HLIB Research

PP 9484/12/2012 (031413)

Hartalega (HOLD
INDUSTRY: NEUTRAL EARNINGS EVALUATION

, EPS

7 August 2013 Price Target: RM6.37 ( ) Share Price: RM6.79 Tan J Young jytan@hlib.hongleong.com.my (603) 2168 1082 KLCI Expected share price return Expected dividend return Expected total return Share price 1784.6 -6.2% 2.5% -3.7%

1QFY14 Results
Results

1QFY14 net profit of RM62.9m (+1.0% qoq, +17.9% yoy) accounted for 23.5% of HLIB and 23.8% of consensus full year forecasts respectively. We consider the results to be within expectations given that more production capacity will commence in coming quarters coupled with the appreciation of USD against MYR.

Deviations Dividends Highlights

Largely in line. None (1QFY13: none). 1QFY14 sales rose 12.2% yoy and 3.1% qoq to RM278.0m on the back of continuous expansion in production capacity and increase in demand. Continuous expansion brought total capacity to 53 lines (+2 lines qoq and +8 lines yoy), boosting quarterly production output to 3.1bn pcs (+3.4% qoq and +20.6 yoy). However, the mismatch growth between sales and volume was attributed to lower ASPs where NR glove ASP was down by 21.7% yoy from RM138/k pcs to RM108/k pcs while nitrile glove ASP was down by 11.4% yoy from RM110/k pcs to RM96.87/k pcs. Little change in sales mix (ratio of latex to nitrile) from 6:94 in 4QFY13 to 7:93 in 1QFY14. EBITDA margin improved by 3.7-ppt yoy and 1.9-ppt qoq to 35.4% thanks to easing raw material prices as well as operational efficiency of the new production lines. Management believes that global demand for nitrile rubber gloves will continue to grow at a high rate of over 20% and the commencement of Plant 6 with an expected 30% (+3.9bn pcs pa) boost to its production capacity will capture this growing market.

Information Bloomberg Ticker Bursa Code Issued Shares (m) Market cap (RM m) 3-mth avg. volume (000) Price Performance Absolute Relative Major Shareholders Hartalega Industries SB EPF Budi Tenggara Sdn Bhd Summary Earnings FYE Mar (RM m) 2012A Turnover 931.1 EBITDA 289.2 PBT 258.4 Net profit 201.4 EPS (sen) 27.5 Diluted EPS (sen) 25.0 P/E 27.1 BV/share (RM) 0.85 P/BV 8.0 Net DY (%) 1.6 ROE (%) 32.5 ROA (%) 26.6 HLIB 1M 4.6 3.9

HART MK 5168 739 5,017 797 3M 28.1 25.8 12M 52.6 40.2

51.2% 6.1% 4.9%

Risks

Delays in capacity expansion plans. Surge in nitrile and latex prices. Shift in demand to natural latex gloves from nitrile gloves, if prices of natural latex fall significantly below nitrile. Depreciation of USD vs. MYR.
Table 2013A 2014E 2015E 1032.0 1288.2 1509.5 337.1 405.1 465.1 305.9 343.8 382.3 234.7 268.1 298.1 32.1 34.7 37.0 31.8 33.3 37.0 21.4 20.4 18.3 1.05 1.34 1.71 6.5 5.1 4.0 1.5 2.5 2.8 30.7 24.9 21.6 25.1 20.0 18.1

Forecasts Rating

Unchanged. HOLD , TP: RM6.37 Positives Leader in nitrile glove market; highest ROE and net profit margins; most efficient and profitable glove maker. In the event of a price war, Hartalegas earnings will be the least affected, shielded by its high profit margins. Negatives Possibility of increased competition in nitrile glove market.

Valuation

Reiterate our HOLD call on the equity on the back of unchanged TP of RM6.37 derived based on 17.5x CY14 EPS. After the industry-wide rerating, we believe that the postrallied share prices have factored in all the positive catalysts and see limited upside going forward.

