Investment Highlights

• We maintain HOLD on Hartalega with a lower fair value of RM11.20 (previously RM13.56), reflecting a neutral ESG rating of 3 stars (Exhibit 3). Our valuation is based on 25x CY22F EPS, which is at a 1 SD discount of the 5-year historical average. This is in view of the faster-thanexpected rollout of global vaccinations as well as rapid capacity expansions by Chinese glove manufacturers.
• We have reduced our FY21E, FY22F and FY23F earnings estimates by 0.4%, 0.4% and 1.1% respectively to account for higher finance costs resulting from a land acquisition announced yesterday. Contributions from the new expansion plan is only expected from FY24F onwards.

• Hartalega announced it was acquiring 250 acres of land in the district of Bukit Kayu Hitam, Kedah from Northern Gateway Free Zone Sdn Bhd (NGFZ) for RM229mil. It has also signed an option agreement to purchase another 130 acres of land in the same location.

• The group states that this will be part of the company’s growth plans towards 95bil pcs/year by 2027. Its existing NGC 2.0 developments may either be delayed or run concurrently.

• Assuming NGC 2.0 plans are deferred, the Kedah expansion will increase annual production capacity by 80bil pcs per annum (totalling around 143bil per annum). The group plans to invest RM7bil to build 16 new plants over the next 20 years, with roughly 12 lines per plant.

• The acquisition is expected to be completed by March 2022, with the first plant set to be completed by CY2024. The acquisition will be funded by internal funds and existing credit facilities. We reckon Hartalega will be able to finance the acquisition without corporate exercises given its net cash position, backed by strong FY21–22 earnings.

• Considering that main infrastructures (i.e. earth filling work, utilities) will be made available by NGFZ, we believe that the price of RM21 psf is fair. Commercial land in the region is valued at around RM16–18psf. The area is said to be conducive for business due to its free industrial and commercial zone status.

• The development is deemed strategic for its potential cross-border trade growth with Thailand and attractive incentive scheme.

• We still like Hartalega for its product innovation and superior operating efficiencies. However, we expect the glove ASPs to decline post-Covid-19 as glove urgency wanes. The likelihood of this happening grows each day given the rapid rate of vaccination in countries such as the UK and US.

• Additionally, we express our concerns on potential competition by China glove manufacturers Intco and Blue Sail. They are slated to reach 120bil and 76bil annual production capacity by end-2022 respectively. Although we remain positive that the demand for gloves will remain stable post-Covid-19, China manufacturers may eventually provide direct competition if they continue expanding at their current rate

Source: AmInvest Research - 11 Mar 2021