Results

1H1 5  revenue  of  RM554.4m  was  translated  into  core  net profit  of  RM107m  (-23%  yoy).  This  came  in  within  our expectations  but  below  consensus,  which  accounted  for 48.1%  and  44.9%  of  HLIB  and  consensus  full  year estimates, respectively.

Dividends

• Declared  1 st interim  (single-tier)  dividend  of  3.0  sen (1HFY14:  3.5 sen) per share with ex -date on 3 rd Dec.

Highlights 

2Q15  sales  revenue  weakened  to  RM275.2m  (-2%  yoy, -1.4%  qoq)  in  spite  of  an  increase  in  sales  volume.  This indicates  a  decline  in  ASP  in  both  latex  and  nitrile  gloves. The  declining  ASP  was  caused  by  declining  raw  material prices and the competitive  pricing environment.

EBITDA  margin  fell  by  5.8ppt  yoy  to  27.5% .  The  margin compression was due to the  high  NGC start- up costs as well as increase in electricity and natural  gas cost.

As NGC capacity has  yet to contribute,  production capacity in  this  current  quarter  stalled  at  3.5bn  pcs  from  the  current 55 lines. Utilisation rate  stood at 87.4%, expecting to remain at this level  which is considered  to be  full capacity.

To  recap,  the  NGC  project  in  Sepang  is  set to  commission its  first  two  production  lines  by  4QCY14  and  complete  the construction  of  two  plants  by  4QCY15.   In  total,  NGC  will house 6 plants  with  72 production  lines   that produce 28.5bn pieces,  bringing  total  annual  installed  capacity  to  42bn pieces upon  targeted completion  in 2020.

Hartalega  views that the incoming NGC capacity  will be able to  sustain their  earnings and mitigate  concern  of lower ASP that has been  impacting top and bottom line.

In view of the steady global demand growth for nitrile gloves, it  does  not  expect  price  war.  Instead,  they  attributed  the lower  ASP  to  declining  raw  material  prices  and  more competitive  product pricing.

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.

Rating

HOLD, TP: RM7.43

Positives  –  Leader in  nitrile glove market; highest ROE and net profit margins; most efficient   and  profitable glove make r; and  appreciation  of  USD.  In  the  event  of  a  price  war, Hartalega’s  earnings  will  be  the  least  affected,  s hielded  by its high profit margins.

Negatives  –  Possibility  of  increased  competition  in  nitrile glove  market.

Valuation

• Although  there  is  an  11.3%  upside  to  our  TP,  we  remain conservative and maintain  our HOLD call on the counter  due to the  declining ASP trend and competitive  environment.
• Reiterate  HOLD  on  th e  back  of  unchanged  TP  of  RM7.34.

Our 

Valuation is   pegged  to  an  unchanged  multiple  of  16.2x of  CY16  EPS,  based  on  1SD  above  5 -year  historic al average  P/E

Source: Hong Leong Investment Bank Research - 19 Nov 2014