Malaysia Company Focus

Hartalega Holdings Berhad

Bloomberg: HART MK EQUITY | Reuters: HTHB.KL

Refer to important disclosures at the end of this report

DBS Group Research . Equity

7 Aug 2013

HOLD RM6.80 RM6.80 KLCI : 1,785.14

(Downgrade from Buy) Price Target : 12-Month RM 6.60 Reason for Report : Downgrade rating and 1QFY14 Results DBSV vs Consensus: In line with consensus Analyst HON Seow Mee +603 2711 2222 seowmee@hwangdbsvickers.com.my

Strong fundamentals priced in

Share price has reached our TP, downgrade to HOLD; our RM6.60 TP (18x CY14 EPS) is intact 1QFY14 net profit of RM63m was in line with our and consensus estimates; margin was stable Expect moderate earnings growth in FY14, before picking up in FY15

Price Relative
RM 7.5 260 6.5 5.5 4.5 3.5 2.5 1.5 Aug-09 240 220 200 180 160 140 120 100 Aug-10 Aug-11 Aug-12 80 Aug-13 Relative Index

Hartalega Holdings Berhad (LHS)

Relative KLCI INDEX (RHS)

Share price has reached our TP. The share price has risen since our report on 10 Jun and has reached our TP. We now downgrade the stock to HOLD, but maintain our RM6.60 TP. Hartalegas fundamentals remains strong i.e. robust demand for nitrile gloves and improving efficiency and line speed will continue to drive earnings growth and sustain margins despite competition, and it remains the most profitable glovemaker in the sector with the highest margins (30% vs 12% peers average) and ROE (31% vs 17% peer average). Current valuation at 19x CY14 EPS has priced in the positives. Our TP is pegged to 18x CY14 EPS (fully diluted), similar to our valuation for Top Glove. 1QFY14 net profit was flat q-o-q. Sales volume growth remained robust at c.5% q-o-q (vs 2% in 4QFY13). Average selling prices (ASP) fell 10% q-o-q as lower raw material costs were passed on to customers. However, it booked RM6m net forex losses and change in fair value of forward exchange contracts in 1QFY14. Despite this, operating margin was stable at 30%. Upside risk to forecast earnings is sustainable USD strength. We expect moderate earnings growth in FY14, before accelerating to 16% in FY15 as Hartalega commissions its new capacities at NGC. Hartalega should benefit from lower raw material prices and stronger USD/RM in the short term, before they are passed on to customers
At A Glance Issued Capital (m shrs) Mkt. Cap (RMm/US$m) Major Shareholders Hartalega Industries (%) EPF (%) Free Float (%) Avg. Daily Vol.(000) 739 5,024 / 1,555 50.5 6.1 49.5 792

Forecasts and Valuation

FY Mar (RM m) 2013A 2013A 2014F 2014F 2015F 2015F 2016F 2016F

Revenue EBITDA Pre-tax Profit Net Profit Net Pft (Pre Ex.) EPS (sen) EPS Pre Ex. (sen) EPS Gth (%) EPS Gth Pre Ex (%) Diluted EPS (sen) Net DPS (sen) BV Per Share (sen) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (sen sen): sen : Other Broker Recs:

1,032 336 306 235 235 32.3 32.3 11 11 32.3 14.5 105.3 21.1 21.1 15.6 14.2 2.1 6.5 CASH 33.9

1,248 377 340 262 262 32.6 32.6 1 1 32.6 14.7 113.5 20.8 20.8 15.8 13.9 2.2 6.0 CASH 31.2 na 34.8 B: 7

1,471 450 398 302 302 37.7 37.7 16 16 37.7 17.0 134.3 18.0 18.0 15.4 11.6 2.5 5.1 CASH 30.5 na 38.1 S: 3

1,700 520 453 344 344 42.9 42.9 14 14 42.9 19.3 157.9 15.8 15.8 13.5 9.9 2.8 4.3 CASH 29.4 na 43.7 H: 9

ICB Industry : Health Care ICB Sector: Health Care Equipment & Services Principal Business: Latex examination gloves, nitrile gloves and technical rubber products manufacturer

Source of all data: Company, DBS Vickers, Bloomberg Finance L.P

In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore. www.dbsvickers.com ed: SGC / sa: WMT

Recipients of this report, received from DBS Vickers Research (Singapore) Pte Ltd (DBSVR), are to contact DBSVR at +65 6398 7954 in respect of any matters arising from or in connection with this report.

