Regional Morning Notes

Wednesday, August 07, 2013

Hartalega Holdings (HART MK)

1QFY14: Respite From The Strengthening Greenback
Hartalegas 1QFY14 net profit rose by a marginal 0.9% qoq as the impact of lower raw material prices and stronger sales were largely offset by a downward revision in nitrile glove selling prices. While earnings in FY14 would continue to be capped by capacity constraints, we expect the recent strengthening of the greenback to offer some near-term respite. Maintain SELL. Target price: RM5.04. 1QFY14 Results
Year to 31 Mar (RMm) Turnover COGS EBIT Finance costs Pre-Tax Profit Tax Net profit EPS (sen) 1QFY13 247.7 (177.6) 69.6 (0.3) 69.9 (16.5) 53.4 8.5 4QFY13 269.8 (190.1) 81.2 (0.2) 81.3 (18.9) 62.4 8.5 33.6 30.1 23.1 1QFY14 278.0 (191.9) 82.0 (0.1) 81.9 (18.9) 63.0 8.3 33.3 29.5 22.6 qoq % chg 3.1 1.0 1.1 (21.1) 0.7 0.0 0.9 1.0 +/- ppts (0.3) (0.7) (0.5) yoy % chg 12.2 8.1 17.9 17.9 17.2 14.7 17.9 17.9 +/- ppts 2.2 1.2 1.1

SELL
(Maintained)

Company Results
Share Price Target Price Upside (Previous TP
Company Description Rubber gloves manufacturer Stock Data GICS sector Bloomberg ticker: Shares issued (m): Market cap (RMm): Market cap (US$m): 3-mth avg daily t'over (US$m): Price Performance (%) 52-week high/low 1mth 3mth 6mth 28.1 46.3 4.6 Major Shareholders Hartalega Industries Sdn Bhd Budi Tenggara Sdn Bhd FY14 NAV/Share (RM) FY14 Net Cash/Share (RM) Price Chart
(lcy) 7.00 6.50 6.00
HARTALEGA HOLDINGS BHD HARTALEGA HOLDINGS BHD/FBMKLCI INDEX

RM6.79 RM5.04 -25.7% RM4.57)

Health Care HART MK 738.9 5,017.1 1,545.0 1.5

EBIT Margin (%) 31.0 PBT Margin (%) 28.2 Net Margin (%) 21.5 Source: Hartalega, UOB Kay Hian

Results 1QFY14 earnings within expectations. Hartalega reported 1QFY14 net profit of RM63.0m, within our and consensus expectations, and accounting for 24.3% and 23.8% of our and consensus full-year estimates respectively. Modest top-line growth. 1QFY14 revenue rose 3.1% qoq, thanks to stronger sales volume for both nitrile (+4.9% qoq) and latex gloves (+10.7% qoq). This was partially offset by a downward revision in nitrile glove ASPs (-5.0% qoq), while there was minimal forex impact given the flattish exchange rate of RM3.08/US$ in the quarter.

RM6.80/RM4.25 1yr YTD 52.6 42.9 % 50.2 5.0 1.29 0.24

(%) 160 150 140 130

Key Financials
Year to 31 Mar (RMm) 2012 Net turnover 931 EBITDA 299 260 Operating profit 202 Net profit (rep./act.) 202 Net profit (adj.) 27.7 EPS (sen) 24.5 PE (x) 8.0 P/B (x) 16.2 EV/EBITDA (x) 1.4 Dividend yield (%) 21.7 Net margin (%) (22.4) Net debt/(cash) to equity (%) 171.9 Interest cover (x) 36.2 ROE (%) Consensus net profit UOBKH/Consensus (x) Source: Hartalega, Bloomberg, UOB Kay Hian 2013 1,032 339 307 235 235 32.1 21.2 6.4 14.3 1.5 22.7 (22.2) 375.0 33.9 2014F 1,148 386 329 267 267 36.5 18.6 5.3 12.5 1.8 23.2 (18.7) n.a. 31.3 264 1.01 2015F 1,335 437 364 294 294 40.3 16.9 4.4 11.1 2.0 22.1 (19.0) n.a. 28.3 292 1.01 2016F 1,614 477 391 316 316 43.2 15.7 3.7 10.2 2.1 19.6 (20.3) n.a. 27.6 337 0.94

5.50 120 5.00 4.50 4.00 3.50

10

110 100 90 80

Volume (m)
5 0

Aug 12

Oct 12

Dec 12

Feb 13

Apr 13

Jun 13

Aug 13

Source: Bloomberg

Analyst Malaysia Research Team +603 2147 1988 research@uobkayhian.com

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Regional Morning Notes

Wednesday, August 07, 2013
Impact of lower ASPs cushioned by softer nitrile prices. Despite the cut in ASPs, the impact of the lower ASPs was largely cushioned by the steep decline in the average nitrile raw material price to US$1,130/tonne in 1QFY14 (4QFY13: US$1,373/tonne) and better operating leverage arising from the commissioning of the final two production lines at Plant 6 during the quarter. This resulted in a marginal 0.3ppt contraction in EBIT margin. Nevertheless, the stronger revenue growth and a stable effective tax rate led to net profit growing 0.9% qoq.
1QFY14 Product Mix
N itrile, 93 .3%

