We believe market is still under-appreciating the potential impact from higher-than-expected ASPs led by the on-going pandemic as tight supply condition had buyers jockeying for allocation and pushing up ASPs. Amplifying the growth spurt is restocking activities reinforced by the pandemic with longer delivery lead times indicating that demand will outstrip supply at least over the medium-term. Hence, we raised our FY21E/FY22E net profit by 22%/19%, to account for higher ASPs. TP is raised from RM9.30 to RM11.66 based on 52x CY21E EPS. Reiterate OP.

Consensus under-appreciating higher ASPs’ impact. We highlight that market consensus is under-appreciating the potential impact from higher-than-expected ASPs in this continuing pandemic and tight supply condition. Due to the tight supply, we expect buyers to jockey for position in order to secure allocation which will push up ASPs. Personal Protective Equipment (PPE) of which glove is one of the components is presently much sought after due to limited supply. Longer delivery lead times are indicating that demand will outstrip supply at least over the medium-term. We believe HARTA will benefit from robust demand which has led to industry longer delivery lead times (the moment order is placed to delivery) which has risen to an average of between 120 to 150 days as compared to 40 to 50 days normally. We understand that industry has raised prices by 3-5% in anticipation of higher demand and we also noted the industry current high >90% utilisation rate for nitrile-centric players which is a stark contrast compared to the lacklustre demand in 2019. However, we are more bullish on higher ASPs in 2H 2020 due to the present tight situation of buyers jockeying for position to secure allocation.

Higher volume sales and ASP; longer delivery lead times. Longer delivery lead times are indicating that demand will outstrip supply at least over the medium-term. The Malaysian Rubber Glove Manufacturers Association has forecast a 20% demand growth to 230b pieces in 2020. We believe HARTALEGA will benefit from robust demand which has led to longer delivery lead times (the moment order is placed to delivery) which has risen to an average of between 80 to 100 days as compared to 40 to 50 days normally. Signs of demand outstripping supply could potentially lead to higher ASPs coupled with incremental cost and higher opex.

Outlook. The first 4 lines of Plant 6 (installed capacity of 4.7b pieces) have commenced commercial operations and the remaining 8 lines are expected to be gradually ramped up. Plant 7 is expected to be commissioned by end 2020 or early 2021, which will focus on small orders as well as specialty products with an installed capacity of 3.4b pieces. All in, Plant 5, 6 and 7 will add a total capacity of 12.1b pieces, raising installed capacity to 43.7b pieces per annum.

Raised FY21E/FY22E net profit by 22%/19% after imputing: (i) higher ASP from USD22/1,000 pieces to USD26/1,000 pieces for each year, and ((ii) higher utilisation rate of 92%/95% to 96%/97%, respectively.

Reiterate OP. YTD, the stock is up 68% and looking at the previous upcycle when the stock rose 200%, this indicates potential further upside. TP is raised from RM9.30 to RM11.66 based on 52x CY21E revised EPS (at slightly >+2.0SD above 5-year historical forward mean) from 50x previously. We like HART for: (i) a solid management, (ii) constantly evolving via innovative products development, and (iii) its booming nitrile gloves segment.

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

Source: Kenanga Research - 15 May 2020