AnalysisBursa

8 things I learned from the 2020 Hartalega AGM

Hartalega Holdings Berhad is the largest nitrile glove manufacturer in the world that can produce up to 39.3 billion pieces of gloves annually. Since it was listed on Bursa Malaysia in 2008, its share price has rallied more than 100 times from RM0.16 to above RM18 as of October 2020.

Throughout the years, the company has benefited from increasing healthcare standards and greying populations in parts of the world, increasing the demand for glove consumption. This year alone, Hartalega’s share price has grown threefold because of COVID-19. Is the rally sustainable? Can Hartalega still maintain its stellar growth as it did in the past?

Here are eight things I learned from the 2020 Hartalega AGM.

1. Hartalega recorded revenue of RM2.9 billion in FY2020, a 3.4% y-o-y increase. But its net profit excluding other income decreased 4.5% to RM421.6 million y-o-y mainly due higher tax expenses. FY2020 did not capture the effects of COVID-19 as Hartelega’s financial year ends on 31 March.

2. In Q1 2021 during the peak months of the pandemic, Hartalega’s revenue and net profit were RM920.1 million and RM213.6 million respectively. This was 43.7% and 128.0% higher than Q1 2020. The improved results were due to higher sales volume and average selling prices (ASPs) as well as lower material and upkeep expenses. Chief commercial officer, Kuan Mun Keng, expects ASPs to grow steeply in the coming quarters. Even with a COVID vaccine, he expects the ASPs to be maintained. The increase in the ASPs was delayed by one quarter to allow its strategic partners to adjust prices accordingly.

3. Hartalega believes there has been a structural step-up in glove demand globally. The estimated increase in glove demand is around 120 billion pieces, which represents an increase of 30% and 100% from developed and developing countries respectively. According to the CCO, the existing capacity expansion plans of the glove industry players may not be sufficient to fulfil the heightened demand.

Company2019 (million pieces)2022 (million pieces)Changes (million pieces)Changes (in percentage)
Top Glove64121+57+89.1%
Hartalega3644+8+22.2%
KOSSAN2942+13+44.8%
Supermax2448+24+100.0%
Total153255+10266.7%

Manufacturing capacities of the Big Four. Source: Annual and quarterly reports.

It may take the industry at least three years to meet the existing demand for gloves. The nitrile raw material shortage will also persist until 2021. However, Hartalega’s production lines can be converted to produce natural rubber gloves if the shortage prolongs.

It takes glove players between 13 and 18 months to fully commission a glove factory and production lines. Executive chairman Kuan Kam Hon had cast his doubts on the feasibility of its competitors’ aggressive expansion plans. As shown in the table above, Hartalega’s expansion plan is the most modest among the Big Four.

4. Top Glove and Supermax proposed bonus issues while Hartalega chose not to follow suit as the chairman deemed the current timing inappropriate. However, he would not rule out bonus issues in the future. Year to date, glove counters have had a great run. In my opinion, reduced share prices resulting from the dilutive effects of bonus issues could give unsophisticated investors a wrong signal that those stocks are trading at a discount, which may not be the case. 

5. In August 2020, Hartalega purchased a piece of land next to its existing Next Generation Integrated Glove Manufacturing Complex (NGC) plant to build NGC 1.5 to meet the increased demand for gloves.NGC 1.5 will house four plants that can accommodate 12 production lines each. The new plant is expected to boost its annual manufacturing capacity by 19 million pieces and start commissioning by the end of 2021.  In 2021, capital expenditure will amount to RM997 million.

Meanwhile, the CCO responded to Minority Shareholder Watch Group that the land acquisition cost of NGC 2.0 totalled RM263 million. This expansion will cost RM3.o billion and will be operational by 2027.

6. CEO Kuan Mun Leong explained to shareholders that Hartalega is predominantly an original equipment manufacturer (OEM) of gloves. In 2020, more than 95% of its revenue came from the OEM segment. Its own-brand gloves are marketed mainly in the Asia Pacific such as China, India, and Australia as it does not wish to compete with its OEM customers. It aims to tap on the existing low glove consumption per capita in this region for growth.

7. The CEO did not disclose the name of the major customer that contributed to 30% of Hartalega’s revenue in 2020. He added that the strategic alliance with this OEM customer is deliberate to achieve cost savings so that Hartalega remains the most efficient glove player in the industry.

8. Hartalega does not aim to be the largest nitrile glove manufacturer in the world. Instead, the CEO highlighted that the company strives for excellence in everything they do by being the most profitable glove player. The company has no plans to venture into other businesses at this juncture.

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

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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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