L atex, 6 .7%

Stock Impact Plant 6 expansion fully completed. Hartalegas production capacity has increased to 13.1b pieces currently (from 12.3b pieces as at end-Mar 13) following the commissioning of the final two production lines in Plant 6 during 4QFY13. While management guided that demand for nitrile gloves is still growing (with European customers migrating to nitrile gloves), the company sees flat sales volume in FY14 as there will be no additional production capacity coming on stream over the next 3-4 quarters. Furthermore, the companys high utilisation rate of 93% suggests limited ability to take on more orders, in our view. Next phase of growth to stem from NGC project. Beyond the nearterm setback, Hartalegas earnings growth hinges on its NGC project, which would house 72 new high-tech production lines (45,000 pcs/hour) on a new site and add an additional 28.4b pieces upon its completion in 2021. The new project would be developed over two phases with construction of the first phase expected to kick off in early-4Q13 and the first eight production lines expected to come into operation progressively from Aug 14 onwards. Competition in nitrile glove segment to intensify. While nitrile gloves continue to sell at higher ASPs of US$28-30/000 pieces (as compared with US$26-28/000 pieces for latex gloves), the industrys aggressive expansion into the nitrile glove segment could heighten competition and result in pricing pressure over the longer term. In addition, the migration effect in the US, the largest nitrile glove consumer, should eventually slow down as the countrys nitrile-to-latex glove consumption mix had hit 83:17 as at 1Q13, a point close to saturation, in our view. With the expected slowdown in migration and the huge capacity build-up in the nitrile glove segment, Hartalega could experience some margin compression going forward. However, stronger US$ offers near-term respite. While Hartalegas near-term earnings could be capped by capacity constraints, the recent strengthening of the US$ could offer some near-term respite. We note that exchange rate movements have been favourable with the US$ strengthening to about RM3.23/US$ currently (vs Hartalegas 1QFY14 average of RM3.07/US$). As such, we raise our FY14-16 RM/US$ assumptions to RM3.12-3.15/US$ (previously RM3.10/US$).

Source: Hartalega

Quarterly Production Capacity And Utilisation Rate

(% ) 95% 90% 85% 80% 75% 70% 65%
Production capacity (RHS) Utilisation rate (LHS)

(m' pcs)
3.2 3.0 2.8 2.6 2.4 2.2 2.0 1.8 1.6 1.4 1.2

Source: Hartalega

Nitrile Prices Weakening

US$/tonne

2,300 2,100 1,900 1,700 1,500 1,300 1,100 900 700 500 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11

US$2,085/tonne -54.4% from peak

Jul 11

Jan 12

Jul 12

Jan 13

Source: Hartalega

Declining Nitrile Glove ASPs

(RM/'000 pcs) 120 115 110 105 100 95 90 1 1 Y F Q 1 1 1 Y F Q 2 1 1 Y F Q 3 1 1 Y F Q 4 2 1 Y F Q 1 2 1 Y F Q 2 2 1 Y F Q 3 2 1 Y F Q 4 3 1 Y F Q 1 3 1 Y F Q 2 3 1 Y F Q 3 3 1 Y F Q 4 4 1 Y F Q 1

Source: Hartalega

Projected EBIT Margin

EBIT margin (%) 35 33 31 29 27 25 23 21 19 17 15 FY11 FY12 FY13 FY14F FY15F FY16F

Earnings Revision/Risk Following the adjustment to our forex assumptions, our FY14-16 net profit forecasts have been raised by 2.2-3.2%. Valuation/Recommendation Maintain SELL with a revised target price of RM5.04. While capacity constraints would continue to hinder near-term earnings growth and the aggressive expansion within the nitrile glove segment could erode Hartalegas margins over the longer term, the improved liquidity in mid cap stocks warrants higher multiple. As such, we raise our valuation benchmark to 14x 2014F PE (from 13x). Together with our earnings revision, our target price is raised to RM5.04 (from RM4.57) but no change to our SELL call.

