We  visited  Hartalega’s  NGC  site  recently  and  gathered  that  all expansions  are  on track. Maintain BUY  and MYR7.70 TP (21x 2015 P/E, 11.8%  upside).The  first  two  lines  will  commence  operations  by  endNovember  and December respectively. The NGC is designed to achieve high efficiency and productivity. Despite a potential short-term earnings impact, this expansion is crucial to retaining its market leadership.

Visit to NGC. We visited Hartalega’s Next Generation Complex (NGC) recently  and  gather that all  progression  is  on track. The first two plants’ super  structures  are  ready  and  production  lines  are  currently  being installed. The first two lines are on schedule to commence operations by end-November and December respectively. The NGC will be built on 112 acres  of  leasehold  land  along  Jalan  KLIA.  Hartalega  will  be commissioning two plants of 12 lines each, with completion slated for 4Q 2015. Once  the  two  plants  are  completed  simultaneously, another  two plants  are  slated  to  be  built  at  the  same  time.  All  these  are  under  its Phase  1  expansion.  Phase  2  will  begin  after  a  market  observation breather and to complete the remaining two plants consecutively. 

Strong  capacity growth  prospects.  Management expects  its installed capacity to progessively reach 22bn by FY16 (Mar) (from 14bn in FY14). The contribution may not be significant as the lines are being installed instages.  Upon  completion  of  its  NGC  plants,  Hartalega’s  total  installed capacity could reach 42bn pieces per annum by 2020.

Focusing  on efficiency.  The dual purposes of building the  NGC are to achieve  cost  efficiency  and high productivity: i) plants and warehouses will  be  streamlined  to  achieve  optimal  logistics  efficiency,  and  ii)  the plants  will  be  equipped  with  the  most  technologically-advanced production lines and automation, which may help to sustain margins.

Potential short-term earnings impact.  We believe there could be some short-term  impact on its  bottomline  as the  production  lines have  yet  to contribute  to  earnings  but  headcount  may  be  increasing.  Nonetheless, we  believe  the  expansion  is  crucial  for  the  company  to  maintain  its market leadership. 

Maintain  BUY.  We  make  no  changes  to  our  earnings  forecasts  –  we expect a flattish FY15 but stronger earnings in FY16 and FY17. Maintain BUY and  MYR7.70  TP,  pegged to  a  21x  2015  P/E,  ie   +1.5SD from  its historical trading mean.

Source: RHB