[HARTA (5168) - AGM 2019 Meeting]

HARTA is the largest producer of Nitrile Glove, producing about 34bil units of glove a year.

Fiscal Year 2019:
Turnover YoY increased by 17.5% and CAGR increased by 26.1% (FY05-FY19).
Profit after tax YoY increased 3.4% and CAGR increased 28.8% (FY05-FY19).
Net profit margin is 16%.
Earning per share - YoY increased by 3.0% and CAGR increased by 16.0% (FY08-FY19).
Dividend per share - 8.2 cents, Dividend Payout Ratio 60%.

✅Q: How does management ensure that the company remains competitive?

A: In the short term, we will focus on cost control and automation to enhance operational efficiency and avoid falling profit margins. In the long term, we will expand production, investing in Industry 4.0 to reduce labor demand, develop new products for customers in different fields, and leverage AMG to highlight and protect our market share.

✅Q: How does management respond to the China-US trade war?

A: China medical gloves have an export tax to US starting in September. We expect this will be good for Harta, as US buyers will look for glove sources from Malaysia, but markets outside the US may be affected as China will sell their gloves to them. Our marketing team will continue to focus on the market to ensure that we are prepared for everything before the market changes.

✅Q: How much influence does natural gas have on the company? How long does it take to pass the cost to the customer? How much impact on FY2020's profit margin?

A: Based on short notice, we cannot immediately transfer costs to customers. It usually takes us 2-3 months to pass the cost to the customer. As for the impact of net profit is less than 1%

✅Q: What percentage of turnover and net profit does AMG account for? When do you expect to get FDA approval? Will the United States be the largest market? Once the permit is obtained, how much turnover can it bring?

A: At present, the turnover of AMG gloves is still very small, because it is still in the initial stage of the product. FDA approval is expected in the second half of 2020. The US will be the largest glove market, but now it is difficult to predict the turnover that can be generated.

✅Q: Is the ERP (Enterprise Resource Planning System) upgraded? What is good for the company?

A: On Apr 19, the ERP System has been upgraded at the NGC plant. The same upgrade will be launched at Bestari Jaya and is expected in 2020. The benefits of ERP are that the order from shipment to shipment will be integrated, labor and raw material planning will be strengthened, and the entire process will be integrated.

✅Q: The Trade Receivable Ageing Analysis of the annual report states that there is a debt overdue of RM18.2mil for more than 121 days. How much was recovered in FY2020? Is it about customer A who accounts for 27% of the turnover? How can companies avoid becoming too dependent on a single customer?

A: The account receivable of RM18.2mil has been recovered in May 19, and customer A currently accounts for 27% of the turnover. We provide 60% of their needs, and we have been working with Customer A for more than 20 years. These customers buy a lot of gloves, and we can also do everything we can to increase production efficiency and reduce production downtime because the company does not need to switch product types, colors and sizes.

✅Q: Why did the Benefit in Kind (BIK) of management increase from RM 0.38mil last year by RM17mil?

A: The reason for the increase is that Director uses ESOS. These consultations have been written in the annual report Note19 (c).

✅Q: What percentage of profit margin will management be satisfied with?

A: At of now, our profit margin is ranging 4-5% and it is higher than our peers. We have confidence in AMG, and customer B. Braun also takes a positive view. They can influence to hospitals to use AMG gloves. And because of market competition, we have to reduce profit margins, which is unavoidable.

✅Q: How does the company keep R & D talents in the company

A: Some R & D colleagues haven't joined us; and some of them have been with us for more than 20 years. We are still hiring talent. We provide our colleagues in the R & D department with the freedom and the all equipment needed. In addition, we also have a new R & D center, which is a good working environment. Of course, the salary package offer is very good. Harta is a leader in the industry, and this honor has made colleagues in the R & D department willing to stay longer.

✅Q: If AMG sells well, how long does it take the company to convert all production lines into AMG products?

A: We can switch from ordinary gloves to AMG at any time.

Team Opinion:

The management has great confidence in the company's future during the AGM meeting. Although Harta's FDA pass will not be available until the second half of 2020 next year, we believe management is confident to obtain the permit.

Management also revealed that once AMG sells well, they can convert all production lines into AMG products in a short time. Therefore, it can quick win in the AMG market. Although Harta's turnover is not as good as TopGlove, the company has been able to produce close to 60% of TopGlove's turnover with fewer production lines, and its profit margin is 4-5% higher than its peers. Even if raw material prices rise, the company still has room to make profit.

Louis Yap

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