Hartalega - where is it standing now in glove industry?

Hartalega had became the best glove companies and the fancy of investors for this few years. It has the best profit margin, the highest ROE and earning growth among the glove companies in Malaysia. With our MYR going weak against USD recently, i can see a lot of export-oriented companies- especially those export to US- doing well in term of their share price in the market. However, why doesn't Harta go along the trend? Is it Harta been leftover by investors? Have people lost their interested on it? Is the fundamental remain status quo?

Share price	Hartalega	Supermx	Topglove	Kossan
As at 31/12/13	7.23	2.77	5.63	4.32
As at 24/01/14	6.77	2.91	5.42	4.09
Up/Down (%)	-6.36	+5.05	-3.73	-5.32

Having a look on this year share price performance, Hartalega is the biggest loser among all. If we looked for long term share price performance, Supermx and Kossan is now nearing the all the high, or basically they are in uptrend. Topglove share price had been retreated from its highest 6.60 level after its weak earning on quarter report. Hartalega had posted a good quarter result, but somehow its share price is hammered down, especially in year 2014.

	Hartalega	Kossan	Supermx	topglove
Share price as at 24/01/14	6.77	4.09	2.91	5.42
L4Q earning(cents)	33.91	21.18	20.57	30.44
PE ratio	19.96	19.31	14.15	17.8

Hartalega used to enjoy the highest PE in the market, but somehow the gap had been narrowed down in 2014.



First, who are the one selling the shares? Does it make you curios on the recent sell down, especially when the company is so good? Of course it is not hard to know if you follow their announcements closely.

Exercise of ESOS, some exercise price are as low as RM2.25. ESOS are always good, it serves as an additional reward to the employees especially when the stock price going up. Then we can see the sell down by the company directors.

DR DANARAJ has been selling down the shares to  large extent of his total shareholding. Probably he exercised his ESOS and sell on market? Is it purely profit taking? As a non independent executive director, certainly he knows something we do not know.

Surely, we can see the substantial shareholder selling, especially the EPF, who has been selling and buying on this share,

I believe it is normal for EPF to sell and buy back the company as their fund are so big, profit taking is normal too especially the cost are low. Besides that, what causes the sell down of the shares? I believe the public expectation on the company is one of the reasons to drive down the price. The price hike on electricity, and the potential price hike of natural gas as well as the raw materials is the major concern i think. Raw materials might see some price hike as the political unrest at Thailand probably dragging the rubber output down.


Probably in 2014 or the years to come, glove industry will become less lucrative, as more companies are venturing into nitrile gloves, and that means price war will occur and thus, margin erosion. In spite of that, the management of Hartalega is being positive on it.

Other than the price war, the potential rebound of raw materials, and the potential fall of demand growth are another reasons too, despite we do not see any of these happen yet. If it is going to happen, i believe it will bring bigger impacts on others glove companies. Overall i will think that the glove industry is still promising. So, if we assume the industry outlook still good, then the company alone got problem?

Story rechecking

	3 years earning CAGR	Profit Margin for FYE13(%)	ROE for FYE13 (%)
Hartalega	17.75	22.6	30
Kossan	6	8.5	12
Supermx	-5.3	12.2	14.6
Topglov	-6.8	8.77	14.75

The calculation of net profit compounded annual growth rate is from year 2010 to year 2013, in which the last quarter result for Kossan and Supermx is based on conservative estimation as the result is pending for released.

Having a quick check on the top 4 gloves companies in Malaysia, we can see that Hartalega is doing so much better than its peers, in term of earning growth, profit margin and return of equity. It is mainly because of its good operating efficiency, and greater exposure in nitrile gloves. If we try to look at the company cash flow in FYE2013, Harta is the one having the highest free cash flow. In fact, hartalega is the one with most consistent operation cash flow and free cash flow over the last few years. Taking the latest share price and divided it by FYE 2013 free cash flow for all the 4 companies, hartalega is the one with lowest Price/FCF ratio of 16, whereas Topglov is having a negative free cash flow on the year.

Well, no matter how good hartalega is, that is the past figures. It serves as a reference for us to find a great company and there are a lot of factors to determine whether the company is worth to invest or not. In fact, a company without proper expansion plan will face stagnant on their earning growth and hence, become less attractive and probably its position will be overtaken by competitors. Now, lets have a look on the expansion plan by each of the companies

extracted from RHB research report

Like others, Hartalega is planning to expand the capacity, and certainly it is the largest nitrile glove manufacturer. Nonetheless, we might see hartalega growth remain stagnant in the coming quarters due to its high utilization rate and capacity constraints. We might see Kossan became the highest PE company among the glove industries due to its robust expansion plan. Supermx is the cheapest among all, we can also see it starts to catch up with its peers.

extracted from amsecurities research report

That is, we might be able to see hartalega growth starts picking up in August 2014, provided the capacity expansion job does not delay. The growth story for coming quarters might not be so good like past years, and as the punishment of slowing down, the share price is falling, and the PE is coming down, quite an efficient market we have, is it? The narrowing of discount gap between nitrile to latex due to the price surge of nitrile is one of the factors to drive down the share price. 

