PP 7767/09/2010(025354)

Malaysia
RHB Research
Corporate Highlights Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

V is it Note

MARKET DATELINE
6 September 2010

Hartalega Share Price

Fair Value
:
:
RM5.02
RM6.19
Looking For Landbank For Further Expansion Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (HARTA; Code: 5168) Bloomberg: HART MK

Net Core EPS Net
FYE Turnover Profit EPS EPS# Growth# PER# C.EPS* P/NTA Gearing ROE NDY
Mar (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (%) (%) (%)
2010 571.9 142.9 39.3 39.3 157.4 12.8 - 3.4 net cash 47.0 3.7
2011f 700.3 173.1 47.6 47.6 21.2 10.5 48.0 2.7 net cash 43.1 4.0
2012f 897.4 202.5 55.7 55.7 16.9 9.0 57.0 2.1 net cash 39.0 4.0
2013f 1011.1 214.7 59.1 59.1 6.0 8.5 62.0 1.6 net cash 32.2 4.0
# Excludes exceptionals
Main Market Listing /Non- Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

♦ We met with management recently and set out below the key highlights Issued Capital (m shares) 363.5
from the meeting. Market Cap (RMm) 1,824.6
Daily Trading Vol (m shs) 0.5
♦ Operations-wise: business as usual. Currently, the expansion in Plant 52wk Price Range (RM) 3.23-5.58
5 is ongoing. Recall that four lines in Plant 5 were commissioned in Major Shareholders: (%)
1HCY10, while the remaining six lines (+0.9 bn pieces) are expected to Hartalega Industries 50.4
be commissioned and installed by end-CY10. The company also plans to Budi Tenggara 9.0
decommission all ten of its line in Plant 1 in Oct ’10, and replace them
with six new high capacity lines. All these six new high capacity lines are
expected to be progressively installed and commissioned from Jul ’11 to FYE Mar FY11 FY12 FY13
Feb ’12. EPS chg (%) - - -
Var to Cons (%) (0.8) (2.3) (4.7)
♦ Looking for landbank for further expansion. The company is actively
looking for new landbank for further expansion beyond FY13. Currently, PE Band Chart
the company is in negotiation to purchase a land adjacent to its existing
location as the company prefers to streamline all it operations in one PER = 11x
location as this will help to minimise cost, which would also help to boost PER = 9x
PER = 7x
margins ahead. PER = 5x

♦ To focus on human capital and improving its processes. Moving

forward, Hartalega’s growth strategy would include: 1) growing
organically by building new production capacity; 2) leveraging on its
technical know-how; 3) expanding its nitrile glove exports to more
developed nations; and 4) developing human capital as well as improving
its processes to enhance its competitiveness against its peers. Relative Performance To FBM KLCI

♦ Risks. 1) Sharp surge in raw material prices which may result in margin
squeeze; 2) Appreciating RM against the US$; and 3) Execution risk from
capacity expansion.
Hartalega
♦ Forecasts. We have left our earnings forecasts unchanged for now.

♦ Investment case. Our ex-bonus fair value will be revised downwards to FBM KLCI

RM6.19 (cum basis = RM9.29), while the theoretical share price ex-bonus
based on Friday’s closing price of RM5.02 still provides an upside of some
23.3%. We continue to like Hartalega for its niche position as the largest
nitrile glove producer in Malaysia and technological capabilities that are
well ahead of its competitors. No change to our Outperform call on the
David Chong, CFA
stock. (603) 92802179
david.chong@rhb.com.my
Please read important disclosures at the end of this report.

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Key takeaways from corporate presentation

♦ We met up with management recently and set out below the key highlights from the meeting.

♦ Operations-wise: business as usual. Currently, the expansion in Plant 5 is ongoing. Recall that four lines in
Plant 5 were commissioned in 1HCY10, while the remaining six lines (+0.9 bn pieces) are expected to be
commissioned and installed by end-CY10. With the completion of Plant 5, Hartalega is set to become the world’s
number one nitrile glove producer, overtaking US healthcare products maker, Kimberly-Clark Corporation, which
has a total capacity of approximately 8 bn pieces (own plant). At the moment, Hartalega controls a 23% market
share in the US for nitrile gloves.
Following that, the company plans to decommission all ten of its lines in Plant 1 in Oct ’10, replacing them with
six new high capacity lines. All these six new high capacity lines are expected to be progressively installed and
commissioned from Jul ’11 to Feb ’12. This upgrade will effectively add another 1bn pieces to annual capacity,
which will be used to produce powdered gloves in order to take advantage of the potential surge in demand from
emerging markets such as China and India. In total, both Plant 5 and the upgrading works in Plant 1 would raise
Hartalega’s annual capacity to 9.8bn pieces from 8.0bn pieces currently.
Hartalega is currently operating at an average utilisation rate of approximately 80%. While this utilisation rate
appears low, management explained that this is due to the product mix. Design capacity is typically based on the
production of natural rubber latex gloves, which normally requires a shorter production process/time frame as
compared to nitrile gloves. Hence, with nitrile gloves accounting for 85% of sales, average utilisation rates tend
to be lower as compared to a manufacturer that predominantly manufactures natural rubber gloves. This has also
been an advantage for Hartalega as the company was not really affected by the surge in latex prices as nitrile
prices have been rather stable. As such, prices for nitrile gloves are currently cheaper than latex gloves and the
company is experiencing a switch in customers’ ordering patterns.