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Figure #1
FYE Mar (RMm) Revenue

Hartalegas 1QFY14 Results

1QFY13 247.7 4QFY13 269.8 1QFY14 278.0 QoQ (%) 3.1 YoY (%) 12.2 Comments QoQ: Higher in tandem with increase in sales volume (+3.4%) as the quarter added two new production lines to a total of 53. YoY: In line with Hartalegas continuous expansion in production capacity (45 lines to 53 lines) and increase in demand. Lifted by lower raw material prices of nitrile and natural latex as well as improved operation efficiency of the new production lines. margin improvements. Filtered down from EBITDA.

EBITDA EBITDA margin (%) EBIT (Operating profit) EBIT margin (%) Net interest exp Exceptional PBT PBT margin (%) Tax Minority Interest Net profit Net profit margin (%) Net profit (ex-exceptional) EPS (sen)
Company Data

78.6 31.7 71.3 28.8 -0.1 -1.3 69.9 28.2 -16.5 0.1 53.4 21.5 54.7 7.3

90.3 33.5 80.9 30.0 0.0 0.4 81.3 30.1 -18.9 0.1 62.3 23.1 61.9 8.5

98.5 35.4 88.0 31.6 0.2 -6.2 81.9 29.5 -18.9 -0.1 62.9 22.6 69.1 8.6

9.1

25.3

8.7

23.3

0.7

17.2

FOREX and change in fair value of forward exchange contracts. Dragged by exceptional.

1.0 11.6 0.5

17.9 26.4 17.3

Filtered down from PBT. After one-off adjustments.

Figure #2
(RMm) Revenue Pretax profit Net profit

1QFY14 Results vs. HLIB and Consensus

Actual 1QFY14 278.0 81.9 62.9 Consensus FY14E 1,223.2 334.0 263.8 Actual vs Consensus (%) 22.7 24.5 23.8 HLIB FY14E 1,288.2 343.8 268.1 Actual vs HLIB (%) 21.6 23.8 23.5 Comments Below expectations. Largely in line. Largely in line.

Company Data, HLIB, Bloomberg

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Financial Projections
Income statement FYE 31 Mar (RMm) 2011A 2012A 2013A Revenue 734.9 931.1 1032.0 289.2 337.1 EBITDA 270.3 Dept. & Amort. -24.9 -29.0 -31.9 Interest income 2.4 0.9 0.8 Interest expense -2.5 -1.7 -0.9 Exceptionals 0.0 0.0 0.0 PBT 242.8 258.4 305.9 Taxation Minorities Net profit No. of shares (m) Basic EPS (sen) Diluted EPS (sen) -52.5 0.03 190.3 731.1 26.0 23.6 -57.0 0.05 201.4 731.1 27.5 25.0 -70.8 -0.33 234.7 731.1 32.1 31.8 2014E 1288.2 405.1 -55.1 4.5 -6.2 0.0 343.8 -75.6 0.05 268.1 771.8 34.7 33.3 2015E 1509.5 465.1 -77.1 5.0 -5.7 0.0 382.3 -84.1 0.05 298.1 805.1 37.0 37.0 Cashflow FYE 31 Mar (RMm) Pretax profit Dep. and Amort. Changes in working cap Net interest received/(paid) Tax paid Others Operating Cash Flow Capex Others Investing Cash Flow Div paid Changes in borrowings Issuance of shares Others Financing Cash Flow Net cash flow Forex Beginning cash Ending cash Valuation Ratios FYE 31 Mar (RMm) EPS (sen) Diluted EPS (sen) P/E (x) Net DPS (sen) Net DY (%) BV/share (RM) P/BV (x) FCF/share (sen) FCF yield (%) Market cap Net cash EV EV/EBITDA ROE (%) ROA (%) 2011A 2012A 2013A 2014E 2015E 242.8 258.4 305.88 343.77 382.25 25.0 29.0 31.9 55.1 77.1 -44.5 35.7 -44.8 -41.4 -40.9 -0.1 1.9 2.9 -1.7 -0.7 -47.8 -48.8 -59.2 -75.6 -84.1 5.7 4.3 -0.1 1.7 0.7 184.8 200.3 317.2 278.4 333.9 -81.3 -60.2 -187.0 -300.0 -250.0 0.3 0.1 -7.0 0.0 0.0 -81.0 -60.1 -194.0 -300.0 -250.0 -56.9 -87.4 -98.8 -120.5 -135.1 -2.5 -14.6 -12.5 -10.0 -10.0 0.3 6.9 0.0 168.5 137.9 0.0 0.0 7.3 0.0 0.0 -59.1 -95.0 -104.0 38.0 -7.2 44.7 45.2 19.2 16.4 76.6 -2.3 1.0 0.0 0.0 0.0 38.2 74.6 163.2 163.2 145.5 117.0 163.2 182.4 161.9 238.5