Company Focus Hartalega Holdings Berhad

Hartalega: Operating Operating margin margin remains resilient in 1QFY14

35% 33% 32% 33% 35%

Hartalegas operating margin remains highest among peers

40%

40%
31%

32%

32%

30%

30%

28%

28%

30%

35%
27%

30%

35%
27% 27%

27%

27%

30%
22% 20%

26%

30% 25% 20% 15% 10% 5% 0%

1QCY08 2QCY08 3QCY08 4QCY08 1QCY09 2QCY09 3QCY09 4QCY09 1QCY10 2QCY10 3QCY10 4QCY10 1QCY11 2QCY11 3QCY11 4QCY11 1QCY12 2QCY12 3QCY12 4QCY12 1QCY13

25%
15%

20% 15% 10% 5% 0%

17%

FY14F

FY15F

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

Top Glove

Supermax

Kossan

Hartalega

Stronger USD will lift export revenue

USD/MYR 3.90 3.70 3.50 3.30 3.10 2.90 2.70 2.50

Rolling forward PE band

PE
25.00

20.00 +2SD 15.00 +1SD 10.00 Mean -1SD -2SD

5.00

Jan-06 Mar-06 May-06 Jul-06 Sep-06 Nov-06 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13

0.00

Aug-08

Aug-09

Aug-10

Aug-11

Aug-12

May-08

May-09

May-10

May-11

May-12

USDMYR Curncy

Source: Companies, Bloomberg Finance L.P, DBS Vickers

Peer comparison
Share Company Top Glove Supermax Kossan Rubber Hartalega Sector Average Price (RM) 6.02 2.26 6.10 6.80 Target Price Price (RM) 7.20 NA 4.50 6.60 Market Cap (US$m) 1,208 497 629 1,626 PE (x) CY12 18.1 12.6 18.7 22.0 17.8 PE (x) CY13 16.8 10.9 16.5 21.3 16.4 PE (x) CY14 15.1 9.8 14.3 19.2 14.6 P/BV (x) 2.7 1.6 1.8 5.2 2.8 Div Yield (%) 2.9 2.6 1.9 2.3 2.4 ROE (%) 16 15 18 31 20

Prices as of 5 Aug 2013 NA (not applicable); NR (not rated)

Source: Bloomberg Finance L.P, DBS Vickers

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May-13

Aug-13

Nov-08

Nov-09

Nov-10

Nov-11

Nov-12

Feb-09

Feb-10

Feb-11

Feb-12

Feb-13

Company Focus Hartalega Holdings Berhad

Key Assumptions
FY Mar 2012A 2012A 2013A 2013A 2014F 2014F 2015F 2015F 2016F 2016F

Sensitivity Analysis
2012

Capacity (bln pcs) Utilisation (%) Nitrile latex (RM/kg) NR latex (RM/kg)

9.8 82.9 4.7 8.3

11.1 90.4 4.4 6.3

13.6 92.0 4.4 6.4

16.1 92.0 4.4 6.1

18.6 92.0 4.5 5.8

Nitrile costs +/- 1% Energy costs +/- 1%

Net Profit +/- 1.8% Net Profit +/- 0.2%

Segmental Breakdown
FY Mar 2012 2012A 2013A 2013A 2014F 2014F 2015F 2015F 2016F 2016F

Revenues (RM m) North America South America Asia Europe Others Total Income Statement (RM m)
FY Mar

506 11 106 281 27 931

597 14 105 283 33 1,032

776 18 116 297 41 1,248

952 23 133 312 52 1,471

1,126 28 153 327 65 1,700

North America remained Hartalegas largest market (58% of total sales) but it is making inroads in Asia (10% of total sales).

