
While its OBM is improving, the main revenue driver is still its OEM business.
For OEM, the group managed to secure several sizeable customers in Brazil.
Aside from this, we understand that the sales in its existing markets, Europe,
the US and Japan are growing.
While it is still focusing on Australia, which generates about RM30m
revenue/year, it has also expanded its OBM business into China, India in
addition to Africa, Middle East and South Korea, which are much smaller
markets than China and India. We understand that its China business is
growing tremendously with revenue doubling from RM4.8m in FY13 to
RM9.9m in FY14. The group is looking to double the sales again to RM20m in
the near future. As for India, its exposure to the country is still small as it just
started exporting to India in 2014.
We do not expect significant contribution from these countries in the near term given that the margins in these countries are much lower (at least 20-40% lower net profit margin as compared to OEM business) than the margins in Australia as well as OEM business, as customers are more price-sensitive due to the lower level of health awareness. In spite of the lower margins, Hartalega needs to tap into these markets early to ride on the potential strong demand growth in the future as health awareness increases gradually. Hartalega’s OBM business currently accounts for 3-4% of Hartalega’s revenue.
We do not expect significant contribution from these countries in the near term given that the margins in these countries are much lower (at least 20-40% lower net profit margin as compared to OEM business) than the margins in Australia as well as OEM business, as customers are more price-sensitive due to the lower level of health awareness. In spite of the lower margins, Hartalega needs to tap into these markets early to ride on the potential strong demand growth in the future as health awareness increases gradually. Hartalega’s OBM business currently accounts for 3-4% of Hartalega’s revenue.
Intensifying competition. Hartalega’s margins have been on the downtrend in the past five quarters due
to increasing competition and the high start-up cost in NGC (estimated
RM20m in FY15). The company is likely to maintain its premium pricing but
narrow the gap with its competitors. We understand that its average selling
prices have declined by 5% since mid-2014 and the company is of the view that
average selling prices could dip 2-3% more in order to secure new orders and
maintain market share. This indicates that margins in the next two years will be
weaker. Hartalega is targeting to maintain net profit margins at 18% to 20% in
FY16 and FY17.
(CIMB Research April.2015 - FY2016)
Capacity expansion. management has projected their capacity
to expand to 42.5bn by FY20 from 14bn pieces in FY14. Nevertheless, in
our modelling, to be conservative and to account for unforeseen delays, we
assumed that this goal would only be achieved in FY22. Management has
also guided that capacity utilization would be around a more comfortable
level of 82% going forward, from an average of 88% for the first three
quarters of FY15. We have also maintained their production split between
nitrile and latex gloves of roughly 90:10.
(RHBResearch April.2015 - FY2016)
We estimate that Hartalega has a breakeven utilisation level of 42%, while its competitors' are 44-57%. This
gives Hartalega an advantage in competing with its peers.
(Alliance Research April.2015 - FY2016)
“We expect sequential sales volume growth of about 5%-6% in 4QFY15 thanks to maiden contribution from five to six new NGC lines that have been coming on-stream progressively since January 2015. This coupled with the firmer 4QFY15 exchange rate of RM3.61/US$ (vs RM3.37/US$ in 3QFY15) suggests that top-line is likely to have grown 7%-10% on-quarter,” it said.
The research house pointed out downward pressure on selling prices, due to intensifying competition within the industry, persisted in 4QFY15. This saw Hartalega further lowering its nitrile glove ASPs by 2%-3% on-quarter to about US$26 to US$27 per 1,000 pieces (from an average of US$28/1,000 pieces in 3QFY15).
“Separately, we note that FY15 forex losses could widen further in the coming quarter (from RM5.1mil for 9MFY15) as the group recognises realised and unrealised forex losses on its hedging transactions,” it said.
http://www.thestar.com.my/Business/Business-News/2015/04/29/UOB-Kay-Hian-Research-sees-lower-FY15-earnings-for-Hartalega/?style=biz May.2015 - FY2016
EBITDA Q4MarchFY2015margin fell to
24% (-5.0-ppt QoQ, -5.1-ppt YoY) on high start-up expenses at the
new NGC plant (early hiring of workforce; NGC incurred a loss of
>MYR10m) and write-off of the inefficient machineries at Plant 1
(MYR6m; Plant 1 had 480m pcs annual capacity and has been
turned into a warehouse).
