Rubber Gloves

7 August 2013
KDN: PP 10251/07/2013(032736)

Results Note

A good start
1QFY03/14 earnings grew +15% yoy to RM62.9m Hartalega (Harta) registered a healthy 1QFY03/14 core net profit growth of +15% yoy to RM62.9m, on the back of a resilient revenue growth of +12% yoy to RM278m. The healthy set of results was driven by strong volume sales growth of +26.9% yoy to 2.81bn pieces of gloves. Natural rubber (NR) latex gloves grew +31% yoy to 167m pieces while its core synthetic nitrile (NBR) gloves product grew by +27% to 2.6bn pieces. The strong growth in Hartas volume sales are mainly due to: 1) the contribution from its new production lines in Plant 6; and 2) the continuous healthy demand growth from Hartas customers. Taken together with the improved in operating efficiencies (as a result of managements push on increase plant automations) as well as low and stable raw material costs, Hartas EBIT margin expanded by +0.6%-points yoy to 29.5%. Results were within expectations, accounting for 24% of both our and streets full year forecasts. Lower ASP and pricing competition resulted in a tepid sequential growth Sequentially, Hartas 1QFY03/14 core net profit grew marginally by +0.6% to RM62.9m, on the back of a tepid +3.1% sales growth. Although volume sales grew by +5.2% qoq, the lower average selling prices (ASPs) for its gloves products has resulted in the tepid revenue growth. We understand that selling prices for NR gloves had declined by -5.26% qoq to RM108/1000pcs, while NBR gloves prices had fallen by -1.1% qoq to RM96.9/1000pcs. We believe the lower ASP was due to lower raw material costs and pricing competition. As a result, Hartas net profit margin has edged down by -0.6%-points qoq to 22.6%.

Hartalega
HART MK

RM6.79 ADD (maintain) Target Price: RM6.95 ()

Price Performance
1M +4.6% +3.9% 3M +28.1% +25.8% 12M +52.6% +40.2%

Absolute Rel to KLCI

Stock Data
Issued shares (m) 738.9 Mkt cap (RMm) 5,017.1 Avg daily vol - 6mth (m) 0.72 52-wk range (RM) 4.21 6.85 Est free float 37.9% NTA per share (RM) 1.03 P/NTA (x) 6.58 Net cash/ (debt) (RMm) (1Q14) 182.4 ROE (FY14E) 36% Derivatives 06/15 warrants, SP RM4.14

Revising our RM/US$ exchange rate target from RM3.05 to RM3.15 Given that the gloves sector is an export-oriented sector, a strengthening in the greenback against the RM generally augurs well to the industry. On a YTD basis, the greenback has appreciated by +6.2% to RM3.25 against the ringgit. In line with our house view, we are revising our end-CY13 RM/US$ exchange rate target from RM3.05 to RM3.15. As a result, our FY14-16 EPS forecast is revised upward by 0.8% - 1.7% to 35.2sen, 38.3sen and 41.9sen respectively. All is healthy. Maintain ADD rating Overall, we remain upbeat on Hartas growth prospect s backed by: 1) the resillient growth in volume demand (nitrile: +20% yoy), considering gloves is now a staple product in the healthcare industry; 2) Hartas push towards greater plant automation; and 3) managements efforts in ramping up production capacity. Following our EPS upgrade, our TP for Harta is raised to RM6.95 from RM6.69 previously. We also pegged the stock at an unchanged PER target of 18.5x CY14 EPS, higher than our PER target for Top Glove of 18x, in view of: 1) the companys solid track record in sustaining its premium net profit margins (at least 22%) vs its peers average of 8-13%; and 2) Hartas ability to generate c.45k pieces of gloves/hour vs the prevailing industry of 33k pieces/hour. With an upside potential of just +2.3%, we maintain our ADD rating for now. Earnings and valuation summary
FYE Mar 2012 2013 2014E** 2015E* 2016E* Revenue (RMm) 931.1 1,032.0 1,197.9 1,311.7 1,401.5 EBITDA (RMm) 295.0 340.9 410.9 462.3 505.3 Pretax profit (RMm) 258.4 305.9 354.3 404.2 445.0 Net profit (RMm) 201.4 234.7 271.0 309.1 338.1 EPS (sen) 27.6 32.1 35.2 38.3 41.9 PER (x) 24.6 21.1 19.3 17.7 16.2 Core net profit (RMm) 207.2 234.7 271.0 309.1 338.1 Core EPS (sen) 28.3 32.1 35.2 38.3 41.9 Core EPS chg (%) 10.7 13.3 9.7 8.8 9.4 Core PER (x) 24.0 21.1 19.3 17.7 16.2 DPS (sen) 12.0 14.5 16.0 18.0 19.0 Dividend Yield (%) 1.8 2.1 2.4 2.7 2.8 EV/EBITDA (x) 16.4 14.1 12.1 11.2 10.1 Consensus profit (RMm) 263.8 291.7 336.6 Affin/Consensus (x) 1.0 1.1 1.0 **based on an enlarged share base after the exercise of 36.8m free warrants ***based on full conversion of free warrants with enlarged share base of 806.9m

Key Shareholders
Hartalega Industries SB EPF Budi Tenggara BNP Paribas 50.2% 6.1% 4.9% 4.6%