2012A 2012A

2013A 2013A

2014F 2014F

2015F 2015F

2016F 2016F

Revenue Cost of Goods Sold Gross Profit Other Opng (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) PrePre-tax Profit Tax Minority Interest Preference Dividend Net Profit Net Profit before Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x)

931 (673) 258 2 260 0 0 (2) 0 259 (57) 0 0 202 202 281 26.7 5.9 5.9 6.0 27.7 28.0 21.7 36.2 29.0 32.3 45.3 149.9

1,032 (731) 301 6 307 0 0 (1) 0 306 (71) 0 0 235 235 336 10.8 19.4 17.8 16.4 29.1 29.7 22.7 33.9 27.7 31.1 45.0 339.7

1,248 (913) 334 6 340 0 0 (1) 0 340 (78) 0 0 262 262 377 20.9 12.4 10.9 11.4 26.8 27.3 21.0 31.2 25.0 29.1 45.0 570.4

1,471 (1,078) 393 6 399 0 0 (1) 0 398 (96) 0 0 302 302 302 450 17.9 19.4 17.1 15.6 26.7 27.1 20.6 30.5 24.1 28.7 45.0 668.1

1,700 (1,252) 447 6 453 0 0 (1) 0 453 (109) 0 0 344 344 520 15.6 15.4 13.7 13.7 26.3 26.7 20.2 29.4 23.5 27.9 45.0 759.8

Margins Trend
31.0% 29.0% 27.0% 25.0% 23.0% 21.0% 19.0% 2012A 2013A 2014F 2015F 2016F
Operating Margin % Net Income Margin %

Source: Company, DBS Vickers

Competition in nitrile gloves will pressure margins, but enhanced productivity and efficiency will mitigate the impact.

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Company Focus Hartalega Holdings Berhad

Quarterly / Interim Income Statement (RM m)
FY Mar 1Q2013 1Q2013 2Q2013 2Q2013 3Q2013 3Q2013 4Q2013 4Q2013 1Q2014 1Q2014

Revenue Trend
300 250 16% 14% 12% 200 150 6% 100 50 0% 0
4Q2011 1Q2012 2Q2012 3Q2012 4Q2012 1Q2013 2Q2013 3Q2013 4Q2013 1Q2014

Revenue Cost of Goods Sold Gross Profit Other Oper. (Exp)/Inc Operating Profit Other Non Opg (Exp)/Inc Associates & JV Inc Net Interest (Exp)/Inc Exceptional Gain/(Loss) PrePre-tax Profit Tax Minority Interest Net Profit Net profit bef Except. EBITDA Growth Revenue Gth (%) EBITDA Gth (%) Opg Profit Gth (%) Net Profit Gth (%) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%)

248 (178) 70 0 70 0 0 0 0 70 (16) 0 53 53 70

255 (180) 75 2 77 0 0 0 0 76 (18) 0 59 59 77

260 (184) 76 3 79 0 0 0 0 78 (18) 0 61 61 79

270 (190) 80 2 81 0 0 0 0 81 (19) 0 62 62 81

278 (192) 86 (4) 82 0 0 0 0 82 (19) 0 63 63 82

10% 8%

4% 2%

-2%

Revenue

Revenue Growth % (QoQ)

3.1 8.3 8.3 6.7 28.3 28.3 21.5

3.0 9.0 9.0 9.7 29.4 30.0 23.0

1.8 2.7 2.7 3.4 29.3 30.3 23.3

3.9 3.7 3.7 2.9 29.5 30.2 23.1

3.1 0.7 0.7 1.0 31.0 29.5 22.6

Revenue grew 3% q-o-q despite ASP falling 10% q-oq due to strong volume growth in the quarter (+5%)

Booked RM6m forex losses and change in fair value of forward exchange contracts.

Balance Sheet (RM m)

FY Mar 2012A 2012A 2013A 2013A 2014F 2014F 2015F 2015F 2016F 2016F

Asset Breakdown (2014) 380 0 0 163 98 108 10 758 13 30 43 12 41 620 1 758 142 139 39.6 17.8 45.5 1.3 4.4 3.2 CASH CASH 244.4 23.4 535 0 8 182 87 120 5 936 8 56 51 4 50 766 1 936 104 170 40.2 22.3 47.8 1.2 3.4 2.6 CASH CASH 1,537.4 20.3 668 0 8 225 107 145 5 1,158 8 70 116 4 50 909 1 1,158 72 213 38.8 26.2 40.4 1.2 2.5 1.9 CASH CASH 1,521.0 16.0 787 0 8 258 126 171 5 1,354 8 82 133 4 50 1,076 1 1,354 87 246 39.2 26.9 41.5 1.2 2.5 1.9 CASH CASH 1,521.0 14.7 891 0 8 323 146 198 5 1,570 8 95 146 4 50 1,265 1 1,570 107 311 39.6 27.2 41.9 1.2 2.7 2.1 CASH CASH 1,521.0 NA
Debtors 12.7% Net Fixed Assets 58.3%

