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Saturday, April 19, 2014

Hartalega - buy on dip?

The glove makers in Malaysia command about 63% of the world glove market. The top four are mainly Topglove, Supermax, Kossan and Hartalega. One that really stands out is Hartalega. Hartalega has carve out it's own niche in the nitrile glove segment.

Although Hartalega has less revenue than it's competitors, it is very profitable. You dun get to be Forbes Asia's 200 Best Under a Billion for consecutive years for no reason. Hartalega has net profit margin in the early twenties, compared to high single digits or mid teens for the other three competitors. This is due to the constant research and development carried out at Hartalega. The R&D has resulted in

  • thinner nitrile gloves. Less material used means more profit. 
  • faster automation processes. Hartalega has high capacity production operating at 45000 pieces of gloves per hour, a new benchmark for the industry. The high automation of manufacturing process also reduces the dependence towards unskilled workers and improves the manufacturing quality consistency by eliminating human errors.
  • innovative plant energy. It is the first in industry to use empty oil palm fruit bunches as biomass fuel to generate heat for manufacturing processes. This could become handy in view of the impending (more to come in the future) hike in gas tariff.

The pulling factors for Hartalega:
  1. Emphasis on R&D
  2. Upcoming NGC in Sepang. Six high capacity manufacturing plants that will house 72 production lines will be built. Hartalega targets to add another 28.5 billion pieces aggregating to total installed capacity of over 42 billion pieces per year upon completion of the NGC project. The total budgeted project cost including land cost about RM2.26 billion and is targeted to complete up to 8 years. The Group will finance the NGC project via a combination of internal funds, conversion of portion of its warrants and bank borrowings (This means no rights issues) .Hartalega have started the construction of plant 1 and 2 and supporting facilities in the 4th quarter of calendar year 2013 and some of the production lines will start in the 4th quarter of calendar year 2014 and other production lines will come on stream progressively. 
The competitors are busy adding capacities while Hartalega is patiently waiting for new plant to be commissioned. So the next few quarters might be flattish. That might put some pressure on Hartalega's stock price. And that should be present some opportunity to buy. Some people say, you make money when you buy a stock, not when you sell the stock!

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