Company Update, 13 June 2013

Hartalega (HART MK)

Industrial - Misc. Manufacturer Market Cap: USD1,476m

Neutral (from Buy)

Target Price: Price:
Macro

MYR6.26 MYR6.30

Long Term Goals In Sight

Risks Growth Value

Hartalega (HART MK)

Price Close Relative to FTSE Bursa Malaysia KLCI Index (RHS)

6.6

153

6.1

143

Hartalegas expansion plans are well on track, having secured the land for its Next Generation Integrated Glove Manufacturing Complex (NGC). We expect the capacity boost from this new facility to gradually kick in from 2015 and double the Groups total capacity by 2022 upon full completion. In view of the recent run-up in its share price, we downgrade our call to NEUTRAL, with FV unchanged at MYR6.26.

5.6

133

5.1

123

4.6

113

4.1

103

9 3.6 8 7 6 5 4 3 2 1

93

Vol m

Landbank expansion for the future. Hartalega (HART) yesterday announced that its wholly owned subsidiary, Hartalega NGC SB (HNSB) has entered into an agreement to acquire a piece of land measuring approximately 120 acres located at Mukim Labu, Sepang, Selangor from Kumpulan Tanjung Balai SB for a total cash consideration of MYR96m. The acquisition will be funded internally and via borrowings. Based on its 4QFY13 financials, Hartalega is currently sitting on a cash pile of MYR182m and total borrowings of MYR12.1m. Capacity to hit 43bn pieces pa by 2022. The acquisition is part of HARTs capacity expansion plans, i.e. the land is earmarked for the NGC. Management has allocated a total capex of MYR1.5bnMYR2.0bn for the complex, which will be constructed over a period of eight years and consists of six plants with a combined installed annual capacity of 29bn pieces. While the quantum appears overwhelming at first glance, we reiterate that construction will be carried out gradually over a eight-year period and given HARTs operating cash flow generation of ~MYR300m pa, we believe the funding for its capex will be adequate. Management has guided that its major shareholders will convert ~40.5m outstanding warrants, which we believe could potentially raise some MYR168m upon conversion. Upon completion, the NGC will expand HARTs total production capacity to 43bn pieces pa. All in, we are positive on this move as it helps to secure the Groups production and hence earnings growth in the foreseeable future. We also see potential costs synergies by combining its plants in a single location.

i
Dec-12 Oct-12
Aug-12 Feb-13

Source: Bloomberg

Avg Turnover (MYR/USD) Cons. Upside (%) Upside (%) 52-wk Price low/high (MYR) Free float (%) Shareholders (%) Hartalega Industries Sdn Bhd

Jun-12

3.84m/1.26m -16.2 -0.6 3.86 - 6.31 70

Apr-13

27.6

Shariah compliant

Forecasts and Valuations Total turnover (MYRm) Reported net profit (MYRm) Recurring net profit (MYRm) Recurring net profit growth (%) Core EPS (MYR) DPS (MYR)

Mar-11 735 190 190 33.0 0.26 0.11 1.7 24.1 44.8 9.26 24.8 17.3 net cash

Mar-12 931 201 201 5.8 0.28 0.09 1.4 22.7 36.2 7.39 22.9 15.7 net cash

Mar-13 1,032 235 235 16.7 0.32 0.15 2.3 19.5 33.9 5.98 14.4 13.3 net cash

Mar-14F 1,173 268 268 14.0 0.37 0.17 2.6 17.1 31.9 5.02 13.6 12.6 net cash 5.9

Mar-15F 1,267 292 292 9.1 0.40 0.18 2.9 15.7 29.4 4.27 14.1 11.6 net cash 15.6

The Research Team +603 9207 7688

Research2@rhbgroup.com

Dividend Yield (%) Core P/E (x) Return on average equity (%) P/B (x) P/CF (x) EV/EBITDA (x) Net debt to equity (%) Our vs consensus EPS (%)
Source: Company data, RHB Estimates

See important disclosures at the end of this report

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Hartalega (HART MK)

