Hartalega

RM6.79 - BUY
Indar Dhaliwal
indar.dhaliwal@clsa.com +60(3)20567826

Defying gravity
Hartalegas 1Q14 results were in-line with ours and consensus forecasts with net profit of RM62.9m (+18%YoY). Operating margins continue to defy gravity and saw an increase of 110bps YoY to 29.5% due to continued easing of raw material costs and strengthening MYR. We reduce our ASP assumption resulting in a cut to NP but we increase our MYR/USD assumption to RM3.20 until 2015 and cut our feedstock forecasts to US$1,200/tonne (from US$1,400) resulting in upgrades to earnings. We increase our TP to 8.00 based on a 20x PE multiple applied to CY14 EPS and upgrade our rec to BUY. Hartalega is our preferred pick in the gloves space due to its nitrile segment leadership and USD exporter status and we recommend investors to switch from Top Glove (U-PF). Positive signs Hartalega reported 1Q14 net profit of RM62.9m (+18%YoY) which was in-line at 24% CLSA and consensus forecasts. Top-line growth was only +12%YoY but continued easing in raw material costs and efficiency gains saw operating expenses only increase by 8%YoY. Therefore, there was an increase of 110bps in operating margins which is a big positive for the company. Catering for demand Demand growth continues to be robust at +20%YoY in stark contrast to the latex segment which is seeing still weak demand at 5-8%YoY. Hartalega commissioned 10 new lines in July, to meet demand in the interim ahead of the planned NGC expansion in 2014, as utilisation continues to be sky-high at 91%. Therefore, profits are expected to pick up in 2H of FY3/14. Adjusting assumptions Given the continued weakening in feedstock costs, we have trimmed our feedstock (butadiene) assumption to US$1,200/tonne (from US$1,400) flat until 2015 and also adjusted our forex assumption to MYR3.20/USD until 2015 which leads to earnings upgrades. Accordingly, we have trimmed our ASP assumption in-line with the lower feedstock costs cutting our revenue. The best BUY Hartalega checks all the boxes being a USD exporter as well as benefitting from lower commodity costs. Its nitrile focus sets it apart from the competition such as Top Glove (U-PF) whom is facing competition in the latex segment. As such, we upgrade our recommendation to BUY (from O-PF) with a raised TP of RM8.00 based on a 20x PE multiple to CY14 earnings. Financials
Year to 31 March Revenue (RMm) Rev forecast change (%) Net profit (RMm) NP forecast change (%) EPS (sen) CL/consensus (13) (EPS%) EPS growth (% YoY) PE (x) Dividend yield (%) ROE (%) Net debt/equity (%)
Source: CLSA

Results review

7 August 2013

Malaysia
Healthcare
Reuters Bloomberg HTHB.KL HART MK

Priced on 6 August 2013 KLSE Comp @ 1,784.6

12M hi/lo

RM6.85/4.21 RM8.00 +18% 484.5m 44.5% US$1,556m

(US$1.5m)

12M price target % potential Shares in issue Free float (est.) Market cap

3M average daily volume

RM4.7m

Major shareholders

Hartalega Industries 55.5%

Stock performance (%)

1M Absolute Relative Abs (US$)
(RM )
6.8

3M 28.1 25.8 20.3

(% )

12M 52.6 40.2 47.6

250 200 150 100 50 0

4.6 3.9 3.2

5.7
4.6 3.5

2.4 Au g-11

Feb-12

Au g-12

Feb-13

H artale ga ( LHS) Rel to Comp (RH S)

Source: Bloomberg

12A 931 201 27.7 5.7 24.5 1.8 36.1 (22.3)

13A 1,032 235 32.2 16.6 21.1 2.1 34.3 (15.0)

14CL 1,158 (3.2) 267 1.2 34.9 101 8.4 19.4 2.4 32.5 (10.3)

15CL 1,303 (1.8) 299 3.2 39.1 103 11.8 17.4 2.7 30.5 (6.9)

16CL 1,520 (3.1) 325 1.5 44.7 104 14.4 15.2 3.0 28.3 (5.5)

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Defying gravity

Hartalega - BUY

Defying gravity
Figure 1

Margins continue to expand

Hartalega: 1Q14 summary Revenue Operating expenses Other income EBITDA Depreciation Operating profit Finance costs Core PBT Taxation PAT MI Core Net profit EPS Margins Operating profit PBT Net profit Effective tax
Source: Hartalega
Figure 2