Earnings & Valuation Revisions

14E Prev EPS (sen) 34.7 Curr EPS (sen) 35.2 Chg (%) +1.4 Prev target price (RM) Curr target price (RM) 15E 38.0 38.3 +0.8 16E 41.2 41.9 +1.7 6.69 6.95

Mandy Teh (603) 2142 5815 ssteh@affininvestmentbank.com.my Important disclosures at end of report

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Revising our RM/US$ exchange rate target from RM3.05 to RM3.15 Given that the gloves sector is an export-oriented sector, a strengthening in the greenback against the RM generally augurs well to the industry as a whole. On a YTD basis, the greenback has appreciated the most (+6.2% to RM3.25) against the ringgit, vis--vis other rubber gloves export countries such as Thailand and Indonesia. Against the Thai Baht and Indonesia Rupiah, the greenback has appreciated by only +2.7% to THB31.42 and +5% to IDR10,286. In that sense, we believe Malaysias glove exports will continue to grow healthily. In line with our house view, we are revising our end-CY13 RM/US$ exchange rate target from RM3.05 to RM3.15. Following our adjustment in our US$ exchange rate assumption, our FY14-16 EPS is revised upward by 0.8% - 1.7% to 35.2sen, 38.3sen and 41.9sen respectively. Harta is looking to introduce new and higher niche glove product, Coats We understand from management that they had invested RM7m and had patented one of its latest products, namely Coats (Oatmeal gloves). Management believes Coats would create new market niche and attract new clients and hence broaden its clientele base. Accordingly, oatmeal gloves are the only lab-proven anti-bacterial glove that is capable of moisturizing the skin. It is to be use in the medical examination sector and we do not rule out the possibility for oatmeal gloves to venture into the beauty and cosmetic sector. Nonetheless, we are not factoring in any potential sales contribution from Coats into our earnings forecast for now pending managements guidance. Maintain ADD with a higher TP of RM6.95 All in, we continue to like the rubber gloves sector. With stable raw material costs and coupled with higher quality gloves products that would enhance the groups product sales mix, we are confident that Harta would continue to churn out superior net profit margins of at least 22% despite the potential pricing competition within the industry. Following our EPS upgrade, our TP for Harta is raised to RM6.95 from RM6.69 previously. We also pegged the stock at an unchanged PER target of 18.5x CY14 EPS, higher than our PER target of 18x for Top Glove in view of: 1) the companys solid track record in sustaining a premium net profit margins (at least 22%) vs its peers average of 8-13%; and 2) Hartas ability to generate c.45k pieces of gloves/hour vs the prevailing industry of 33k pieces/hour. Since we upgraded Harta on 7 November 2012, share price has appreciated sharply by +39%. With an upside of just +2.3%, we are maintaining our ADD rating for now. Fig 1: Quarterly Results comparison
FYE Mar (RMm ) Revenue Operating cost EBIT EBIT margin (%) 1QFY13 4QFY13 1QFY14 247.7 (177.6) 71.6 28.9 269.8 (190.1) 81.5 30.2 278.0 (191.9) 82.0 29.5 QoQ % chg 3.1 1.0 0.7 (0.7) YoY % chg 12.2 8.1 14.6 0.6 Com m ent Driven by higher sales volume, yoy: +31% for natural rubber latex gloves; +27% for synthetic nitrile gloves

Yoy margin expansion is attributed to improved operating efficiencies and stable raw material costs. On a qoq basis, margins were impacted from lower ASP and pricing competition

Int expense Int and other inc Associates Exceptional items Pretax profit Tax Tax rate (%) MI Net profit EPS (sen) Core net profit

(0.3) 0.0 0.0 (1.3) 69.9 (16.5) 23.6 (0.1) 53.4 101.2 54.7

(0.2) 0.0 0.0 0.0 81.3 (18.9) 23.2 0.1 62.6 114.3 62.6

(0.1) 0.0 0.0 0.0 81.9 (18.9) 23.1 (0.1) 62.9 108.4 62.9

(21.1) nm nm nm 0.7 0.0 Nm 0.0 0.6 (5.2) 0.6

(57.8) nm nm nm 17.2 (14.7) Nm 0.0 17.9 7.1 15.0

1QFY03/13 Net gain in foreign exchange in forward contracts of RM1.3m

Within expectation, accounting for 24% of both our consensus full year estimates Within expectation, accounting for 24% of both our consensus full year estimates

Source: Affin

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Equity Rating Structure and Definitions BUY Total return is expected to exceed +15% over a 12-month period TRADING BUY Total return is expected to exceed +15% over a 3-month period due to short-term positive development, but fundamentals are (TR BUY) not strong enough to warrant a Buy call. This is to cater to investors who are willing to take on higher risks ADD RE DUCE TRADING SELL (TR SELL) SELL NOT RATED Total return is expected to be between 0% to +15% over a 12-month period Total return is expected to be between 0% to -15% over a 12-month period Total return is expected to exceed -15% over a 3-month period due to short-term negative development, but fundamentals are strong enough to avoid a Sell call. This is to cater to investors who are willing to take on higher risks Total return is expected to be below -15% over a 12-month period Affin Investment Bank does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation

OVERWEIGHT Industry, as defined by the analysts coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analysts coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analysts coverage universe is expected to under-perform the KLCI benchmark over the next 12 months

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