Highlights

• We organised a plant visit to Hartelega NGC in Sepang and came back feeling neutral with slight positive bias by looking at the progress of NGC.

• Plant 1 and Plant 2 in NGC has commenced operation in Jan’15, two months behind its schedule. We understand that the delay was due to completion of utilities supply.

• Currently, Plant 1 and Plant 2 are running with three production lines each and we were guided that every month, one production line will be added on every plant.

• Upon full commissioning of the NGC, there will be six production plants in total with 12 production lines installed in each plant. This will contributes an additional 28.5bn pcs annual capacity for Hartalgea, on top of its current 14bn pcs capacity from Bestari Jaya.

• We also learnt that speed of production line now improved to 45,800 pcs per hour per line, consistently higher that industry’s average.

• 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.

• We also saw Hart alega’s continuous effort to pres erve the envi ronment 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.

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

• We trimmed our production capacity for FY15 from 12.9bn pcs to 12.5bn pcs as we factor in the previous delay in NGC commissioning from Nov’ 14 to Jan’ 15. As a result, our EPS assumption for FY15 was diluted by 3%.

Rating

HOLD , TP: RM8.45

Positives

• Leader in nitrile glove market; highest ROE and net profit margins; most efficient and profitable glove maker; and appreciation of USD. In the event of a price war, Hart alega’s earnings will be the least affected, shielded by its high profit margins.

Negatives

• Possibility of increased competition in nitrile glove market.

Valuation

• We raise our TP from RM7.43 to RM8.45 as we lift our target P/E from 16.2x to 18.4x as we update the latest figure.

Our valuation is pegged to Hartal ega’s CY16 EPS, based on 1SD above 5-year historical average P/E. Maintain HOLD.

Source: Hong Leong Investment Bank Research - 3 Apr 2015