• Hartalega’s results were very strong - 1HFY21 PATAMI of RM764.7m (+286% yoy) was supported by a 40% increase in ASP in 2QFY21
• Although the 1HFY21 PATAMI is only 41% and 39% of our and the consensus forecasts respectively, we are still expecting stronger quarters ahead, as management is guiding ASP to increase by 5-50% in the next few quarters
• We raise our earnings for FY20-22E by 22%-60% to input a higher ASP forecast, but lower our TP to RM27.10 as we peg it to a lower PE multiple at 31x.

Guiding for Stronger Quarters Ahead

Although HART managed to increase ASP by 40% qoq in 2QFY21, management is still guiding for higher ASPs to the tune of 5-50% qoq in the coming quarters, and mentioned that their ASPs are still 25-30% below the price leader. We believe that the ASP guidance is achievable, given that the number of COVID-19 cases is still on an upward trajectory, and the new capacity coming on stream in the next 6 months is still insufficient to meet current demand. Management also believes that the current demand will continue even with a vaccine, and the ASP can still rise post-2021. However, we are taking a more prudent approach, as we assume that ASPs will remain stagnant by 2H21.

New Entrants Are Not a Threat

We concur with management that the new entrants are unlikely to be a threat to existing players, at least over the next 6-12 months, given that there is also a shortage in equipment for new production lines. Apart from that, the new entrants would also need to address the current labour shortage issues, where existing players are able to rationalise their current workforce with the help of more automation. Given that the current shortage of nitrile (raw material) is unlikely to be resolved by early 2022, existing manufacturers including Hartalega, have to allocate some of the new capacity to produce natural rubber latex gloves instead of nitrile gloves.

Reaffirming BUY Rating With a Lower TP of RM27.10

We raise our FY21-23E EPS by 22.4%-60.3% to factor in a higher ASP assumption, given the recent management guidance. We believe that there could be upside risk to the current ASP assumption, given the recent new wave of COVID-19 cases around the world. However, we have reduced our TP to RM27.10 (from RM28.00) as we pegged to a lower multiple at 38x CY21E EPS (pre-COVID19 +1stdev) from 52x (+2 stdev), as we believe that the market sentiment might be weaker in the coming months, due to the news of the progress of the vaccine. Key risks: earlier-than-expected availability of a COVID- 19 vaccine and additional tax on rubber gloves.

Source: Affin Hwang Research - 28 Oct 2020