FINANCIAL ANALYSIS AND MANAGEMENT ASSIGNMENTS

Student Name

YONG SU PING 0021WLWL0113 DR. SYED MUSA ALHABSHI DR. HARWINDAR SINGH

Student ID Number : Lecturer Tutor : :

Assignment 1

Company: Hartalega Holdings Berhad

a) Overview

In the last decade, the world rubber industry has undergone fundamental changes with the appearance of many new players that pose consequent challenges to Malaysia. Ever since, Malaysian rubber industry has evolved and transformed itself into a more integrated industry with rapid developments of downstream industries.

Today, Malaysia is the world largest glove producer that accounts for 60% 65% of the world rubber glove supply contributed by the four largest glove manufacturers in Malaysia; namely Top Glove, Hartalega, Kossan and Supermax. Based on market capitalization value, Hartalega is leading the industry with total value of RM3,761.81 million; Top Glove came second with value of RM3,549.29 million.

Hartalega started their establishment as property developer. During the recession in 1980s, Hartalega took the drastic strategy to convert the company into glove manufacturer. Instead of being follower in the industry, Hartalega diverted their production focus to alternate latex based glove. Since then, Hartalega continues to lead the R&D in nitrile glove and became largest producer of nitrile glove.

The business transformation made Hartalega an interesting study case as the change of Hartalega and maintaining sustainable developments required strong vision & mission of management as well as effective and holistic strategies.

b) Analysis on Chairman Statement and Management Reports

A few major issues highlighted in the Chairman Statement which was the obstacle to the achievement in 2012. It was a challenging year as the world is in the recovery stage from financial crisis caused by U.S. sub-prime mortgage crisis. Major revenue generation of Hartalega is from export business. Despite the glove business is considered as recessionproof industry, the company is exposed to currency transactional risk as sales and purchases that are denominated mainly in US dollar. Besides, the company also holds cash and cash equivalents as well as term loans that are denominated in US dollar. In order to reduce exposure of exchange rate fluctuation, the company hedged it by using forward foreign currency contracts.

In the statement, it highlighted the company is exposed to risk of rising raw material price. In order to buffer the raw material cost impact, the company may have stock up their raw material inventories; coupled with the increasing cost of raw material, the total value of raw material inventories increased by 234% from RM11.3 million to RM37.7 million.

The company also experienced declining in profit margin due to emerging of new players that compete in the market with low price strategy. Anyhow, it was not reflected directly on revenue generation of Hartalega as the revenue generation growth was well maintained at same momentum as previous year. However, the profit margin grew at smaller pace. The influencing factor to the declining of profit margin is the increase in cost of sales. It is partly contributed by the rising of raw material price.

Due to incoming new players in the industry, the company had implemented various strategies including establishing presence in untapped markets such as China and India as well as expanding its existing production capacity in order to enhance productivity and efficiency which would directly improve financial performance of the company to face the challenging future. In line with the direction, Hartalega (through its subsidiary) acquired 70% of share capital of Yancheng Pharmatex in China on 26 May 2011, with equivalent value of RM322,714. This was a significant effort in capturing the populous China market.

On the other hand, Hartalega had completed construction of a new production line which expected to be commissioned in Aug 2012. Furthermore, additional 9 lines are in progress

and soon to be commissioned by mid of 2013. In addition, the company is planning Next Generation Integrated Glove Manufacturing Complex which will be launched in 2 phases started from 2013 to 2021. Once the complex completed, it would increase the total production capacity to 38 billion pieces gloves per annum.

The investment in foreign companies and new production facilities were reflected in the increasing of total asset which is about 50% as compared to previous year. The assets are expected to be increased in folds in the coming years when the construction plan materialised.

c) 5 Year Financial Trends

Summary of financial information of Hartalega Berhad

No Key Info 1 2 3 4 5 6 Revenue (RM) Operating Profit (EBIT) (RM) Dividend (RM) Total Asset (RM) Total Equity (RM) Total Borrowings (RM)

