• Although Hartalega’s (HART) FY21 core-PATAMI of RM2.97bn (+585% yoy) came in below our expectation, its results were within consensus
• Despite ASP increasing by more than 50% qoq, the miss was due to lower sales volume as HART was forced to operate at reduced capacity due to Covid-19 outbreak at its factory
• We raise our FY22-23E earnings by 3.2%-3.8% to factor in the latest ASP forecast, but reduce our TP to RM14.90 while maintaining our BUY call

Production Has Now Been Fully Resumed

Despite growing its core-PATAMI by 20% qoq, this was still below our expectation as HART was not able take the full benefit of the >50% qoq increase in ASP given that it was forced to operate at a reduced capacity due to the Covid-19 outbreak at its factory. HART was operating at a reduced capacity for most of Jan and Feb, which resulted in volumes declining by 29.5% qoq. Overall utilisation had also fallen to 64% from 95% in 3QFY21. Although production has fully resumed, management guided that the current shortage of shipping containers globally would also have a negative impact on its sales, as it is currently taking longer to deliver goods to its customers, although still manageable.

Guidance on ASP Is Still Positive for the Next Quarter

Management guided that they are still expecting positive ASP growth for 1QFY22, despite some of its peers having already started to cut their ASPs. Management believes that the reduction in its peers’ ASPs were not due to an overcapacity issue, but company-specific issues instead. In our forecast, we are assuming for ASPs to decline by around 5%-10% in 3QFY22E, and around 3-5% mom for the following quarters. The decline is mainly due to the reduction in spot orders, which has helped to drive up ASPs for normal deliveries too. We are not expecting an overcapacity scenario to materialize in 2022, as we believe the Big 4 will continue to behave rationally in building their capacity.

Maintain BUY With a Lower TP at RM14.90

We raise our 2022-23E earnings forecasts by 3.2%-3.8% to factor in the higher realised ASP for the quarter. We are, however, pegging valuations to a lower PE multiple of 20.0x (at -1SD of historical average), which is lower than the previous 23.5x (at historical average), as investors remain sceptical on the ASP trend, and lower our TP to RM14.90 (from RM17.00). However, we are keeping our BUY call, as the current valuation is still attractive. Key downside risks are: 1) unexpected disruption to its production line, and 2) spike in volatility in the USD/MYR.

Source: Affin Hwang Research - 5 May 2021