12 things we learned from the 2017 Hartalega AGM

Hartalega is one the largest glove companies in the world with a market capitalization exceeding RM11 billion. Hartalega’s share price has appreciated over 22 times since its IPO, from RM0.30 (adjusted for bonus share issues) to its current price of RM6.70 as at 11 September 2017.

Hartalega sets the benchmark with the world’s fastest and most efficient production lines in the glove industry producing 45,000 pieces of gloves per hour. In addition, they are the largest nitrile glove producer in the world with a total production of 27 billion gloves per year. They also export to more than 50 countries, up from 40 in 2016.

When we arrived early at the venue for the AGM, we saw two groups of shareholders, one surrounding Mr Kuan Kam Hon, the executive chairman, and another surrounding his son, Mr Kuan Mun Leong, the managing director. We were curious to listen in and we decided to join the group that surrounded the chairman.

Throughout the conversation, it seemed that the chairman possessed a humble personality and was willing to share his personal insights freely with shareholders. Many of the shareholders were also serious investors as they continually posed business-related questions and stayed to attend the entire AGM.

Here are 12 things we learned from the 2017 Hartalega AGM:

1. Hartalega registered double-digit revenue growth of 21.6% from RM1,498 million in 2016 to RM1,822 million in 2017. Compound annual growth rate (CAGR) for revenue from 2005 to 2017 is 26%. Profit after tax likewise increased 9.9% from RM257.4 million in 2016 to RM283 million 2017. CAGR for profit after tax from 2005 to 2017 is 29%. This is due to an increase in production capacity and efficiency as well as robust demand for nitrile gloves and a stronger U.S. dollar.

2. Earnings per share (EPS) grew 9.8% year-on-year from 15.7 cents to 17.24 cents. Since its listing in 2008, Hartalega has recorded a CAGR of 14% for its EPS and seen its net earnings grow sevenfold from RM40 million to RM283 million. Even though the number of shares has increased tremendously (due to three bonus issues) from 243 million shares in 2008 to 1,644 million shares today, it has not affected Hartalega’s EPS growth. Credit can be given to the management for growing the EPS via combination of economies of scale and stable margins.

3. Hartalega paid a dividend per share of 8.5 cents in 2017 compared to 8.0 cents in 2016 although the number of shares increased. Dividend payout ratio is 49.3%, which is slightly lower than 2016’s payout ratio of 50.9%. Since 2012, the management is committed to ensure that a minimum of 45% of annual net profit is paid as dividends to shareholders.

4. A few shareholders asked about the potential impact of the drastic depreciation of the Ringgit Malaysia against the U.S dollar. Executive director Kuan Mun Keng replied that Hartalega’s cost and customer pricing are mostly denominated in U.S. dollars. The impact will be short term as any changes in the USD/RM exchange rate will be adjusted accordingly based on a monthly pricing policy.

5. Other shareholders asked if there were any negative implications with regards to Bank Negara Malaysia’s policy that 75% of total foreign currency proceeds must be converted to ringgit. The management views that the policy has minimal impact because it allows a reconversion of up to 100% of the proceeds back to U.S. dollars without added cost burden to meet U.S. dollar denominated payments and loans and foreign exchange forward contract obligations. The chairman added that Hartalega does not benefit much from foreign exchange gains as they pass on any gains to customers.

6. To date, Hartalega has completed Factories 1, 2 and 3, started commissioning work for Factory 4, and piling work for Factory 5. Hartalega plans to complete 12 production lines in Factory 5 within one year. However, the management has not decided when to start construction for Factory 6 due to the economic slowdown. Other than these six factories, the chairman mentioned that Hartalega may consider building a seventh factory for future expansion. Currently, Factory 7 is still on the drawing board and the management plans to use this factory to produce surgical gloves and product specialty gloves that require post-processing (e.g. double chlorinated gloves). Factory 7 will specifically cater to smaller customers as the demand for these types of gloves is smaller.

7. The Chinese government recently clamped down on the production of PVC gloves to comply with pollution laws. This has caused a disruption in glove supply as Chinese glove manufacturers are required to shut down to upgrade their facilities or to relocate themselves away from major cities. Because of this, rubber gloves are expected to win market share from PVC gloves.

8. Global glove demand is expected to grow faster than the expansion of the industry’s production capacity. In general, global glove demand is growing at 8% per annum, but global glove consumption is projected to grow from 210 billion pieces in 2016 to 251 billion pieces by 2018 — an increase of 41 billion pieces. The global market share of Malaysia’s “Big Four” glove manufacturers (i.e. Hartalega, Top Glove, Kossan, and Supermax) is 56% and demand for Malaysian-manufactured gloves is expected to increase.

9. A representative from the Minority Shareholder Watchdog Group highlighted that Hartalega’s competitors have diversified their portfolios after losing market share. He asked if the management had any intention to diversify upstream or into other areas to mitigate any possible impact from policies imposed by the government. The management explained that 99% of the company’s sales are from exports overseas and they are working closely with the authorities to ensure that sales are not negatively impacted. Hartalega will also focus on completing its major expansion project, the Next Generation Integrated Glove Manufacturing Complex in Sepang as the management believes the glove industry will continue to see healthy growth, especially from emerging markets. As such, the management does not see any reason to diversify outside of the glove manufacturing industry. Instead, Hartalega will push to maintain its growth rate and increase its market share.

10. Hartalega’s global distribution arm, MUN, will increasingly contribute to the group’s revenue and profit. The management shared that healthcare awareness in China and India still has much potential to grow. MUN enables Hartalega to better tap on new markets and enhance their brand and marketing presence in China and India. So far, MUN has expanded its footprint from Mumbai to Chennai in India and from Yancheng to Foshan in China.

11. Several shareholders asked the management to clarify the following issues related to Foshan Dynamic Limited including:

  • Why was Foshan Dynamic excluded from the list of investment in subsidiaries on page 113 of the 2017 annual report?
  • Why does Dr Danaraj hold a 30% interest in Foshan Dynamic? (Hartalega indirectly owns the remaining 70%.)
  • What are the principal activities of Foshan Dynamic?

The management clarified that Foshan Dynamic was only formed on 1 April 2017 and, as such, was excluded from the list of investment in subsidiaries. However, note 27 on page 132 in the annual report disclosed details of Foshan Dynamic’s formation. Chairman Kuan Kam Hon justified Dr Danaraj’s 30% stake by explaining that he’s a key personnel who contributed significantly to ensure the successful formation of Foshan Dynamic in China. The subsidiary’s primary business is in e-commerce consumer healthcare in China. It also acts as the product sourcing company to identify suitable China-made healthcare products for the group.

12. A shareholder congratulated Hartalega for its excellence financial performance but raised his concerns about its employee share option scheme. He understood the scheme is to incentivise employees and retain top talent, but wanted to know how the management could balance shareholders interests as well. The chairman replied that shareholders should focus on Hartelega’s EPS growth as proof that the group is aligned with shareholders’ interests. As long as Hartalega continues to grow its EPS, there should be no issue with the employee share option scheme.

With additional article contributions by Calvin Soon.

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Mitra Chen

Mitra Chen is a value investor since 2008. Prior to that, she had over 20 years experience in human resources in the recruitment industry. She strongly believes that everyone can achieve financial independence when they use the right financial methods and tools for their investments.

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