This article first appeared in The Edge Financial Daily on January 10, 2018

Hartalega Holdings Bhd
(Jan 9, RM10.8)
Maintain sell with a higher target price (TP) of RM8.04: We believe China’s anti-pollution drive should continue in the near term, forcing Chinese vinyl glove producers to grapple with strict environmental laws. In turn, Hartalega looks set to continue benefitting from the current global market shortage. The supply gap is filled by lighter-weight nitrile gloves (3g and below) as product substitution. Hartalega Holdings Bhd’s management shared that its gloves are sold out until April 2018 and we gathered the company is running at capacity utilisation of about 92% (similar to the second quarter of financial year 2018 [2QFY18] level). These indicate robust short-term demand and the new capacity coming on stream is indeed advantageous to Hartalega.

Over the past two months, Hartalega has added five production lines, bringing the total number of lines to 91. Now, the company is able to manufacture up to 30 billion gloves annually. We note that the expansion of its Plant 4 Next Generation Integrated Glove Manufacturing Complex (NGC) is slightly ahead of schedule. It has already installed 10 out of 12 lines and the target completion has been brought forward to this month instead of April. We believe the acceleration is deliberate in order to capture the current pent-up demand for its products. That said, Plant 5’s timeline for commissioning in the second half of 2018 (2H18) remains unchanged. Nevertheless, Hartalega plans to add one manufacturing line a month over the next one to two years.

Hartalega will likely employ a competitive pricing strategy to encourage take-up of its new anti-microbial gloves (AMG). The aim is to leverage on product innovation and ultimately create customer stickiness and minimise churn.

Hartalega booked in an adjusted bottom line of RM106 million in 2QFY18. The company is poised to release its 3QFY18 results on Feb 6. — UOB Kay Hian, Jan 9