Highlights

• Last week we had the privilege to visit Hartalega’s Next Generation Integrated Glove Manufacturing Complex (NGC) in Sepang. The following are some of the key take away:

• To recap, upon completion the NGC will house 6 factories running 72 lines with a built up capacity of 28.5bn pieces per annum. In addition to their existing capacity of 14bn pieces at Bestari Jaya, Hartalega’s total capacity will increase to 42.5bn pieces per annum.

• To note, production capacity rose to c.27bn pcs in 1Q18 (4Q17: c.25bn pcs) with the current 83 lines having a blended utilization rate of 91%. Adding to that, the NGC has a higher utilization rate than Bestari Jaya with a consistent above 90% utilization rate.

• We toured the NGC with a focus on plant 1 and 4. As per the update in 1Q18 results, plant 4 is fully constructed. We witnessed line 1 and 2 running at circa 45k pieces of glove per hour as highlighted by the group. Line 3 and 4 are being prepared for commissioning which is in line with the group’s promise to commission at about 1 line per month. Plant 4 is expected to be fully commissioned (12 lines) by 1 st half of CY18.

• Ground breaking for factory 5 has already commenced which will house 12 lines whilst plans for plant 6 would be tabled at a later stage. Construction of factory 5 is expected to be completed in CY18 for commissioning.

• As we toured factory 3, management highlighted certain areas in their production lines which have since been improved upon and will be reflected in future plants at NGC. Relative to its peers, the factory footprint was smaller in size as it utilizes an automated transport system to transport finished goods to storage.

• On water supply, which is crucial to the production of gloves, the NGC has water reserves which are able to sustain its operations for up to 3 weeks should there be a disruption.

Risks

• Key risks to the stock include a further surge in nitrile and latex prices, inability to sell off enlarged capacity culminating in ASP competition and a sharp appreciation of MYR vs USD.

Forecasts

• Unchanged.

Rating

• Whilst we like Hartalega for its leadership position in the nitrile glove market; high ROE and net profit margins amidst a favourable operating environment, we believe the share price has run its course and these fundamentals are fully reflected at the current share price. As such the stock warrants a HOLD call.

Valuation

• Maintain TP of RM7.04 as we peg our CY18 EPS to unchanged PER of 25.6x. Our ascribed PER of 25.6x is in line with Hartalega’s 5 year PER historical mean.

Source: Hong Leong Investment Bank Research - 13 Sept 2017