FY2012 931,064,704 260,141,084 87,386,940 758,139,563 620,056,048 24,649,401

Growth FY12/FY11 27% 6% 53% 19% 25% -37%

FY2011 734,920,894 245,304,614 56,946,805 634,963,679 494,794,384 38,976,950

Growth FY11/FY10 29% 35% 31% 33% 40% -6%

FY2010 571,892,668 181,151,458 43,616,160 478,860,945 354,382,248 41,409,923

Growth FY10/FY09 29% 85% 350% 28% 39% -28%

FY2009 443,204,278 97,911,810 9,692,480 374,843,641 254,500,418 57,754,884

Growth FY09/FY08 72% 28% -20% 39% 42% -86%

FY2008 257,582,149 76,743,440 12,115,600 269,394,929 179,590,084 409,649,934

Revenue Hartalega is aggressively expanding their production capacity under both short and long term plan. Besides, Hartalega is enhancing its global market presence by establishing business interest in both world populous countries, China and India. It is expected its revenue generation will grow in few folds once its planned production line commissioned.

Operating Profit The change of market environment and growing competition, it is expected that operating margin of Hartalega will grow in slow pace. Furthermore, Hartalega may need to implement price strategy in capturing new market share. However, with the expansion of production capacity and improvement in production efficiency, it will help to improve Hartalegas ability in retain profit margin. Dividend Currently, Hartalega is relied on equity funding in financing its expansion plan. With its attractive revenue earning capability, investors are likely interested to join and gain from their expansion plan. In order to sustain the equity investor support, Hartalega has to maintain its high dividend payout policy.

Total Assets With the existing plan of expansion production line as well as the long term project of building manufacturing complex, total assets holdings under Hartalega will be increasing in folds in years to come.

Total Equity & Total Borrowing As Hartalega is relied on equity funding on its expansion plan, Hartalega will look into increasing its equity portion gradually and reducing its borrowing. However, Hartalega should strategically take advantage on its strong financial leverage to further explore the available funding opportunity.

d) Financial Ratio Analysis Top Glove Corporation Berhad is the closest rival to Hartalega Holdings Berhad based on their production capacity and market capitalization value.

i)

Liquidity Needs Hartalega Holdings Berhad

No 1 2 3 Key Ratio Current Ratio Cash Ratio AR Ratio FY2012 4.4 1.9 1.4 FY2011 3.6 1.5 1.3 FY2010 2.7 1.1 1.2 FY2009 2.4 0.7 1.2 FY2008 1.4 0.2 0.8

Top Glove Corporation Berhad

No 1 2 3 Key Ratio Current Ratio Cash Ratio AR Ratio FY2012 3.0 0.6 1.1 FY2011 3.1 0.6 1.1 FY2010 3.4 1.2 1.1 FY2009 2.1 0.8 0.8 FY2008 1.7 0.4 0.7

Comparing with close competitor, Hartalega has better position in term of ability to meet short-term financial obligations. Both companies had experienced the bottom out during the recession in 2008. However, Hartalega has constantly improved its assets, liabilities as well as equity to main healthy liquidity ratio.

ii)

Operational Performance Hartalega Holdings Berhad

No 1 2 3

Key Ratio FY2012 Inventory Period (days) 38.2 Debtors Period (days) 45.9 Gross Asset Conversion (days) 84.2

FY2011 32.1 50.2 82.3

FY2010 17.9 53.0 70.9

FY2009 20.3 53.9 74.2

FY2008 31.2 54.7 86.0

Top Glove Corporation Berhad

No 1 2 3 Key Ratio Inventory Period (days) Debtors Period (days) Gross Asset Conversion (days) FY2012 28.3 46.3 74.6 FY2011 31.2 46.6 77.8 FY2010 29.4 43.4 72.8 FY2009 28.4 47.3 75.7 FY2008 41.8 56.7 98.5

Overall, there isnt much variance between Hartalega and Top Glove in all the activity ratio. The reason is because the glove industry is much consolidated and intense in competition. Furthermore, both companies are serving the same market or customer base. So, there isnt be much difference in trading terms or credit terms.

iii)

Bond Holders Expectation Hartalega Holdings Berhad

No 1 2 3 Key Ratio Gearing (%) Asset Financing (%) Interest Cover (X) FY2012 4.0 3.3 149.8 FY2011 7.9 6.1 99.3 FY2010 11.7 8.6 53.7 FY2009 22.7 15.4 40.3 FY2008 228.1 152.1 106.7

