Tell-tale signs like normalising demand, swelling capacities and intensified competition are pointing towards a potential slower set of results over the next two quarters. Anecdotal evidence suggests that shorter delivery lead time means tapering demand coupled with competitive pressure and industry-wide production ramp-ups could result in ASP compression. These prompted us to downgrade our FY19E/FY20E forecasts by 2%/5%. TP is cut from RM5.15 to RM4.85 based on 32x CY19E EPS. Reiterate MP.

Competitive pressure, demand tapering off. Tell-tale signs like normalising demand and intensified competition are pointing towards potential slower set of results in subsequent quarters. Anecdotal evidence suggests that shorter delivery lead time does indicate that strong demand is tapering off and players ramping up production could result in further ASP pressure. From our channel checks, we gather that competition in the nitrile gloves segment has intensified leading to pressures on ASPs. 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. We understand that over the past six months, delivery lead times (the time frame between order and delivery) have shortened from 60-70 days compared to 30-45 days, potentially indicating that strong demand is tapering off.

Undemanding valuations, lacks catalysts. Based on past historical observation over the past two oversupply period in year 2014 and 2016, glove makers’ 1-year forward PER trades at between mean to +1.0SD mark. Hartalega is currently trading at mean to +1.0SD above five years’ forward average which appears undemanding.

Outlook. Looking ahead, Plant 5 of NGC facility has commissioned 6 out of 12 lines with remaining production lines to come on progressively by end 1H 2019. Construction of Plant 6 structure has started with the supporting facilities to follow in the second half of calendar year 2019. Plant 5 and Plant 6 will each have annual installed capacity of 4.7b pieces. Additionally, construction of Plant 7 is expected to begin in May 2019, which will focus on small orders as well as specialty products with 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.

Downgrade FY19E/FY20E earnings by 2%/5%. We downgrade our FY19E/FY20E net profits by 2%/5% to take into account the lower-thanexpected ASPs.

Reiterate MP. Correspondingly, we downgrade our TP from RM5.15 to RM4.85 based on 32x PER (at +0.5SD above 5-year historical forward mean) over CY19 EPS. We believe all the negatives could have been priced in with valuations trading at previous oversupply cycle of between mean and +1.0SD which appear undemanding. However, the sector lacks positive catalysts over the short-to-medium term.

Risks to our call. Higher-than-expected volume sales and ASPs.

Source: Kenanga Research - 18 Mar 2019