Source: Hartalega, UOB Kay Hian

Key Assumptions
Sa le sg ro w th U tilisa tionra te AS P(R M / 00 0' pcs) N B Rprice (R M /kg)
Source: UOB Kay Hian

FY 14 F 1 5% 8 7% 10 1 .1 5.0 0

FY 15 F 15 % 88 % 10 0 .8 5.00

FY 16 F 15 % 89 % 10 0.5 5.00

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Wednesday, August 07, 2013
Profit & Loss
Year to 31 Mar (RMm) Net turnover EBITDA Deprec. & amort. EBIT Net interest income/(expense) Pre-tax profit Tax Minorities Net profit Net profit (adj.) 2013 1,032 339 32 307 (1) 306 (71) 0 235 235 2014F 1,148 386 57 329 4 334 (67) n.a. 267 267 2015F 1,335 437 73 364 4 368 (74) n.a. 294 294 2016F 1,614 477 86 391 4 395 (79) n.a. 316 316

Balance Sheet
Year to 31 Mar (RMm) Other LT assets Cash/ST investment Other current assets Total assets ST debt Other current liabilities LT debt Other LT liabilities Shareholders' equity Minority interest Total liabilities & equity 2013 543 182 211 936 8 107 4 50 766 1 936 2014F 691 288 224 1,203 108 98 4 50 942 0 1,203 2015F 827 329 261 1,416 108 116 4 50 1,137 0 1,416 2016F 944 385 315 1,645 108 136 4 50 1,347 0 1,645

Cash Flow
Year to 31 Mar (RMm) Operating Pre-tax profit Tax Deprec. & amort. Working capital changes Other operating cashflows Investing Capex (growth) Investments Proceeds from sale of assets Others Financing Dividend payments Issue of shares Proceeds from borrowings Loan repayment Others/interest paid Net cash inflow (outflow) Beginning cash & cash equivalent Changes due to forex impact Ending cash & cash equivalent 2013 317 306 (49) 32 31 (3) (194) (194) 0 0 0 (104) (99) 7 0 (12) 0 19 163 0 182 2014F 296 334 (67) 57 (24) (4) (200) (200) 0 0 0 10 (90) 0 100 0 0 106 182 0 288 2015F 340 368 (74) 73 (23) (4) (200) (200) 0 0 0 (99) (99) 0 0 0 0 41 288 0 329 2016F 363 395 (79) 86 (35) (4) (200) (200) 0 0 0 (107) (107) 0 0 0 0 57 329 0 385

Key Metrics
Year to 31 Mar (%) Profitability EBITDA margin Pre-tax margin Net margin ROA ROE Growth Turnover EBITDA Pre-tax profit Net profit Net profit (adj.) EPS Leverage Debt to total capital Debt to equity Net debt/(cash) to equity Interest cover (x) 1.6 1.6 (22.2) 375.0 10.6 11.9 (18.7) n.a. 9.0 9.9 (19.0) n.a. 7.7 8.3 (20.3) n.a. 10.8 13.4 18.3 16.4 16.4 15.7 11.3 14.1 9.1 13.7 13.7 13.7 16.3 13.0 10.3 10.3 10.3 10.3 20.9 9.2 7.2 7.2 7.2 7.2 32.8 29.6 22.7 27.8 33.9 33.7 29.1 23.2 25.0 31.3 32.7 27.6 22.1 22.5 28.3 29.5 24.4 19.6 22.2 27.6 2013 2014F 2015F 2016F

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Regional Morning Notes

Wednesday, August 07, 2013

We have based this document on information obtained from sources we believe to be reliable, but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Expressions of opinion contained herein are those of UOB Kay Hian Research Pte Ltd only and are subject to change without notice. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of the addressee only and is not to be taken as substitution for the exercise of judgement by the addressee. This document is not and should not be construed as an offer or a solicitation of an offer to purchase or subscribe or sell any securities. UOB Kay Hian and its affiliates, their Directors, officers and/or employees may own or have positions in any securities mentioned herein or any securities related thereto and may from time to time add to or dispose of any such securities. UOB Kay Hian and its affiliates may act as market maker or have assumed an underwriting position in the securities of companies discussed herein (or investments related thereto) and may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. UOB Kay Hian (U.K.) Limited, a UOB Kay Hian subsidiary which distributes UOB Kay Hian research for only institutional clients, is an authorised person in the meaning of the Financial Services and Markets Act 2000 and is regulated by Financial Services Authority (FSA). In the United States of America, this research report is being distributed by UOB Kay Hian (U.S.) Inc (UOBKHUS) which accepts responsibility for the contents. UOBKHUS is a broker-dealer registered with the U.S. Securities and Exchange Commission and is an affiliate company of UOBKH. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact UOBKHUS, not its affiliate. The information herein has been obtained from, and any opinions herein are based upon sources believed reliable, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions and estimates herein reflect our judgement on the date of this report and are subject to change without notice. This report is not intended to be an offer, or the solicitation of any offer, to buy or sell the securities referred to herein. From time to time, the firm preparing this report or its affiliates or the principals or employees of such firm or its affiliates may have a position in the securities referred to herein or hold options, warrants or rights with respect thereto or other securities of such issuers and may make a market or otherwise act as principal In transactions in any of these securities. Any such non-U.S. persons may have purchased securities referred to herein for their own account in advance of release of this report. Further information on the securities referred to herein may be obtained from UOBKHUS upon request. http://research.uobkayhian.com
MCI (P) 122/03/2013 RCB Regn. No. 198700235E

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