Top Glove Corporation Berhad

No 1 2 3 Key Ratio Gearing (%) Asset Financing (%) Interest Cover (X) FY2012 0.2 0.2 2,743.4 FY2011 0.3 0.2 856.5 FY2010 1.0 0.3 570.7 FY2009 8.1 1.8 33.7 FY2008 104.1 16.9 19.5

Hartalega is expanding its business and operation aggressively either through foreign establishment or enhancing its production capacity. So, the increasing of debt through bank loan or borrowing is necessary to finance its expansion plan. The borrowings for its expansion plan did increase its asset financing ratio. Anyhow, it considered healthy as it showed that Hartalega is continuously investing in its business. In such, Hartalega could attract more investor to join in their expansion plan. In term of interest cover ratio, Hartalega showed it at much lower value as compared to Top Golve. However, there is still available opportunity for Hartalega to explore its leverage to magnify its future earnings.

iv)

Board Expectation Hartalega Holdings Berhad

No 1 2 3 4 5 Key Ratio Asset Utilisation (RM) Operating Margin (%) Net Margin (%) Operating ROI (%) Net ROI (%) FY2012 1.2 27.9 21.6 34.3 26.6 FY2011 1.2 33.4 25.9 38.6 30.0 FY2010 1.2 31.7 25.0 37.8 29.9 FY2009 1.2 22.1 19.1 26.1 22.6 FY2008 1.0 29.8 27.0 28.5 25.8

Top Glove Corporation Berhad

No 1 2 3 4 5 Key Ratio Asset Utilisation (RM) Operating Margin (%) Net Margin (%) Operating ROI (%) Net ROI (%) FY2012 1.4 13.4 9.0 19.4 13.0 FY2011 1.4 10.1 5.6 14.6 8.1 FY2010 1.5 17.5 12.0 26.6 18.3 FY2009 1.4 18.8 11.0 25.4 14.8 FY2008 1.2 14.4 7.8 17.8 9.7

Asset utilization for both companies are quite close to each other throughout the 5 years comparison with Top Glove 2 points higher than Hartalega. On the other hand, Hartalega maintain it revenue generation against its invested assets at consistent momentum. Hartalegas operation showed higher ability in retaining profit as compared to Top Glove. Its earning capability is almost twice of Top Glove. Due to higher retained profit, Hartalega showed more attractive return of investment as compared to Top Glove. In another words, the management of Hartalega is more efficient than Top Glove.

v)

Shareholder Expectation Hartalega Holdings Berhad

No 1 2 3 4 Key Ratio Equity Multiplier (X) Return on Equity (%) Dividend Payout (%) P/E Ratio (X) FY2012 1.2 32.5 43.4 23.9 FY2011 1.3 38.5 29.9 17.3 FY2010 1.4 40.4 30.5 11.6 FY2009 1.5 33.2 11.5 6.0 FY2008 1.5 38.8 17.4 5.0

Top Glove Corporation Berhad

No 1 2 3 4 Key Ratio Equity Multiplier (X) Return on Equity (%) Dividend Payout (%) P/E Ratio (X) FY2012 1.2 16.2 38.8 16.0 FY2011 1.2 10.0 75.2 27.0 FY2010 3.9 70.7 39.5 15.0 FY2009 4.4 66.0 39.2 24.8 FY2008 6.2 60.2 30.0 22.6

Despite it is same with Top Glove, the equity multiplier of Hartalega is considered low and Hartalega should take advantage on the financial leverage to enhance its efficiency and revenue generation. With twice of ROE of Top Glove, it reveals that Hartalega has the ability to generate more profit for every fund invested by shareholders. At such, Hartalega is a good potential investment for equity investor. Hartalega business expansion is majorly financed through equity funding. With high dividend payout ratio, it will attract equity investor to invest in its company. On the other hand, Top Glove expansion funding is also majorly contributed from equity. So, higher dividend payout ratio will be one of the determine factor for investor to choose their stock. Due to various attractive factor of Hartalega especially the ability in retain profit and commitment in high dividend payout, investor is more willing to pay premium to invest in Hartalega as compared to Top Glove.

vi)

Extended DuPont ROE = (EBIT / Sales) x (Sales / Assets) x (Assets / Equity)

Or in words, ROE = Operating Margin x Asset Utilization x Equity Multiplier

Top Glove

= =

0.134 x 1.4 x 1.2 0.225

Hartalega

= =

0.279 x 1.2 x 1.2 0.402

Hartalega has great potential to further improve its return of equity. The company should explore further on its financial leverage to finance its expansion plan and which will improve its equity multiplier.