1QFY13 247.7 (177.6) 0.1 81.5 (11.3) 70.2 (0.3) 69.9 (16.5) 53.4 0.1 53.5 7.3

4QFY13 269.8 (190.1) 1.8 88.8 (7.3) 81.5 (0.2) 81.3 (18.9) 62.4 (0.1) 62.3 8.5

1QFY14 278.0 (191.9) (4.0) 100.8 (18.8) 82.0 (0.1) 81.9 (18.9) 63.0 (0.1) 62.9 8.6

% YoY 12.2 8.1 nm 23.8 67.0 16.8 (57.8) 17.2 14.7 17.9 (233.8) 17.6

% QoQ 3.1 1.0 nm 13.6 158.4 0.7 (21.1) 0.7 0.0 0.9 (20.2) 1.0

28.4% 28.2% 21.6% 23.6%

30.2% 30.1% 23.1% 23.2%

29.5% 29.5% 22.6% 23.1%

Mainly N America and Europe customers

Hartalega 1Q14: Customer split by geography

Oceania 2%

ROW 0%

Asia 11%

Europe 30%

North America 54%

Latam 3%
Source: Hartalega

7 August 2013

indar.dhaliwal@clsa.com

Defying gravity

Hartalega - BUY

Figure 3

Feedstock is 44% of costs

Hartalega: 1Q14 cost breakdown

Overhead & others 19%

Chemical 10%

Feedstock 44%

Packaging 6%

Labour 12% Fuel 9%

Source: Hartalega
Figure 4

and they keep coming off now at US$950/tonne

Hartalega: Feedstock (butadiene) prices

2,100 2,000

US$/t

1,900
1,800 1,700 1,600

1,500
1,400 1,300 1,200

1,100
1,000 900 800 Jan-07
Source: Platts
Figure 5

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Glove: Peer comp Name Hartalega Top Glove Ansell Supermax Kossan BBG code HART MK Equity TOPG MK Equity ANN AU Equity SUCB MK Equity KRI MK Equity Mkt Cap (US$bil) 1.5 1.1 2.2 0.5 0.6 Wgt Avg
Source: CLSA *Bloomberg consensus for KRI, SUCB

ADT (US$m) 1.5 2.5 14.5 1.6 1.3

PE (x) CY13 CY14 20.0 16.3 15.3 11.0 15.0 16.3 18.4 14.8 12.5 9.9 12.8 14.3

EPS Growth (%) CY13 9.5 9.3 9.4 16.1 24.8 11.5 CY14 9.0 9.9 10.8 11.1 17.3 10.8

ROE (%) CY13 30.3 16.8 16.6 14.7 19.7 20.4

Yield (%) CY13 2.8 3.2 2.4 3.1 2.4 2.7

PB (x) CY13 6.2 2.6 2.6 1.6 2.7 3.5

7 August 2013

indar.dhaliwal@clsa.com

Defying gravity

Hartalega - BUY

Summary financials
Year to 31 March Summary P&L forecast (RMm) Revenue Op Ebitda Op Ebit Interest income Interest expense Other items Profit before tax Taxation Minorities/Pref divs Net profit 2012A 931 289 257 0 2 0 258 (57) 0 201 2013A 1,032 337 305 0 1 306 (71) 0 235 305 32 0 (70) 267 (188) 79 0 (188) 0 (106) 0 (106) (26) 1 162 137 137 142 99 0 536 0 0 914 13 88 13 12 40 1 749 914 10.8 16.4 32.6 22.7 45.0 23.2 (15.0) 34.3 39.1 29.4 2014CL 1,158 385 343 (1) (2) 341 (74) 0 267 343 41 (18) (75) 291 (190) 101 (1) (191) 0 (120) 0 (120) (20) 1 136 117 117 159 109 0 685 0 0 1,071 13 97 13 12 40 1 896 1,070 12.2 14.2 33.2 23.1 47.3 21.6 176.7 (10.3) 32.5 35.4 25.7 2015CL 1,303 435 383 0 (2) 381 (82) 0 299 383 52 (21) (84) 330 (214) 116 0 (214) 0 (134) 0 (134) (19) 1 116 98 98 179 123 0 847 0 0 1,247 13 109 13 12 40 1 1,060 1,247 12.5 13.2 33.4 22.9 47.3 21.6 260.3 (6.9) 30.5 32.1 22.4 2016CL 1,520 479 416 0 0 0 416 (90) 0 325 416 63 (33) (90) 356 (215) 141 (215) 0 (146) 0 (146) (5) 1 97 93 93 209 148 0 998 0 0 1,449 13 131 13 12 40 2 1,239 1,449 16.7 10.0 31.5 21.4 45.0 21.6 (5.5) 28.3 29.1 19.4

