We maintain NEUTRAL with an unchanged TP of MYR3.95 (5% downside) as we remain cautious of heightened industry competition amidst a rising cost environment. We expect operating margins to be crimped as manufacturers struggle to fully pass on the higher costs, while deferredcapacity expansion will subdue earnings growth. Nonetheless, we believe current valuations have caught up with the fundamentals where the stock is trading marginally above its historical +0.5SD valuation band.

Weaker ASP. Reflecting the more competitive landscape, Hartalega reported a 17% QoQ fall in ASP. We believe that the ASP decay was exacerbated by greater exposure in the nitrile glove segment as well as a relatively more concentrated clientele base. Furthermore, we forecast ASP pressure to remain in subsequent quarters, as the industry adjusts to evolving demand-supply dynamics. This could complicate the cost pass-through mechanism with itscustomers, especially in a rising cost environment (minimum wage/raw materials) and would adversely impact operating margins.

Capacity growth deferred. Amid a more competitive landscape, Plant 3&4 of the Next Generation Complex (NGC) would now be delayed to Oct 2016 (three months delay) while the pace of commissioning would fall to two lines per 1.5 months (from two lines per month for Plant 1&2). While this would alleviate over-supply concerns, future earnings growth will be moderated. Downside risk to our recommendation includes a rebound in raw material prices while upside risk is a weaker-than-expected competitive landscape.

Maintain NEUTRAL. We remain cautious as we believe valuations have caught up with fundamentals despite the challenging outlook. Maintain NEUTRAL with unchanged TP of MYR3.95 (5% downside, CoE:9%, TG:2%) with an implied CY16F P/E of 23.5x. The stock is trading at 24.7x CY16F P/E, marginally above its historical +0.5SD trading band of 24.0x - an 8 month valuation low.

Source: RHB Research - 4 May 2016