Solid glove player

Maintain HOLD, RM5.30 TP. We maintain our HOLD recommendation on Hartalega with a revised TP of RM5.30, based on 27x CY17F EPS. We expect Hartalega to register FY17- 19F earnings CAGR of 15%, as improving demand and staggered capacity expansion offset slight margin compression from higher operating costs. We believe valuations has priced in this growth.

Premier nitrile glove maker. We expect Hartalega’s Next Generation Complex (NGC) to cement the group’s position as the premier nitrile glove maker in the world, reinforcing its competitive advantages with better efficiency and sufficient capacity growth. Located on a 112-acre site in Sepang, Hartalega’s NGC comprises six nitrile glove plants with a total of 72 production lines capable of producing 28.2bn gloves p.a. Each production line is able to churn out 45k gloves/hour, translating into a record high productivity level of2.6 employees per million gloves per month (vs 3.9 currently, and industry average of 4.7).

NGC to drive growth ahead. NGC Plants #1 and #2 were fully commissioned in March 2016 with 24 production lines. The average output per line is 45,000 pieces per hour.These new plants have lifted its total capacity to 20bn pieces p.a. Meanwhile, the group has started construction on NGC Plant #3 targeted for completion in 2H17. The construction of NGC Plant #4 is scheduled for completion by end-2018.

Valuation

Expect share price to consolidate at current level. In our view, earnings growth prospects from NGC have largely been priced in. Our TP is based on 27x CY17 EPS.

Key Risks to Our View

Increased competition could erode margins. Hartalega could face increased competition ifother glove makers significantly ramp up capacity into the nitrile glove segment. This could reduce Hartalega’s lucrative margins.

Source: Alliance Research - 13 Mar 2017