Highlights/ Comment

From  our  recent  update  with  management,  it  is  confirmed that NGC (Next Generation Integrated Glove Manufacturing Complex)  is  on  track   towards  the  commissioning  of  its  first two production  lines  by November.

Under Phase 1, there will be  2 plants housing 12 production lines each,  with  commencement in  Nov 2014  and  expected completion  by  4QCY15.  In  total,  NGC  will  accommodate  6 plants with 72 production  lines , targeting  completion  in 2020.

Given that the  production lines will be progressively built, the increase in  capacity will be marginal  in FY15 and the  boost will  only  come on -stream in FY16 and FY17.   This will  bring capacity from 12bn to 25bn in  FY14 to FY17 or  double within 3 years.

Utilisation  rate  will  be  maintained  at  85% -90%,  which  is considered  to be at full capacity.

Hartalega  does  not  face  any  demand  issue  with  demand growing steadily at double digit.  They are c onfident in selling off  the  capacity  from  Phase  1  as  existing  customers   have already shown  interests .

NGC will be built for the purpose of cost  efficiency  and  high productivity,  by  incorporating the  most  technologicallyadvanced  production  lines  and  a  decent  blueprint  to streamline production.  We deem this to be a strategic move to sustain margin going  forward.

Given  the  minimal  capacity  contribution  in  FY15  as  well  as higher  NGC  start-up  costs,  we  are  expecting  weaker earnings  in  FY15.  Nevertheless,  we  believe  that  it   will  be short-lived  and  earnings  will  gain  momentum  once  the capacity commences in FY16.

On  a  side  note  regarding  Ebola,  Hartalega  noticed  slight increase in demand. However, it  is insignificant to their total sales,  which  is  expected  as  mentioned  in  our  sector  report dated 30 th October 2014.

Risks

• Further  reduction in ASP amid steep competition.
• Surge in nitrile and latex prices.
• Shift in demand from nitrile gloves to natural latex gloves, if prices of natural  latex fall significantly below that of nitrile.
• Depreciation  of USD  vs.  MYR.

Forecasts

• Updated model  based on the latest capacity guidance. As   a result,  FY15  EPS  w ere  trimmed  by  4.3%  but  FY16-FY17 EPS  were  raised  by  1- 17%.  Net  adjustment  resulted  in  a higher  CY16  EPS.

Rating

HOLD, TP: RM7.43

• Positives  –  Leader in nitrile glove market; highest ROE and net profit margins; most efficient and  profitable glove maker. In the event of a  price war,  Hartalega’s earnings will be the least affected,  shielded by its high profit margins.
• Negatives  –  Possibility  of  increased  competition  in  nitrile glove  market.

Valuation

• Maintain  HOLD  with  a  higher  TP  of  RM7.43  (+21.4%  from RM6.12  previously)  as we roll forward valuation to CY16.
• Our  valuation was  pegged  to  an  unchanged  multiple  of 16.2x  of  CY16  EPS,  based  on  1SD  above  5-year  historical average  P/E

Source: Hong Leong Investment Bank Research - 13 Nov 2014