• The following are some key takeaways from our recent update with management.

• To recap, 1H18 revenue of RM1, 186m, was achieved on the back of (i) higher quantity sales (+30.2%) on an enlarged production capacity (1H18: 85 lines vs. 1H17: 69 lines) and (ii) higher ASP which resulted in PATAMI growing 64.7% yoy. EBITDA margins expanded by 3.0ppts (1H17: 22.1% vs. 1H18: 25.1%).

• Whilst the whole sector has benefited from China’s environmental policy resulting in a deficit of vinyl gloves. However China alone hasn’t been the only driver of Hartalega’s earnings. The China “vinyl factor” currently constitutes less than 5% of the group’s total sales.

• The group’s customer acquisition strategy to sell off its capacity expansion has been the primary driver of its earnings growth. We can expect sales to Asia/EM and Eastern Europe in general to continue to grow as the group focuses its sales force in these non-traditional markets. To note, Hartalega’s customer base has increased by c.20% yoy.

• Hartalega recently announced a new product extension to its stable with the introduction of the first “non-leaching anti microbial glove”. The product is said to kill 99.99% of germs within 5 minutes of contact and is expected to mitigate “hospital acquired infections” (HA I). Unlike other gloves of a similar utility in the market, this product is completely dry (vs. wet), does not leave traces of anti-microbe agent (“non leaching”) and isn’t a niche product (i.e surgical).

• This new product is designed to be a mass market medical product which is expected to take up the additional capacity of the NGC moving forward. Trials in the UK are being undertaken this month, with launching of the product expected to take place by 1Q19. Expect FDA registration to take about a year before the product can be sold in the USA.

• On the NGC, Plant 4 which is targeted to complete in 1Q19 is expected to remain on schedule, whilst construction of Plant 5 will commence in May 2018.

Risks

• Key risks 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

• We like Hartalega for its leadership position in the nitrile segment and strong fundamentals. However, we believe the stock is fully valued at this juncture, whilst the shadow of the demising ringgit catalyst could halt further impressive earnings gain this year. Maintain HOLD.

Valuation

• Increase our TP to RM8.75 from (RM7.45) as we roll our valuation into on CY19 EPS pegged to PER of 26x. Our ascribed PER of 26x is in line with Hartalega’s 5 year PER historical mean (see figure #5).

Source: Hong Leong Investment Bank Research - 8 Dec 2017