This article first appeared in The Edge Financial Daily on December 11, 2017

Hartalega Holdings Bhd
(Dec 8, RM9.19)
Maintain hold with an increased target price of RM8.75: To recap, first half of financial year 2018 (1HFY18) revenue of RM1,186 million was achieved on the back of (i) higher quantity sales (+30.2%) on an enlarged production capacity (1HFY18: 85 lines versus 1HFY17: 69 lines) and (ii) higher average selling prices (ASP) which resulted in profit after tax, amortisation and minority interest growing 64.7% year-on-year (y-o-y). Earnings before interest, taxes, depreciation and amortisation margins expanded by three percentage points (1HFY17: 22.1% versus 1HFY18: 25.1%).

The whole sector, meanwhile, has benefited from China’s environmental policy resulting in a deficit of vinyl gloves.

However, China alone hasn’t been the only driver of Hartalega’s earnings. The China “vinyl factor” currently constitutes less than 5% of the group’s total sales.

The group’s customer acquisition strategy to sell off its capacity expansion has been the primary driver of its earnings growth. We can expect sales to Asia/emerging markets and Eastern Europe in general to continue to grow as the group focuses its sales force in these non-traditional markets.

To note, Hartalega’s customer base has increased by about 20% y-o-y.

Hartalega recently announced a new product extension to its stable with the introduction of the first “non-leaching antimicrobial glove”. The product is said to kill 99.99% of germs within five minutes of contact and is expected to mitigate “hospital-acquired infections”.

Unlike other gloves of a similar utility in the market, this product is completely dry (versus wet), does not leave traces of antimicrobial agent (“nonleaching”) and isn’t a niche product (that is surgical).

The new product is designed to be a mass market medical product which is expected to take up the additional capacity of the next generation integrated glove manufacturing complex (NGC), moving forward. Trials in the UK are being undertaken this month, with launching of the product expected to take place by 1QFY19. Expect Food and Drug Administration (FDA) registration to take about a year before the product can be sold in the US.

On the NGC, Plant 4 which is targeted to be completed in 1QFY19, is expected to remain on schedule, while construction of Plant 5 will commence in May 2018. — Hong Leong Investment Bank Research, Dec 8