We visited Hartalega’s NGC plant in Sepang yesterday. Hartalega’s total production capacity has almost doubled since the NGC plant commenced operations in FY15. The Group currently has 41 lines in full operation at NGC, in addition to its 45 lines at the old manufacturing facility. 92% of the NGC’s overall equipment efficiency is much higher than the global standard and the company is currently the largest nitrile glove manufacturer in the world. Maintain HOLD with TP of RM7.20.

Untapped Market in Developing Countries

Hartalega’s production capacity is expanding at 15-20% p.a. (approximately 4- 5bn pieces of glove products p.a.) over the next 3 years. The group’s production capacity is 21.3bn pieces in FY17 and will gradually expand to approximately 30bn pieces and 34bn pieces in FY18 and FY19 respectively. Hartalega expects the demand for glove products to remain strong in the coming years, owing to the large untapped market in developing countries and increasing consumption of glove per capita in line with the growing health awareness. Hence, the company is expanding its production capacity to cope with rising global demand.

This Note Marks a Transfer of Analyst Coverage.

Production Capability

Hartalega has one of the lowest rejection rate in the industry at 0.3% or 3000PPM (3000 rejects for every 1m glove products). All the 41 production lines at NGC are running at a rate of 45,000 pieces/hour. The building of three additional NGC plants (Plant 4-6) will continue to underpin Hartalega’s capacity expansion in the coming years, adding capacity to produce 14.7bn pieces p.a. The group has allocated approximately RM300m p.a. for capital expenditure (capex), of which 60% of capex can be utilized to offset statutory income for tax purposes. The impact of the planned capacity expansion is reflected in our FY18-20E earnings.

Maintain HOLD With Unchanged TP Raised of RM7.20

We maintain our HOLD call with TP of RM7.20, based on an unchanged PER of 25x. We continue to like Hartalega for its i) strong volume growth from increasing production capacity; and ii) improving operational efficiency. Key risks to our view include: i) sudden movements in the US$ against the RM, ii) sharp changes in raw material prices, and iii) greater or lesser-than-expected price competition among the glove manufacturers.

Source: Affin Hwang Research - 20 Oct 2017