Balance sheet FYE 31 Mar (RMm) Fixed assets Other long-term assets Other short-term assets Working capital Receivables Payables Inventories Net cash Cash ST debt LT debt Shareholder's funds Share capital Reserves Minorities Other liabilities

2011A 2012A 2013A 348.6 379.7 534.9 0.3 0.5 7.6 3.4 0.1 0.1 108.5 154.2 118.5 101.0 117.1 124.7 -57.2 -60.4 -92.8 64.7 97.5 86.6 78.0 138.6 170.3 117.0 163.2 182.4 -14.5 -12.6 -7.7 -24.5 -12.1 -4.5 494.4 619.5 765.5 181.8 182.5 366.7 312.7 437.0 398.9 0.4 0.6 1.0 44.0 53.0 64.8

2014E 856.9 0.0 0.0 213.7 212.5 -106.2 107.5 47.2 161.9 -12.6 -102.1 1077.0 385.9 691.1 0.6 40.2

2015E 1029.7 0.0 0.0 255.1 254.1 -127.1 128.1 133.9 238.5 -12.6 -92.1 1377.9 402.5 975.4 0.6 40.2

2011A 2012A 2013A 2014E 2015E 26.0 27.5 32.1 34.7 37.0 23.6 25.0 31.8 33.3 37.0 27.1 21.4 20.4 18.3 28.7 10.5 10.8 10.5 17.0 19.0 1.5 1.6 1.5 2.5 2.8 0.68 0.85 1.05 1.34 1.71 10.0 8.0 6.5 5.1 4.0 14.2 19.2 17.8 -2.8 10.4 2.1 2.8 2.6 -0.4 1.5 4964.1 4964.1 4964.1 5240.5 5466.6 78.0 138.6 170.3 47.2 133.9 4886.1 4825.6 4793.9 5193.2 5332.7 18.1 16.7 14.2 12.8 11.5 38.5 32.5 30.7 24.9 21.6 30.0 26.6 25.1 20.0 18.1

Assumption Metrics FYE 31 Mar (RMm) Effective capacity (bn) Utilisation rate (%) NBR latex price (USD/kg) NR latex price (RM/kg) 2011A 2012A 2013A 8.33 9.78 11.0 80 83 85 1.79 8.21 1.48 8.29 1.60 6.36 2014E 13.7 85 1.70 6.96 2015E 15.7 85 1.80 7.48

Other Ratios FYE 31 Mar (RMm) Growth (%) Sales Growth EBITDA Growth PBT Growth Net Profit Growth Margins (%) EBITDA Margin PBT Margin Net Profit Margin 2011A 28.5 34.5 36.6 33.2 36.8 33.0 25.9 2012A 26.7 7.0 6.4 5.8 31.1 27.8 21.6 2013A 9.9 13.9 14.1 14.2 32.2 28.8 22.5 2014E 25.8 23.0 16.6 16.6 31.4 26.7 20.8 2015E 17.2 14.8 11.2 11.2 30.8 25.3 19.7

