We are maintaining our HOLD call on Hartalega (HART), despite raising our TP to RM6.30, due to the limited upside, post our recent meeting with management. Management does not think that there will be an oversupply looming the industry moving into 2H18, as demand for rubber glove remains robust, echoing our positive view on the sector. The recent weakness in the RM is also benefiting HART and the industry.

44.6bn Pcs Capacity Target by End of 2020

By end of 2020 with the completion of the Next Generation Integrated Glove Manufacturing Complex (NGC), HART’s overall production capacity would rise to 44.6bn pcs from the 32.5bn pcs currently. There are some delays to the start of Plant 6 and 7, which will add around 7.3bn (~22%) pcs to its current capacity. However, this is still within our expectations. Nevertheless, Plant 5 has started production, and management is targeting full production by year-end, effectively adding around 4.7bn (~14%) pcs to its capacity. Hartalega is currently operating at 90% utilisation rate.

Weakness in RM Can Benefit Everyone

Management is not worried that the new capacity coming through in the 2H18 will lead to an overcapacity, as the current demand is able to absorb the incremental supply. The sector is operating at around 85%-90% utilisation. Although there are concerns about rising production cost (under the new SST regime) and also increase in nitrile cost, we believe that the recent weakening of RM can helped to ease the need to raise ASP. Even without positive impact from the currency, manufacturers would still be able to pass on the higher cost, in our view.

Maintain HOLD With a Higher TP at RM6.30

We are maintaining our HOLD call, despite increasing our TP to RM6.30 based on 35x FY20E PER (+2SD) from 31x FY20E PER previously, due to the limited upside. We have also tweaked our EPS forecast by 0.3%-0.4%, to factor in the impact of currency and progress of Plant 5. The risk to our investment thesis lies in a sharp movement in the RM, and unexpected changes to production cost.

Source: Affin Hwang Research - 25 Jul 2018