(Maybank Research May.2015)
Proposing a new ESOS programme. Hartalega proposed a new ESOS programme in August 2014. While the
proposal has not been approved by the relevant authorities, we understand that
Hartalega may need to incur millions of RM over the next five years with the
bulk of it to be expensed in the first year, FY16.
Hartalega had an ESOS programme which expired in March 2015. With NGC
contributing to earnings growth, Hartalega has decided to extend the ESOS
programme by another five years and to the technician level by granting 82.1m
ESOS to eligible employees. The company believes that the ESOS programme is
important to instill a sense of ownership and drive better performance. This,
together with the existing warrants and ESOS programme, would expand
Hartalega’s shares outstanding from 758m shares (as at 23 July 2014) to 903m
shares, assuming full conversion of warrants and ESOS.
(CIMB Research April.2015 - FY2016)
Share price
Alliance said the stock had rallied by 26% since the research house upgraded the stock to Buy on 2 Dec 2014. “The stock is now trading at 23x FY16F P/E, which is slightly more than 1SD above its 5-year mean P/E. At current share price, we believe the market has priced in NGC’s earnings prospects.
“We are downgrading our rating on the stock to Hold, as our RM8.45 target price has been achieved,” it said.
http://www.theedgemarkets.com/my/article/alliancedbs-research-downgrades-hartalega-hold-target-rm845 April.2015 - FY2016
We are leaving our FY15F-FY17F earnings forecasts unchanged.
Hartalega is expected to end its FY15F on a lower note (-13%
YoY) due to the lack of new capacity, price competition, and
high NGC start-up costs. That said, earnings are expected to
pick-up from FY16F (+33% YoY) onwards.
(AMResearch April.2015 - FY2016)
On a side note, trading of Hartalega’s warrants will be suspended on 14 May and delisted on 1 June following the expiry on 29 May. As of 23 April, 22% of the 74.3mil warrants (exercise price: RM4.14) have yet to be converted.
(AMResearch May.2015 - FY2016)
Since our upgrade to BUY in December 2014, the stock has
rallied by 26%, spurred partly by the sharp appreciation of the
USD vs. the RM (+5%). We believe that the imminent US rate hike
will continue to exert further downward pressure on the RM.
(AMResearch April.2015 - FY2016)
On a side note, trading of Hartalega’s warrants will be suspended on 14 May and delisted on 1 June following the expiry on 29 May. As of 23 April, 22% of the 74.3mil warrants (exercise price: RM4.14) have yet to be converted.
(AMResearch May.2015 - FY2016)
Bear case
- It is still a commodity product. Although Hartalega Holdings is one of the largest glove maker in the world, it does not have control over the pricing of the gloves. Currently latex gloves are similarly priced to nitrile gloves, thus the demand of nitrile gloves are not very affected. However, one can only imagine what happen if the price of latex gloves fell to just half of nitrile gloves, it is hard to imagine customers not tempted to switch over to the cheaper options. One might argue that it is impossible for latex gloves to fall so drastically. I would say to that, “look at the oil price”
- Hartalega is spending about RM2.0 billion to build its new factory. However, the company currently only has a total asset base of about RM1.4 billion and only RM85.7 million in cash. Although the company is generating about RM200 to RM300 million of operating cash flow a year, it might still not be enough to fund the expansion. Most likely, the company should be using some debt financing to complete the expansion. Thus, investors need to watch out how the company managed the debt.
- It is not only Hartalega Holdings expanding its capacity. Most of its competitors are actively increasing their capacity as well. There is a real risk of oversupply in the future when all the production comes online. No one knows how that will affect the market, but most likely gross margins of the company should be heading downwards in the future
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