Assignment 2

Question 1

Concerning to the issue of 50% of the recent sales exceeded the singe customer limit of 20%, it is a serious issue because it indicated that the company revenue and profit are derived from 2 to 3 customers. No doubt that every company started with 1 or 2 customers and grown into profitable business due to the relationships built over the years. The risk is that if anything happened and impaired your company ability to supply or sell your products to the customer, your business earning capacity and profitability will be affected.

In view of the situation, the company should take action to find new or substitute customers in considering the required skill, technology and network connection to break off the dependence. Anyhow, the dependence may not unavoidable due to the nature of the industry landscape that dominated by a few players. In such situation, it is difficult for the company to pull away from the reliance as it is a mutual and complementary relationship. In worse case when the industry showed downtrend, the reliance will be a great concern about their business sustainability. Anyhow, the company could look into diversify its business focus and expanding their sales and marketing network to reduce their reliance.

It is advisable to review the customer list periodically to find out if the major revenue contribution if from a minority of customer base as well as preparing a prudent contingency plans to respond if such event of losing customer happened.

In real world, there isnt any common guideline in determining credit period as it varied on industry basis. So, the issue of more than 40% of account receivables exceeded the 60 days credit period may require more information for analysis purpose. In order to address the issue above, the company should study their existing framework in establishing of account receivables policy which includes establishing trading terms such as credit period and discounts for early payment settlement, interest charged on overdue payment, the procedures to grant credit term to the customer. Ideally, customer will settle the payment within the agreed trading term. If payment delayed, the company should deal with overdue accounts through the agreed procedures. On the other hand, the company should reassess

creditworthiness and re-evaluate the possible change in the policy to the customer by taking consideration of profitability gained from the change.

Outsourcing will offer the company strategic and economic benefits. It could help to reduce cost, increase flexibility, and enhance expertise and discipline. Consequently, the company could put more focus on its core business capabilities. This is an ideal direction for the company to match its low price sales strategy in order to compete with competitors in a competitive business environment However, the company have to study the potential negative impact of outsourcing to their business and prepare responding action plan to address it when it happened.

Firstly, the delay in delivery by the outsourcing party will affect on-time delivery performance and customer satisfaction levels towards the company. Most of the time, the delay is caused by factors that are outside the control of any party. Secondly, uncertainty or poor product quality will cause customer dissatisfaction. So, the company have to select carefully, qualify and manage their outsourcing partners to ensure quality of their product matched according to agreed specification. Thirdly, the outsourcing transition phase is critical. Outsourcing is a replacement of the companys production or service functions. So, the outsourcing project must be run with the same discipline and planning in order to meet their commitments to customers. Lastly, internal problem of the outsourcing party may pose risk to the company especially its financial issue. Lack of financial resources could be risk of supply interruption. So, financial viability of the outsourcing party should be one the criterion in selection process.

Same as a business, a product will go through stages of life cycle. The company should recognised importance of product cycle and potential problem in near future in facing market competition as undermined by competitors. When a product has gone into decline stage or underperformed, the company should make decision according to the context of the overall aims of the business; either to end the product line or extend the product life cycle through product enhancement. Perhaps, there is a most important stage of the product life cycle happened before a product being launched, namely research and development (R&D). At such stage, it involved product design study to meet market need and identify market gap for product development. The R&D work would be the best foundation for a companys product development direction and sustain product line continuity.

Question 3 Capacity Planning Cost-volume-profit (CVP) analysis expands the use of information provided by break-even analysis.