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Disclaimer The information contained in this report is based on data obtained from sources believed to be reliable. However, the data and/or sources have not been independently verified and as such, no representation, express or implied, are made as to the accuracy, adequacy, completeness or reliability of the info or opinions in the report. Accordingly, neither Hong Leong Investment Bank Berhad nor any of its related companies and associates nor person connected to it accept any liability whatsoever for any direct, indirect or consequential losses (including loss of profits) or damages that may arise from the use or reliance on the info or opinions in this publication. Any information, opinions or recommendations contained herein are subject to change at any time without prior notice. Hong Leong Investment Bank Berhad has no obligation to update its opinion or the information in this report. Investors are advised to make their own independent evaluation of the info contained in this report and seek independent financial, legal or other advice regarding the appropriateness of investing in any securites or the investment strategies discussed or recommended in this report. Nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to your individual circumstances or otherwise represent a personal recommndation to you. Under no circumstances should this report be considered as an offer to sell or a solicitation of any offer to buy any securities referred to herein. Hong Leong Investment Bank Berhad and its related companies, their associates, directors, connected parties and/or employees may, from time to time, own, have positions or be materially interested in any securities mentioned herein or any securites related thereto, and may further act as market maker or have assumed underwriting commitment or deal with such securities and provide advisory, investment or other services for or do business with any companies or entities mentioned in this report. In reviewing the report, investors should be aware that any or all of the foregoing among other things, may give rise to real or potential conflict of interests. This research report is being supplied to you on a strictly confidential basis solely for your information and is made strictly on the basis that it will remain confidential. All materials presented in this report, unless specifically indicated otherwise, is under copyright to Hong Leong Investment Bank Berhad . This research report and its contents may not be reproduced, stored in a retrieval system, redistributed, transmitted or passed on, direclty or indirectly, to any person or published in whole or in part, or altered in any way, for any purpose. This report may provide the addresses of, or contain hyperlinks to, websites. Hong Leong Investment Bank Berhad takes no responsibility for the content contained therein. Such addresses or hyperlinks (including addresses or hyperlinks to Hong Leong Investment Bank Berhad own website material) are provided solely for your convenience. The information and the content of the linked site do not in any way form part of this report. Accessing such website or following such link through the report or Hong Leong Investment Bank Berhad website shall be at your own risk. 1. As of 7 August 2013, Hong Leong Investment Bank Berhad has proprietary interest in the following securities covered in this report: (a) -. 2. As of 7 August 2013, the analyst, Tan J Young who prepared this report, has interest in the following securities covered in this report: (a) -.

Published & Printed by

Hong Leong Investment Bank Berhad (10209-W)

(Formerly known as MIMB Investment Bank Berhad) Level 8, Menara HLA No. 3, Jalan Kia Peng 50450 Kuala Lumpur Tel 603 2168 1168 / 603 2710 1168 Fax 603 2161 3880

Equity rating definitions

BUY TRADING BUY HOLD TRADING SELL SELL NOT RATED Positive recommendation of stock under coverage. Expected absolute return of more than +10% over 12-months, with low risk of sustained downside. Positive recommendation of stock not under coverage. Expected absolute return of more than +10% over 6-months. Situational or arbitrage trading opportunity. Neutral recommendation of stock under coverage. Expected absolute return between -10% and +10% over 12-months, with low risk of sustained downside. Negative recommendation of stock not under coverage. Expected absolute return of less than -10% over 6-months. Situational or arbitrage trading opportunity. Negative recommendation of stock under coverage. High risk of negative absolute return of more than -10% over 12-months. No research coverage and report is intended purely for informational purposes.

Industry rating definitions

OVERWEIGHT NEUTRAL UNDERWEIGHT The sector, based on weighted market capitalization, is expected to have absolute return of more than +5% over 12-months. The sector, based on weighted market capitalization, is expected to have absolute return between 5% and +5% over 12-months. The sector, based on weighted market capitalization, is expected to have absolute return of less than 5% over 12-months.

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