We are positive on Hartalega (HART)’s growth prospect underpinned by demand uptick. We see re-stocking activities ramp up as the current outbreak of the Wuhan virus enforces higher hygiene standards. BUY with a TP of RM6.50 based on 39.5x FY21E EPS. We like HART for: (i) its “highly automated production processes” model as they are head and shoulders above its peers in terms of margins and cost reduction management, (ii) constantly evolving via innovative products development, and (iii) its booming nitrile gloves segment.

Based on our analysis, we expect nitrile gloves to continue growing and grabbing market share from latex gloves. The growth in nitrile segment is evident. For illustration purposes, going forward, assuming nitrile:latex breakdown of 80:20 (current is 67:37) and based on estimated global demand of 324bn pieces in 2020 (forecast for 2019 is 300bn pieces and assuming 8% growth rate in 2020), this implies nitrile growth rate of 30% or an additional 51bn pieces from switch to nitrile gloves.

From our ground checks, demand for nitrile gloves is picking up again where players’ new capacities are being swiftly taken up. The application of higher hygienic standards to rein in the outbreak of the new Wuhan virus is expected to help ramp up re-stocking activities. For every 1% increase in volume sales our FY21E net profit will be enhanced by 1.2%.

The first line of Plant 6 (installed capacity of 4.7bn pieces) has commenced commercial operations and the remaining 11 lines are expected to be gradually ramped up. Plant 7 is expected to be commissioned by 2HCY20, which will focus on small orders as well as specialty products with an annual installed capacity of 3.4bn pieces. All in, Plant 5, 6 and 7 will add a total capacity of 12.1bn pieces, raising installed capacity by 27% to 44.6bn pieces per annum.

Source: Rakuten Research - 22 Jan 2020