Figure showed cost-volume-profit analysis

CVP analysis can be used for both planning and control. Since the analysis involved the interaction relationship of revenue, unit selling prices, sales mix, costs including both fixed and variable cost, sales volume and profit, it provide a general model of financial activity in which it can be used for short-run management planning as well as measuring performance and analysing various action plan for decision making purpose. During management planning process, CVP analysis can be used to estimate the business operating income when sales volume is desired. Operating income is the total revenue generated deducted with total expenses incurred. Operating Income = (Unit Price X Unit Sold) (Unit Variable Cost X Unit Sold) Fixed Cost CVP analysis is to be used to determine the level of sales volume required in order to achieve the targeted amount of operating income. For instance, RM 40,000 is the target operating income, unit price of the product is RM500, unit variable cost is RM475 and the total fixed cost is RM60,000: RM40,000 = (RM500 X Unit Sold) (RM475 X Unit Sold) RM60,000 Unit Sold = (RM40,000 + RM60,000) / (RM500 RM475) =4,000 In order to verify if the sales of 4,000 can really generate target operating income of RM40,000: Sales (RM500 X 4,000) Total Variable Cost (RM475 X 4,000) Total Contribution Margin Total Fixed Cost RM 2,000,000 RM 1,900,000 RM 100,000 RM 60,000

Operating Income So, the sales volume of 4,000 units are desirable.

RM 40,000

Sometimes when the business is in high competitive commercial environment, break-even point is desired: Unit Sales = Total Variable Costs + Total Fixed Costs + Operating Income RM500 X Unit Sold = RM475 X Unit Sold + RM 60,000 + 0

At break-even point, operating income is zero: Unit Sold = = RM60,000 / (RM500 RM475) 2,4000

In such, CVP analysis is widely applied in business budgeting as it can perform several different type of sensitivity analysis by changing sales volume based on various commercial environment in order to achieve target operating income. On the other hand, it can be used to study the effect of change in a sales mix which could help to determining the potential variation impact.

Performance Management Due to the increasing complexity of the business environment, decentralisation has become common practice in most organization. There is negative impact of decentralisation when a decision making is not based on the best interest of the company. In order to address the issue, system of performance measurement employed according to the nature of various responsibility structure of operation; namely cost centre, profit centre and investment centre. Standard costing variance analysis is commonly used in measuring performance of cost centre. On the other hand, operating income is used for profit centres. Lastly, return of investment and residual income are taken into consideration of measuring performance of investment centres. CVP analysis is the ideal tool to be used for performance measurements on various responsibility structures. Through CVP analysis, sales volume and related costs are analysed to find actual operating income. Performance of department / division can be measured by comparing the actual costs incurred during the year with expected costs that derived from applying CVP analysis on the actual sales volume achieved. Nevertheless, CVP analysis can be used to generate periodical performance report which to be compared among the operation to identify the variance in revenue and cost of function. It provide valid base to be used in controlling and identifying the reasons of differences so that solution or emphasis could be taken in place. However, CVP analysis is useful only under certain conditions and when certain assumption holds true:

1. 2. 3. 4. 5. 6.

Both variable and fixed costs are measureable. Both costs and revenues are in linear functions throughout the related time range. Efficiency and productivity hold steady throughout the relevant range of activity. Cost and price are stagnant during the period being planned. Sales mix does not change during the particular period being planned. Production and sales volume are equal

Any of these conditions and assumptions is not fulfilled; the result obtained from the CVP analysis will be misleading.

Bibliography

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http://www.utexas.edu/research/ceer/esm282/dfe/Chap13final.PDF> 6. Solmaz Soltani, 2012. Strategic Marketing Plan in Product Life Cycle. Business Economics and Tourism, University of Applied Sciences. 7. Allan Miller, Michael Boehlje, Craig Dobbins. Key Financial Performance Measures for Farm General Managers. Farm Business Management for the 21st Century. ID-243 8. Annual Report (2008 2012), Hartalega Holdings Berhad. [online] Available at: < http://www.bursamalaysia.com/market/listed-companies/companyannouncements/#/?category=AR&sub_category=all&alphabetical=All&company=51 68> 9. Annual Report (2008 2012), Top Glove Corporation Berhad. [online] Available at: <http://www.bursamalaysia.com/market/listed-companies/companyannouncements/#/?category=AR&sub_category=all&alphabetical=All&company=71 13 > 10. Reuters. [online] Available at: <http://www.reuters.com/finance/stocks/financialHighlights?symbol=HTHB.KL> 11. Atrill, 2006. Financial Management for Decision Makers, 4th Ed, Financial Time Press 12. Brealey, R. A., Myers, S.C. & Allen, F., 2008. Principles of Corporate Finance, 9th Ed, McGraw-Hill