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AnalysisBursa

10 things I learned from the 2021 Hartalega AGM

Hartalega is a fast-growing glove company that is listed on Bursa Malaysia. Its factories are equipped with the fastest and most efficient production lines in the world that can manufacture 44 billion gloves per year.

The past year was a bumper one for glove manufacturers like Hartalega. It posted record revenue and net profit amid the pandemic as glove demand rose tremendously. Hartalega’s share price peaked in August 2020 before falling to a 52-week low in September 2021. Interestingly, the company delivered its best quarterly results just a few months prior in June 2021! As we can see from this, the stock market is extremely forward-looking, and investors bid up the price of Hartalega stock by 10 months in advance.

How will Hartalega fare now that its pandemic boom is over? Here are 10 things I learned from the 2021 Hartalega AGM.

1. Revenue grew 129.2% year-on-year to RM6.7 billion in 2021 because of higher average selling prices and sales volume driven by strong demand. As a result of increased capacity and utilisation rate, net profit excluding other income surged 571.8% year-on-year to RM2.8 billion in 2021. Dividend per share jumped from 7.75 sen in 2020 to 50.95 sen in 2021. Dividend payout has maintained at above 60% in the past four years.

2. Revenue and net profit in Q1 2021 continued to grow fourfold and ninefold year-on-year respectively. However, the average selling prices (ASP) of gloves peaked in the first half of 2021 according to the management. The prices are expected to decline by 30% quarter-on-quarter in the coming quarters and stabilise by early 2022. Nevertheless, the ASPs will be expected to trend higher than before the pandemic mainly because of rising raw material prices driven by shortage. The Delta variant of COVID-19 did not cause a further spike in ASPs as there is no shortage in glove supply and panic buying has reduced.

The results in the upcoming second quarter will also be affected by lower plant utilisation rates of around 70% because of workforce restrictions and the two-week mandatory plant closure in July 2021. The company does not intend to go upstream to produce glove raw materials.

3. The two-week plant closure in July resulted in a 5% capacity loss in total annual output. Strangely, the glove industry was not categorised under the personal protective equipment sector and was not allowed to operate, although gloves are essential to help frontliners combat the pandemic. As the length of the shutdown was not specified then, Hartalega’s customers went on to purchase gloves from foreign sellers instead.

CEO Kuan Mun Leong has urged the government to create a more business-friendly environment, adding that the disruption could affect the reputation of Malaysia as the world’s leading glove exporter.

4The expansion into Kedah is a timely move. Hartalega is acquiring 250 acres of land in Kedah at RM228.7 million. Over the next 20 years, it will invest RM7 billion to build new production facilities there as part of its plan to boost its manufacturing capacity to 95 billion pieces by 2027 and 143 billion pieces in the long term. The investment will total approximately RM11.9 billion. If another lockdown occurs in Selangor (where all of Hartelega’s plants are currently located), Hartalega can still operate its Kedah facilities as usual.

The CEO responded to a shareholder that this future expansion is a public-private initiative to spur economic growth in underdeveloped states and contribute back to the local community. Its expansion will be planned carefully and done sequentially in order not to lead to a glove oversupply situation. At the same time, other glove manufacturers have also slowed down their capacity expansion in alignment with declining demand.

5. The growth of global glove demand had averaged between 8% and 10% annually in the past. Since the pandemic, glove consumption has seen an uptick in glove consumption in emerging markets due to heightened hygiene awareness and low glove consumption pre-pandemic. The management believes the glove demand has stepped up structurally post-pandemic.

6. Hartalega is not too worried about the projected growth of glove capacity in Malaysia and China (at 28% and 59% respectively from 2019 to 2022). Malaysia will continue to hold the lion’s share in the global glove market at around 60%. At the same time, the management will continue to pay attention to up-and-coming Thai and Chinese contenders like INTCO Medical and Blue Sail Medical which ramped up their glove supply recently.

Hartalega also does not plan to set up factories in China. The geopolitical tension between the East and the West also propels some Western buyers to continue their purchases with ASEAN players. In 2021, buyers from North America and Europe contributed to 76.7% of Hartalega’s total revenue.

7. Hartalega will strive to maintain its status as the glove manufacturer with the lowest cost per unit of production. Despite its claims of being capable to produce up to 45,000 gloves per line per hour, the CEO highlighted that the undisclosed capacity figure is much more than that. It will embark on automation initiatives and green investment to mitigate the impact of declining ASPs on its margin.

Hartalega currently employs between 1.5 to 2 workers to manufacture one million gloves. More automation initiatives including an automated packing system will be rolled out in the future to reduce manual labour by about 20%. A digital vision system was also introduced to all production lines to detect glove defects via cameras which can reduce manual labour by another 7%. The company will also focus on hiring local staff as the country’s border is currently closed. As of September 2021, foreign workers made up of 60% of the total workforce.

Hartalega continues to embark on a number of energy-efficient initiatives to mitigate the impact of increasing energy costs. These initiatives include a cogeneration plant, more energy-efficient burners, and progressive installation of solar panels on more warehouses. Currently, energy costs make up of between 8% and 12% of total costs. Starting 2022, Malaysia will liberalise the gas supply market and the cost of gas is expected to drop.

8. Hartalega is predominantly an original equipment manufacturer of gloves as its major customers are either brand owners or distributors in developed markets in the U.S. and Europe. It is an original brand manufacturer in other regions such as China, India, and Australia to avoid competition with its customers. Its glove brand, GloveOn, is in fact the leading glove brand in Australia. Its good relationship with its customers, supply reliability, and high product quality have protected its business from stiff competition.

9. In Chief Business Officer Kuan Mun Keng’s opinion, the U.S. government’s initiative to encourage American firms to venture into glove manufacturing is ‘difficult to sustain’ due to higher operating costs compared to Asia. The initiative was part of the U.S. government’s plan to secure enough gloves in order to prepare the country for potential future outbreaks.

The CEO also reassured shareholders that a succession plan is in place to bring in more professionals into the leadership team. In fact, Hartalega has managed to successfully scout for talent for leadership positions from different fields many times in the past.

10. Hartalega constantly engages with the relevant overseas parties such as regulators and embassies to improve its labour practices. In June 2021, Hartalega reimbursed all recruitment fees amounting to RM41 million to all foreign workers who paid to join the company. The reimbursement was even extended to former workers who went back to their home countries. The company also donated RM90 million to the Malaysian government to fight against the pandemic. At the same time, there were occasional calls for imposition of a windfall tax on the glove manufacturers.

The fifth perspective

At the end of the day, gloves are commodities. Glove oversupply is an issue that Hartalega has to deal with. I can see that the management is trying to protect its margin from falling glove demand as well as the declining ASPs of gloves. In fact, the company has one of the highest profit margins among all glove makers. It will not be overtaken by its competitors in the near term, but the future is definitely less rosy.

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.

3 Comments

  1. Hi Chee Hoi,
    Thank you for your sharing.

    Would like to ask if Hartalega produce gloves for semiconductor cleanroom operation?

    Thank you
    David

  2. Thanks, Chee Hoi.
    Most Glove stocks are having correction now.
    I am eyeing on Riverstone that is listed in Singapore, though ALL their manufacturing/operations are in Malaysia:-)
    Riverstone produce glove for healthcare sector & Semiconductor cleanroom.
    Malaysia EPF has ~5% stacke in Riverstone.
    Though, EPF also has ~5% in Top Glove that is dual-listed in Malaysia & Singapore.

    David

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