Net Fixed Assets Invts in Associates & JVs Other LT Assets Cash & ST Invts Inventory Debtors Other Current Assets Total Assets ST Debt Creditor Other Current Liab LT Debt Other LT Liabilities Shareholders Equity Minority Interests Total Cap. & Liab. Non-Cash Wkg. Capital Net Cash/(Debt) Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) Net Debt/Equity ex MI (X) Capex to Debt (%) Z-Score (X)

Assocs'/JVs 0.0% Inventory 9.4% Bank, Cash and Liquid Assets 19.6%

RM182m net cash as of Jun-13 vs RM170m as of Mar-13

Source: Company, DBS Vickers

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Company Focus Hartalega Holdings Berhad

Cash Flow Statement (RM m)

FY Mar 2012 2012A 2013A 2013A 2014F 2014F 2015F 2015F 2016F 2016F

Capital Expenditure
200 180 160 140 120 100 80 60 40 20 0 2012A 2013A 2014F 2015F 2016F

Pre-Tax Profit Dep. & Amort. Tax Paid Assoc. & JV Inc/(loss) Chg in Wkg.Cap. Other Operating CF Net Operating CF Capital Exp.(net) Other Invts.(net) Invts in Assoc. & JV Div from Assoc & JV Other Investing CF Net Investing CF Div Paid Chg in Gross Debt Capital Issues Other Financing CF Net Financing CF Currency Adjustments Chg in Cash Opg CFPS (sen) Free CFPS (sen)

259 29 (49) 0 (44) 7 201 (60) 0 0 0 0 (60) (87) (15) 0 7 (95) 0 46 35.5 20.4

306 37 (59) 0 36 (2) 317 (187) 0 0 0 (7) (194) (99) (12) 0 7 (104) 0 19 38.7 17.9

340 52 (14) 0 (32) 0 345 (185) 0 0 0 0 (185) (118) 0 0 0 (118) 0 43 47.1 20.0

398 66 (78) 0 (33) 0 354 (185) 0 0 0 0 (185) (136) 0 0 0 (136) 0 33 48.2 21.1

453 81 (96) 0 (34) 0 405 (185) 0 0 0 0 (185) (155) 0 0 0 (155) 0 65 54.7 27.4

Capital Expenditure (-)

45% dividend payout

Source: Company, DBS Vickers

Target Price & Ratings History

7.03 6.53 6.03

RM S.No . 1: 2: Cl o s i n g Ta rg e t Pri c e Pri c e 08 Aug 12 4.50 4.70 07 Nov 12 5.01 4.70 Da te 23 Nov 12 15 Jan 13 06 Feb 13 20 Feb 13 23 Apr 13 09 May 13 10 Jun 13 4.82 4.93 4.64 4.75 5.27 5.67 5.87 4.70 4.70 4.80 4.80 5.50 5.50 6.60 R a ti n g Hold Hold Hold Hold Hold Hold Hold Hold Buy

8
5.53

3:

9 7 2 4 6 3 5 1

4: 5: 6: 7: 8: 9:

5.03 4.53 4.03 Aug-12

Dec-12

Apr-13

Aug-13

Not e : Share price and Target price are adjusted for corporate actions.

Source: DBS Vickers

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Company Focus Hartalega Holdings Berhad

DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

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Company Focus Hartalega Holdings Berhad

COMPANYCOMPANY-SPECIFIC / REGULATORY DISCLOSURES DISCLOSURES DBS Vickers Securities (Singapore) Pte Ltd and its subsidiaries do not have a proprietary position in the company mentioned as 1. of 05-Aug-2013 2. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBS Vickers Securities (USA) Inc ("DBSVUSA"), a U.S.-registered brokerdealer, may beneficially own a total of 1% or more of any class of common equity securities of the company mentioned as of 7 Aug 2013. Compensation for investment banking services: i. DBSVR, DBSVS, DBS Bank Ltd and/or other affiliates of DBSVUSA may have received compensation, within the past 12 months, and within the next 3 months receive or intends to seek compensation for investment banking services from the company mentioned. DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

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