Conclusion

Overall i think Hartalega is still the best in long term perspective. Their capacities will be quadrupled, and they will need less labor when their automated machines start working. They always focus on research and development on glove manufacturing, and they have came out a new oatmeal glove which will potential create a new market niche, although it is still early to say.  We will see their earning grows aggressively again when the first line starts to commission, if the demand remain robust, and barring any unforeseen circumstances. 

YOCB - Is it a true gem waiting to be revealed?

Yoong Onn Corporation Berhad, a company which involved in design, manufacture, distribute and retail of home linen products and bedding accessories.  When talk about Yoong onn, it is not a famous name, however, I believe most of the household are familiar with the brand Novelle or Jean Perry . This few years, the company has been opening more retail outlets under the name “ Home’s Harmony” which mostly located around Kl and Selangor area.   As we know, it is not easy to build up a brand and I believe the company is doing a right thing in forming up own retail outlets to gain more recognition from consumers. In Malaysia, Yoong Onn is having a whopping 30% market share according to sources, which is surprisingly huge in such a competitive market. Yoong Onn is having its profit growing at 5 years compounded annual growth rate of 14%. The management have found their niche market and been working hard in R&D as well as growing their distribution network. The company has been partner with department stores to grow their business.

('000)	2009	2010	2011	2012	2013
REVENUE	130084	127541	141002	153913	178607
PATAMI	13881	15528	18302	17277	20453

  

Having a 5 years CAGR of 14% is considered as  a high growing stock for me. According to Kenanga report, the company is planning to grow even further in years to come

In 2013 annual report the management said

If one is having a quick look on this company, definitely it is attracting. The company is growing fast, the ROE is 14%, company is in a net cash position, current P/E is considered low(is it?) compared to its peers, current price is close to book value even without considered the intangible asset( the value of its long established brand), the management is not a stingy one and paying out dividend year on year. All the financial data is showing it a good buy, and one might starts screaming to buy buy buy. Now, is it a true gem to be discovered? Is it a good company which can keep up its growth consistently in years to come?


Competitors

Before we come to a conclusion, let's at least have a look on one of its greatest competitors, Eastern Decorator(ED), which is the owner of Akemi brand. Whenever you see Novelle or Jean Perry in any department stores, you can always see Akemi there. Another famous brand you can see is Windsir. Akemi brand had been long established back in year 1992 and its the proud of ED and perhaps you might not know,

In fact, ED present is not only in Malaysia, it is also having operation in other SEA countries like Singapore, Thailand, Indonesia and etc. Its is famous in whole SEA in compare to YOCB which having more than 70% sales on local market. ED is having more than 30 brands and YOCB is having 14 home grown brands.
 In term of manufacturing capacity per day, Eastern Decorator is way larger than Yoong Onn. ED able to manufacture 12,000 set of bed linen daily while Yoong Onn can manufacture 3,000 set daily now. While YOCB is having 16 retail outlets and around 120 counters in department stores, ED is having :

One might think that such comparison is unfair as YOCB is just a small company with market cap around 140 million now. However what i trying to stress out is, can a small firm like YOCB continue to grow its market share for let's say, another 5 years? Can it grab more market shares from ED? Well, before one starts guessing, let's have a look on some "worrisome" part:

Working Capital Analysis

What does it mean to you when you spotted a company with continuous increasing in receivable and inventory? As for me, when a company having its inventory and receivable been increasing so aggressively, red flag should be raised. In fact if you notice, inventories and receivable are increasing every year from 2009 to 2013, in some years, receivable even outgrow the revenue which signify that the company is using credit sales to boost the revenue. Besides that, what went wrong to inventories?

If we know the business model of the company, it is not hard to find out the reason. First, the company is depend heavily on consignment counters to expand the business. The selling of goods through the premier department stores make up more than half of the sales. As when the company expands to more consignment counters, more inventories will be piling up. How about the receivable? Having partner with more department stores, the number of receivable should be increasing too, just like inventories. The good part is they are collaborating with big department stores like Isetan, Jusco, Parkson and etc which have high credibility. Personally, I would think that the management is not good in handling their inventory estimation or the whole working capital. Or is it? Let's have a look on its cash flow statement.

