12 things I learned from the 2019 Hartalega AGM

As you may already know, Hartalega Holdings Berhad is the largest nitrile glove manufacturer in the world. It has an annual installed capacity of 36 billion gloves and can produce up to 45,000 nitrile gloves per hour per production line. As a first mover, Hartalega also spurred the shift in demand from natural rubber to nitrile gloves in the industry.

Here are 12 things I learned from the 2019 Hartalega AGM:

1. Revenue grew 16.6% year-on-year to RM2.8 billion in 2019. The increase in revenue was due to the growing demand for nitrile gloves worldwide particularly in the U.S. and Europe. Glove sales increased by 10.5% y-o-y to 27.2 billion pieces in 2019. In 2019, the North America market contributed 54.1% of revenue, followed by Europe (25.3%), Asia Pacific (18.1%), and South America (2.5%).

2. Net profit increased by just 3.5% y-o-y to RM454.9 million in 2019. The lower gain in net profit compared to its revenue was due to higher labour and electricity costs as well as lower gains from foreign exchange.

3. Hartalega maintains its dividend policy of distributing 60% of its net profit as dividend to shareholders. Its dividend policy is one of the highest among glove manufacturers compared to Top Glove Corporation and Kossan Rubber Industries which pay 50% and 30%  respectively. Hartalega’s dividend per share stood at 8.2 sen in 2019, which translates to a total payout of RM274.0 million — a dividend payout ratio of 60.2%.

4. Malaysian rubber glove exports grew 11.8% to 81.8 million in 2018 because of a vinyl supply disruption in China in 2017-18. Export growth in nitrile rubber gloves was much higher than that of natural rubber gloves as global demand continues to shift toward nitrile. Nitrile gloves now comprise 63% of Malaysian glove exports, up from 51% in 2014.

Source: 2019 Hartalega AGM presentation slides

5. Since 2000, demand for rubber gloves has grown at a CAGR of 8.0% and is expected to grow at the same rate annually moving forward. Malaysia is the largest producer and exporter of rubber gloves with a 63%  share of the market. The directors expect Hartalega to grow at 10% annually over the next three years. Managing director Kuan Mun Leong highlighted that the company’s Next Generation Integrated Glove Manufacturing Complex (NGC) is running at almost full capacity with a utilisation rate of 95% in alignment with growing demand since August 2019.

Source: 2019 Hartalega AGM presentation slides

6. The construction of Plant 6 and Plant 7 at NGC is ongoing. The plants will commence productions by early and end-2020 respectively, thereby marking the completion of the entire complex. Plants 6 and 7 will increasing Hartalega’s total installed capacity from 36 billion to 44 billion gloves annually by 2022. Hartalega has set aside RM630 million as capital expenditure for the next three years for these expansions. Managing director Kuan Mun Leong added that Plant 7 will cater to lower volume orders from smaller customers as well as specialty gloves such as surgical gloves. The plant serves to expand Hartalega’s product portfolio and as a benchmark for NGC 2.0. The NGC 2.0 plan is still at the incubation stage. Details will be announced once the land purchase is finalised.

7. The glove industry, including Hartalega, is not spared from the uncertainty caused by the U.S.-China trade war as brought up by the Minority Shareholder Watch Group (MSWG) and a shareholder. Non-independent executive director Kuan Mun Keng said that U.S. customers may switch their glove sourcing to Malaysia after tariffs are imposed on China’s medical glove exports effective 1 September 2019. However, Hartalega may face stiffer competition in non-U.S. markets, especially in Europe, as China’s glove manufacturers will promote their products aggressively after losing the U.S. market.

8. MSWG noticed that ‘trade receivables of more than 121 days past due but not impaired’ increased significantly from RM0.6 million in 2018 to RM18.3 million in 2019. Kuan Mun Keng explained that the trade receivables were settled in May 2019 and were from their major customer. Revenue contribution from this customer increased from 21% in 2018 to 27% in 2019. He believes the customer concentration risk is still manageable as the company supplies more than 60% of the customer’s needs. The long-term business relationship is stable and has lasted for over 20 years.

9. MSWG also pointed out that estimated monetary value of benefits-in-kind under compensation for key management personnel significantly increased from RM0.4 million in 2018 to RM17.0 million in 2019. Kuan Mun Keng explained that more directors exercised their share options under the employees share option scheme in 2019.

10. Executive chairman Kuan Kam Hon recognises that the glove industry is a volume market. Hartalega’s product pricing is partially affected by its competitors. Its export sales to the U.S. is currently ahead of its competitor, Top Glove. Nevertheless, he reckons that Top Glove will eventually overtake Hartalega in terms of size. Hartalega will aim to secure its competitive advantage by maintaining its net profit margin in the high teens or above 20% through cost optimisation and increased automation. In comparison, Hartalega’s competitors all have net margins below 15%.

11. The executive chairman admitted that Hartalega is not yet successful in China at this point in time and requested shareholders to assess Hartalega’s overall performance instead of specific regions. Hartalega has not managed to successfully penetrate into developing countries like China and India where there is often a lack of an established centralised procurement system. Business growth in these fragmented markets is slow as many small distributors need to be engaged to sell gloves to hospitals in various regions. Instead, Hartalega has started adopting an OEM approach to enter these cost-conscious markets. Non-independent executive director Dr. Danaraj A/L Nadarajah added that the company aims to first create a stable distribution channel in these developing countries and subsequently bring in suitable products to market.

12. Hartalega is in the midst of securing approval from the U.S. Food and Drug Administration (FDA) to launch its AMG antimicrobial gloves in the U.S. The gloves will be made affordable to the mass market for examination usage. A patent has been filed globally and is still pending approval. AMG gloves were launched in 2018 and its contribution to revenue is still relatively small. As at September 2019, the gloves were exported to customers in 20 countries. The directors expect AMG uptake to increase in the coming years after the expected FDA approval by the second half of 2020. The existing production lines at NGC can also be switched from regular nitrile gloves to AMG almost immediately with no specific modification.

Liked our analysis of this AGM? Click here to view a complete list of AGMs we’ve attended »

Shak Chee Hoi

Chee Hoi is an investor and research analyst at The Fifth Person. He was previously involved in wildlife conservation work with a non-governmental organisation as well as sustainability consultancy work. He personally believes in impacting society and the environment for the greater good.

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