Hartalega (HART) announced that they will be spending around RM3bn to build NGC 2.0, which will increase its capacity by 75% to 76bn pcs by 2029. We view the news as positive, given that its current NGC project is expected to be completed by early 2021, and new capacity from NGC 2.0 in 2022 will continue to support its profit growth. The announcement also helped to ease some of our concerns on HART’s growth strategy. Nevertheless, we are keeping our HOLD call unchanged and maintain our TP at RM6.40.

If It Ain’t Broken, Don’t Fix It

Given that the NGC model has been a success, we are not surprised that HART decided to undertake a similar expansion strategy as previously. The new NGC 2.0 will consist of 7 plants with an estimated production capacity of 32bn pcs and will cost around RM3bn (inclusive of land cost). We do not view the expansion as aggressive, as the capacity added is only around 8-10% a year, which is inline with long-term demand growth. We also believe that HART will continue to act rational, and slow down its expansion if needed to avoid overcapacity.

Positive Impact From Covid-19

During the call, HART also indicated that demand from rubber gloves remain strong, and they have locked in orders for the next 2 months. Interestingly, unlike its peers, HART is not committing any orders beyond 2 months, despite its peers already locking in orders beyond 4 months. We believe that the strong demand would allow manufacturers like HART more flexibility in determining their selling prices, which will have a positive impact on its profitability. Although there is some disruption in the current supply chain due to the movement control order, things are still manageable.

Maintain HOLD With An Unchanged TP of RM6.40

We view the announcement as positive, as it eases our concern about HART expansion strategy, given NGC project is close to completion. Despite that, we believe that the current valuation have already price in the expansion, hence we are keeping our TP unchanged at RM6.40 based on 42x CY20 PER (+1SD above its historical average), while maintaining our HOLD call unchanged. Risks to our call would be a sharp depreciation/appreciation of the Ringgit and a lower/higher-than-expected increase in raw-material prices.

Source: Affin Hwang Research - 26 Mar 2020