Summary cashflow forecast (RMm) Operating profit 257 Operating adjustments Depreciation/amortisation 33 Working capital changes (44) Net interest/taxes/other (48) Net operating cashflow 197 Capital expenditure (60) Free cashflow 137 Acq/inv/disposals 0 Int, invt & associate div 4 Net investing cashflow (57) Increase in loans (15) Dividends (87) Net equity raised/other 7 Net financing cashflow (95) Incr/(decr) in net cash 45 Exch rate movements 1 Opening cash 117 Closing cash 163 Summary balance sheet forecast (RMm) Cash & equivalents 163 Debtors 111 Inventories 98 Other current assets 0 Fixed assets 380 Intangible assets 0 Other term assets 0 Total assets 752 Short-term debt 13 Creditors 55 Other current liabs 13 Long-term debt/CBs 12 Provisions/other LT liabs 40 Minorities/other equity 1 Shareholder funds 620 Total liabs & equity 752 Ratio analysis Revenue growth (% YoY) Ebitda growth (% YoY) Ebitda margin (%) Net profit margin (%) Dividend payout (%) Effective tax rate (%) Ebitda/net int exp (x) Net debt/equity (%) ROE (%) ROIC (%) EVA/IC (%)
Source: CLSA

26.7 4.8 31.1 21.6 45.0 22.0 (22.3) 36.1 41.0 31.3

7 August 2013

indar.dhaliwal@clsa.com

Defying gravity

Hartalega - BUY

Companies mentioned
Hartalega (HART MK - RM6.79 - BUY)

Recommendation history of Hartalega Holdings Bhd HART MK

Stock price (RM)

7 6 5 4 3 2 Sep 10

Indar Dhaliwal Other analysts No coverage

BUY U-PF N-R

O-PF SELL

Jan 11 May 11 Sep 11

Jan 12 May 12 Sep 12 Date 09 Apr 2012 02 Feb 2012 14 Sep 2011 18 Mar 2011

Jan 13 May 13 Rec BUY BUY BUY BUY Target 4.63 4.30 3.65 3.70

Date 27 Jun 2013 08 May 2013 18 Jan 2013 22 Nov 2012

Source: CLSA

Rec Target O-PF 7.00 O-PF 5.80 U-PF 5.10 Dropped Coverage

7 August 2013

indar.dhaliwal@clsa.com

Defying gravity

Hartalega - BUY

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Key to CLSA/CA Taiwan investment rankings: BUY : Total return expected to exceed market return AND provide 20% or greater absolute return; O-PF: Total return expected to be greater than market return but less than 20% absolute return; U-PF: Total return expected to be less than market return but expected to provide a positive absolute return; SELL : Total return expected to be less than market return AND to provide a negative absolute return. For relative performance, we benchmark the 12-month total return (including dividends) for the stock against the 12month forecast return (including dividends) for the local market where the stock is traded. We define stocks we expect to provide returns of 100% or higher including dividends within three years as Double Baggers. 2013 CLSA Limited (for research compiled by non-Taiwan analyst(s)) and/or Credit Agricole Securities Taiwan Co., Ltd (for research compiled by Taiwan analyst(s)). Note: In the interests of timeliness, this document has not been edited. The analyst/s who compiled this publication/communication hereby state/s and confirm/s that the contents hereof truly reflect his/her/their views and opinions on the subject matter and that the analyst/s has/have not been placed under any undue influence, intervention or pressure by any person/s in compiling such publication/communication. CLSA group of companies (excluding CLSA Americas, LLC) (CLSA), Credit Agricole Securities Taiwan Co., Ltd. (CA Taiwan), CLSA/CA Taiwan's analysts and/or their associates do and from time to time seek to establish business or financial relationships with companies covered in their research reports. As a result, investors should be aware that CLSA and/or such individuals may have one or more conflicts of interests that could affect the objectivity of this report. Regulations or market practice of some jurisdictions/markets prescribe certain disclosures to be made for certain actual, potential or perceived conflicts of interests relating to research reports and such details are available at www.clsa.com/member/research_disclosures/. Disclosures therein include the position of CLSA, CLSA Americas, LLC and CA Taiwan only and do not reflect those of CITIC Securities International Company Limited, Credit Agricole Corporate & Investment Bank and/or their respective affiliates. If investors have any difficulty accessing this website, please contact webadmin@clsa.com or +852 2600 8111. If you require disclosure information on previous dates, please contact compliance_hk@clsa.com IMPORTANT: The content of this report is subject to and should be read in conjunction with the disclaimer and CLSA's Legal and Regulatory Notices as set out at www.clsa.com/disclaimer.html, a hard copy of which may be obtained on request from CLSA Publications or CLSA Compliance Group (18/F, One Pacific Place, 88 Queensway, Hong Kong, telephone +852 2600 8888) and/or CA Taiwan Compliance (27/F, 95, Section 2 Dun Hua South Road, Taipei 10682, Taiwan, telephone +886 2 2326 8188). 05/08/2013

7 August 2013

indar.dhaliwal@clsa.com