13 June 2013 Fastest production lines in the industry. On a side note, with HARTs Plant 6 fully commissioned in July 2013, we expect the Groups overall production capacity to increase to 14bn pieces pa. Also, line speeds in Plant 6 has reached 45,000 pieces/hour, which is among the fastest in the industry. We believe that the company will continue to further improve its line production efficiency as it expands its capacity. Downgrade to NEUTRAL. We are positive that HART is making good progress in getting its NGC up and running. Although, we continue to like the company for its advanced technology and automation processes, we downgrade our call to NEUTRAL given the recent run-up in its share price. Our FV is unchanged at MYR6.26 based on 17x FY14 P/E.

See important disclosures at the end of this report

Hartalega (HART MK)

13 June 2013

Financial Exhibits
Profit & Loss (MYRm) Total turnover Cost of sales Gross profit Gen & admin expenses Selling expenses Other operating costs Operating profit Operating EBITDA Depreciation of fixed assets Amortisation of intangible assets Operating EBIT Other recurring income Interest expense Pre-tax profit Taxation Minority interests Profit after tax & minorities Reported net profit Recurring net profit
Source: Company data, RHB Estimates

Mar-11 735 (462) 273 (25) (10) (2) 236 261 (25) (0) 236 10 (2) 243 (53) (0) 190 190 190

Mar-12 931 (634) 297 (28) (11) (5) 254 283 (29) (0) 254 6 (2) 258 (57) (0) 201 201 201

Mar-13 1,032 (683) 350 (31) (13) (5) 301 333 (32) 0 301 6 (1) 306 (71) (0) 235 235 235

Mar-14F 1,173 (801) 372 (35) (14) (6) 317 355 (37) 317 2 (7) 312 (45) (0) 268 268 268

Mar-15F 1,267 (863) 404 (38) (15) (6) 345 386 (41) 345 2 (6) 341 (49) 292 292 292

Cash flow (MYRm) Operating profit Depreciation & amortisation Change in working capital Other operating cash flow Operating cash flow Interest received Interest paid Tax paid Cash flow from operations Capex Other investing cash flow Cash flow from investing activities Dividends paid Increase in debt Other financing cash flow Cash flow from financing activities Cash at beginning of period Total cash generated Forex effects Implied cash at end of period
Source: Company data, RHB Estimates

Mar-11 236 25 (41) 12 232 (2) 2 (48) 185 (22) (59) (81) (57) (2) 0 (59) 75 45 (2) 117

Mar-12 254 29 (44) 8 246 (1) 2 (47) 200 (35) (25) (60) (87) (15) 7 (95) 117 45 1 163

Mar-13 301 32 36 5 374 1 (56) 318 (18) (176) (194) (99) (12) 7 (104) 163 20 183

Mar-14F 317 37 (76) 95 374 7 (45) 336 (250) (250) (121) (7) (127) 182 (41) 142

Mar-15F 345 41 (16) (3) 367 6 (49) 324 (200) (200) (132) (6) (137) 238 (13) 225

See important disclosures at the end of this report

Hartalega (HART MK)

13 June 2013

Financial Exhibits
Balance Sheet (MYRm) Total cash and equivalents Inventories Accounts receivable Other current assets Total current assets Total investments Tangible fixed assets Intangible assets Total other assets Total non-current assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Total long-term debt Other liabilities Total non-current liabilities Total liabilities Share capital Retained earnings reserve Other reserves Shareholders' equity Minority interests Other equity Total equity Total liabilities & equity
Source: Company data, RHB Estimates

Mar-11 117 65 101 3 286 0 349 0 0 349 635 15 57 7 79 24 37 61 140 182 307 5 494 0 (0) 495 635

Mar-12 163 98 117 0 378 0 380 0 0 380 758 13 60 12 85 12 41 53 138 183 421 16 620 1 0 620 758

Mar-13 182 87 125 0 394 1 535 7 0 543 936 8 93 15 115 4 50 55 170 367 399 766 1 (0) 767 936

