1H19 PATAMI of RM245.1m (+16.9% YoY) came in within expectations at 50%/48% of our/consensus full-year forecasts. We gather that competition in the nitrile gloves segment has intensified leading to pressures on ASPs and demand tapering off. TP is at RM5.15 based on an unchanged 32.5x PER (at +1.5 SD above 5-year historical forward mean) over CY19 EPS. Reiterate UP.

1H19 PATAMI of RM245.1m (+16.9% YoY) came in within expectations at 50%/48% of our/consensus full-year forecasts. A 1st interim dividend of 2.2 sen was declared in this quarter which is within expectation.

Key result highlights. QoQ, 2Q19 revenue rose 1.1% due to lower sales volume (-4%) and mitigated by higher ASP (+5%). The lower volume sales were due to a higher utilisation rate of 88% in 2Q19 compared to 92% in 1Q19 which we believe was due to demand tapering off coupled with competitive pressure. 2Q19 PBT margin decreased 0.7ppt to 19.9% from 20.6% in 1Q19 which we believe was due to higher input nitrile raw material cost. This brings 2Q19 PBT to RM142.4m (-2.4%). 2Q19 PATAMI came in at RM120.2m (- 3.7% QoQ) due to a higher effective tax rate of 15.4% compared to 14.2% in 1Q19.

YoY, 1H19 revenue rose by 20% due to higher sales volume (+15%) and ASP (+4%). Correspondingly, PBT rose 14% due to increase in sales volume despite PBT margin eroded by 1.0ppt to 20.3% from 21.3% in 1H18. This brings 1H19 PATAMI to RM245.1m (+16.9% YoY) due to lower effective tax rate of 14.8% compared to 16.9% in 1H18.

Potential competitive pressure. From our channel checks, we gather that competition in the nitrile gloves segment has intensified leading to pressures on ASPs. Note that generally, rubber glove ASPs had risen by an average of 25% since end 2016. As such, coupled with the moderating demand and in anticipation of new capacities ramp-ups, we would not be surprised if ASPs come under further pressure over the next two quarters.

Outlook. Looking ahead, the commissioning of Plant 5 has gradually commenced, starting from Aug 2018 with construction of Plant 6 in 1Q 2019. Two lines have commissioned in end Sept 2018. The remaining lines will be ready by end 1Q 2019. Plant 5 and Plant 6 will each have annual installed capacity of 4.7b pieces. Additionally, Hartalega plans to set up Plant 7, expected in March 2019, which will focus on small orders as well as specialty products. Plant 7 will have an annual installed capacity of 2.6b pieces. We expect contributions from Plant 5 to drive FY19 earnings growth. Once completed, Plant 5 is expected to boost additional capacity by 14.5% to 37.2b pieces per annum. All in, Plant 5, 6 and 7 will add a total capacity of 12.1b pieces, raising installed capacity by 27% to 44.6b pieces per annum.

Reiterate UNDERPERFORM. TP unchanged at RM5.15 based on an unchanged 32.5x PER (at +1.5 SD above 5-year historical forward mean) over CY19 EPS. We believe all the positives have been priced-in and valuations are steep with FY19-20E PERs trading at 42.7-39.0x compared to net profit growth of 10%-9% p.a. over the next two years.

Risks to our call. Higher-than-expected volume sales and faster- than-expected commissioning of new production lines.

Source: Kenanga Research - 09 Nov 2018