In an announcement to Bursa Malaysia, Hartalega (HART) disclosed that it is buying a piece of land measuring 250 acres for approximately RM229m located in Bukit Kayu Hitam. We are positive on this latest corporate development by HART which reaffirmed its commitment towards long- term future expansion growth as well as capitalising on post-COVID demand growth, estimated at 15-20% per annum. Due to the industry’s reduced lead time and diminishing sentiment on the sector, we trim our TP from RM21.00 to RM17.00 based on 17x CY22E EPS. Reiterate Outperform.

Land acquisition in Northern Corridor economic region. In an announcement to Bursa Malaysia, wholly-owned Hartalega NSM Sdn Bhd is buying a piece of land via signing a sales and purchase agreement for RM229m measuring 250 acres (RM21/sq feet) from Northern Gateway Free Zone Sdn Bhd (Northern Gateway Free Zone), a wholly owned subsidiary of Northern Gateway Sdn Bhd (Northern Gateway is wholly owned entity of Minister of Finance Incorporated) – the master developer of the Kota Perdana Special Border Economic Zone (SBEZ) in Bukit Kayu Hitam, Kedah. Concurrently, both parties have also signed an option agreement for Hartalega to purchase another 130 acres in the same location. With endorsement from Government, the acquisition is located within the Kota Perdana SBEZ which is highly conducive for business due to its free industrial and commercial zone status. We are positive on this latest corporate development by HART which reaffirmed its commitment towards long- term future expansion growth as well as capitalising on post-COVID demand growth, estimated at 15-20% per annum compared to 8% pre- COVID. This land is an integral part of HART embarking on a massive capacity expansion with a potential investment of RM7b to build 16 plants over the next 20 years consisting of 192 new production lines with a capacity of 80b pieces. The entire expansion when completed will raise capacity to 143b pieces (including NGC 1.5 of 20b pieces). The first plant is set to be completed by 2024. The land acquisition cost is only a small dent to its net cash of RM1,785m as at 30 Dec 2020.

Industry lead time reduced but demand to remain steady. The recently announced results of industry peers suggest that the nitrile ASP uptrend could be waning and is expected to soften albeit at a slower pace on the back of still robust demand but unlikely to fall off the cliff. According to Malaysian Rubber Glove Manufacturers Association, the global shortage of rubber gloves will last beyond 1Q 2022 with growth rate averaging between 15% and 20% per annum going forward with still high lead time averaging 6-8 months though lower compared to 12-14 months previously. The lead times suggest that CY22 demand will remain strong, from increased demand brought by heightened hygiene awareness extending beyond the healthcare community.

Reiterate OP. No changes to our earnings forecasts. Our FY22E/FY23E ASP assumption are USD65/40 per 1,000 pieces. Due to the reduced industry lead time amidst diminishing sentiment on the sector, we downgrade our TP from RM21.00 to RM17.00 based on 17x CY22E EPS of 100.0 sen (at -0.5SD below 5-year historical forward mean) as we roll over our valuation base from CY21 to CY22. Our target PER is at a 35% discount to normalised 5-year pre-COVID historical forward mean averaging 26-28x. In our view, from the perspective of a long-term investor, we still see significant value in Malaysian glove players which command 65-68% of global market share which have consistently evolve and innovate in terms of products and plant modernization via automation.

Risks to our call is lower ASP occurring sooner than expected since it is likely to be unsustainable in the long term.

Source: Kenanga Research - 11 Mar 2021