Mar-14F 238 123 148 0 509 1 651 7 0 658 1,167 8 76 15 98 104 50 155 253 367 546 913 1 (0) 914 1,167

Mar-15F 224 133 159 0 516 1 810 7 0 817 1,334 8 82 15 104 104 50 155 259 367 707 1,074 1 (0) 1,075 1,334

Key Ratios (MYR) Revenue growth (%) Operating profit growth (%) Net profit growth (%) EPS growth (%) Bv per share growth (%) Operating margin (%) Net profit margin (%) Return on average assets (%) Return on average equity (%) Net debt to equity (%) DPS Recurrent cash flow per share
Source: Company data, RHB Estimates

Mar-11 28.5 32.6 33.0 33.0 39.6 32.1 25.9 34.2 44.8 (15.8) 0.11 0.25

Mar-12 26.7 7.6 5.8 5.8 25.3 27.2 21.6 28.9 36.2 (22.3) 0.09 0.28

Mar-13 10.9 18.5 16.7 16.7 23.6 29.1 22.8 27.7 33.9 (22.2) 0.15 0.44

Mar-14F 13.6 5.4 14.0 14.0 19.2 27.0 22.8 25.5 31.9 (13.8) 0.17 0.46

Mar-15F 8.0 8.7 9.1 9.1 17.6 27.2 23.1 23.4 29.4 (10.4) 0.18 0.45

See important disclosures at the end of this report

Hartalega (HART MK)

13 June 2013

SWOT Analysis
x Worlds largest nitrile glove producer. x Owns several patents for in-house proprietary machines. x Highly automated production processes. x Price competition in the rubber gloves industry.

x Increasing exports to developed markets such as US and EU. x Create own brand distribution channels in emerging markets such as China and India. x Too reliant on nitrile.

P/E (x) vs EPS growth

30 25 20 15 10 5 0 40% 33% 27% 20% 13% 7% 0% 12.0 10.0 8.0 6.0 4.0 2.0 0.0

P/BV (x) vs ROAE

50% 42% 33% 25% 17% 8% 0%

Jan-11

Jan-12

Jan-13

Jan-15

Jan-12

Jan-13

Jan-14

Jan-14

Jan-11

P/E (x) (lhs)

EPS growth (rhs)

P/B (x) (lhs)

Return on average equity (rhs)

Source: Company data, RHB Estimates

Source: Company data, RHB Estimates

Company Profile
Hartalega Holdings Bhd (HART) manufactures a wide range of latex gloves.

See important disclosures at the end of this report

Jan-15

Hartalega (HART MK)

13 June 2013

Recommendation Chart
Price Close
7.0
Recommendations & Target Price

NR

6.19

5.07 5.07

7.37

6.0
5.0

4.0
3.0

2.0
1.0
Buy 0.0 Jun-08 Neutral Sell Trading Buy Take Profit Not Rated

Sep-09

Dec-10

Mar-12

Source: RHB Estimates, Bloomberg

Date 2013-05-08 2012-11-07 2012-09-10 2012-08-16 2012-08-08 2012-06-25 2012-05-09 2012-04-16 2012-04-09 2012-02-23 Recommendation Buy Neutral Neutral Neutral Neutral Neutral Sell Sell Sell Sell Target Price Price 6.26 5.07 4.47 4.47 4.38 4.38 7.37 7.37 7.12 7.12 5.56 5.01 4.46 4.51 4.50 3.99 3.91 3.98 3.98 4.09

Source : RHB Estimates, Bloomberg

See important disclosures at the end of this report

7.19 7.12

7.93

6.19

6.06

6.26

7.36

8.89

9.29

5.64

6.14

6.10

4.38

4.47

5.07

RHB Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral: Share price may fall within the range of +/- 10% over the next 12 months Take Profit: Target price has been attained. Look to accumulate at lower levels Sell: Share price may fall by more than 10% over the next 12 months Not Rated: Stock is not within regular research coverage

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