♦ Looking for new landbank for further expansion. The company is actively looking for new landbank for
further expansion beyond FY12. Currently, the company is negotiating to purchase a land adjacent to its existing
location. In addition, management appears to prefer to expand their production capacity at its existing location
rather than overseas as this would keep their production cost minimal and streamlined, which could help boost
margins moving forward.

♦ To focus on human capital and improving its processes. Moving forward, Hartalega’s growth strategy would
include: 1) growing organically by building new production capacity; 2) leveraging on its technical know-how; 3)
expanding its nitrile glove exports to more developed nations; and 4) developing human capital as well as
improving its processes to enhance its competitiveness against its peers.

♦ Maintaining its dividend policy of 33%. Following the 1-for-2 bonus issue, Hartalega’s share base will
increase to 363.5m shares from 242.2m shares. Moving forward, the management intends to maintain its 20 sen
net DPS despite the larger share base given its strong cash balance. To recap, Hartalega’s net cash position grew
to 22 sen at end-Jun from 14 sen at end-Mar. As such, we have revised our FY11-13 net DPS to 20 sen. This
represents net payout of 29-36% and a net yield of 2.9% p.a. respectively.

Risks

♦ Risks to our view. 1) Sharp surge in raw material prices which may result in margin squeeze; 2) Appreciating
RM against the US$; and 3) Execution risk from capacity expansion.

Forecast And Assumptions

♦ Forecasts maintained. We have left our earnings forecasts unchanged for now.

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Valuations and Recommendation

♦ Investment case. Our ex-bonus fair value will be revised downwards to RM6.19 (cum basis = RM9.29), while
the theoretical share price ex-bonus based on Friday’s closing price of RM5.02 still provides an upside of some
23.3%. We continue to like Hartalega for its niche position as the largest nitrile glove producer in Malaysia and
technological capabilities that are well ahead of its competitors. No change to our Outperform call on the stock.

Table 2: Earnings Forecasts Table 3: Forecast Assumptions

FYE Mar (RMm) FY10a FY11F FY12F FY12F FYE Mar FY11F FY12F FY13F

Turnover 571.9 700.3 897.4 1,011.1 Average capacity (bn pcs) 7.7 10.0 10.0
Turnover growth (%) 256.8 22.4 28.2 12.7 Utilisation rate (%) 81.6 81.5 83.9
Average selling price (RM/kg) 111.88 110.13 120.48
EBITDA 201.0 231.9 269.1 284.5
EBITDA margin (%) 35.1 33.1 30.0 28.1

Dep. & amort. (19.8) (12.7) (13.3) (13.9)

EBIT 181.2 219.1 255.8 270.6

EBIT margin (%) 31.7 31.3 28.5 26.8
Net interest expense (3.4) (2.5) (2.5) (2.0)
Associates 0.0 0.0 0.0 0.0
Exceptionals 0.0 0.0 0.0 0.0
Pretax Profit 177.8 216.6 253.3 268.6
Tax (34.7) (43.3) (50.7) (53.7)
Minorities (0.1) (0.1) (0.1) (0.1)

Net Profit 142.9 173.1 202.5 214.7

Core Net Profit 142.9 173.1 202.5 214.7
Source: Company data, RHBRI estimates

Chart 1: Harta Technical View Point

♦ Harta’s share price upward momentum slowed
down when it surpassed the resistance level of
RM5.00 in Jan 2010.

♦ After a consolidation, it surged further to a high of

RM5.69 in Mar 2010, but a subsequent profit-taking
dip had pressed it lower to the RM5.00 support
region.

♦ It began to surge again in Jun, and managed to hit

a higher high at RM5.70 in late Jul. However, after
hitting the resistance, it turned south on stronger
profit-taking pressure.

♦ The stock closed last Friday at RM5.02, with a

series of negative candles and a weakened
momentum reading.

♦ Coupled with the downtrend on the 10-day and 40-

day SMAs, which are currently pointing to a bearish
medium-term outlook, the stock may roll into a
bearish trend if it loses the critical RM5.00 level
soon.

♦ Next lower support is only seen near the RM4.50

level, followed by a lower level near RM3.70.

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IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
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Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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