• Revenue to be supported by resilient demand

• Higher capacity to offset lower ASPs

• Capacity expansion well on track

• 1QFY18 earnings to imitate previous quarter’s earnings

• Earnings forecasts for FY18-19F lifted by +10.3% and +19.3%

• Maintain NEUTRAL with a revised TP of RM6.99

Revenue to be supported by resilient demand. We opine that Hartalega’s earnings will remain resilient in FY18 as we are expecting new demand to come from China due to the switch from vinyl gloves to rubber gloves. In addition, the continuous switch in demand for powdered gloves to non-powdered gloves and nitrile gloves has allowed demand to remain resilient. Furthermore, we opine that revenue wil also continue to be supported by the slower growth in the glove industry’s capacity expansion which has provided Hartalega with a more conducive environment to price its product. This is as opposed to the intense pricing competition last year which caused the glove manufacturers to reduce prices in order to compete for orders.

Increasing capacity to offset lower ASP. From our observation, we note that natural rubber price have been steadily coming down from its peak of RM8.16 per kg back in February. As of 30 June, the average price of natural rubber stands at RM5.73 per kg. This means that Hartalega would have to adjust its ASPs lower to accommodate for lower raw materials price. However, despite the expected lower ASPs, we think that the new capacity from Plant 3 will assist to offset the lower ASPs going forward as demand is expected to remain resilient.

Capacity expansion well on track. We understand from the management that the commissioning of the production lines in its Plant 3 of the NGC has now been fully-completed. It will now move on to the production lines in Plant 4 which will begin commissioning in late July. There will be 12 production lines in Plant 4 and Hartalega expects to commission one production line per month. Management expects to complete the full-commissioning of Plant 4 by middle of 2018.

Source: MIDF Research - 12 Jul 2017