Cash Flow Analysis

Please have a look on the figures circled in red. Most of the cash generated are stuck in working capital which leads to a low operating cash flow, or a weak earning quality. (earning quality for 2013, 12578 divided by 27680 = 0.4544)


Valuation

Kenanga has put up a research report stating that YOCB is undervalued by comparing its PE against its peers, which is a norm in looking on the valuation of different companies in same industry. In my humble opinion, i always believe that price is driven by the market, and there is always a reason behind it. Example, there is a reason why the market favors Hartalega in the glove industry and thus, a higher PE. Having a look through its historical PE, YOCB is currently trading at its highest PE since 2010.

However, if we put in the growth factor in account by calculating PEG(taking 14% 5 years CAGR as norm), the figure we get is less than 1, which shows that the stock is undervalued.


Conclusion

Undeniably, Yoong Onn has showed a solid growth for the past few years amid a high competition industry.The good part is while the big department stores, hypermarkets, shopping malls are growing in Malaysia, it helps YOCB to grow further. On the other hand, it also means that YOCB growth will be capped if all these big players stop or slow down their growth, that's why the management had been growing their retail outlets aggressively on 2012 and certainly it is something worth to monitor for although current retail sales only constitute a small portion of earning. Having considered the high competition and the potential of housing market slow down, it is not easy for YOCB to have double digits growth for the next five years, nevertheless it is good to monitor its progress of future planning as well as earning.

Note: This write-up might consist some financial terms, please feel free to raise your question, if there is any.

KLSE: What should an amateur investor expects from stock market?

Most of the times, small time retail investors always think that they are not good enough to manage their fund, they are not good enough to do their own research or analysis, they are indecision in buying or selling a stock, or they simply have no confident on their thinking and etc. With that, they entrusted their money to fund manager, they took advises from their brokers, they listen and act on rumors regardless where the sources from, they read the research report conducted by professional analyst and so on. Non of the method mentioned are bad at all as i believe some people indeed earning a huge bulk of money too. However, the message that i wish to bring out is, amateur investor like us can actually earn from the market too without going through the above mentioned methods. We can be more self-dependent and still earning from the market. So, what is wrong when one put in their money into unit trust or mutual fund? Or what is wrong when we over rely on our brokers?

1. For many people, buying into a mutual funds or unit trust is easy as their money are managed by all the professional fund managers who has ample experience and knowledge in the stock market. It might be good to those people who wishes to grow their money but too busy to do some homework before buying any shares. However, little do they know that buying a unit trust or a mutual funds need a lot of homework too! It is good if you know all the particulars of the fund that you invested, it is good if you pick a fund with sound performance over some years as investing into a fund are meant to be long term. Homework needs to be done too, there is no free lunch. 

2. More often than not we received calls from our brokers for tips or rumors. Sometimes we able to reap some profit but sometimes we loss as there is no guarantee return. My advises on you when your brokers call for stock tips, don't be shy on asking questions below:

a) What is the business of the company? What makes you think that it is a good buy now?

b) Is the company making money now? How about past few years? What is the growth rate?

c)How is the balance sheet of the company? If it is in debt situation, how heavy is it? 

d) How is the management teams? Are they being kind to pay out dividend? Or have the company call up for cash from shareholders for many times? 

Basically this is the general idea of what questions to ask, you can always raised your queries to your brokers as i believe if they want to do your business, they will try to answer you. 

3. Whenever you heard some rumors, and you feel that it is promising, try to ask yourself

a) Who are the rumors teller? What is your last experience when you heard and react into a rumor?

b)How long the rumors have been passed through, will you possibly be the last one who get to know it? 

c) What is the percentage of you strike a lottery? 

Well i deeply understand that most of the people have the same experiences of earning huge gain nor losing big money from rumors. Most of the times the experience must be pain. If you try to buy a stock by listening to rumors, you are trying to time the market as for me. If you are fast or lucky enough to sell off your shares, you are safe and happy. However, not all people are so lucky especially when they bought into a highly speculated stock, their funds will be stuck as their entry level is high and they dare not to realize the losses. Worst still they kept a hope that the rumors will come back and the shares will up again, and thus becoming an involuntary long term investors. By that, not to mention about growing your money, you have problem to retain the value of your money now. 

So now, 

What should an amateur investor expects from stock market?

First of all, i do not wish to mislead you. I am not here to tell you any secret nor telling you any foolproof method in stock investing, if there is any. As a amateur investor, if you do not wish to rely on fund manager to manage your hard earn money, if you have enough bad experiences with your brokers and rumors, you always have other options. I am going to list down a few and to be frankly, you have to spend some times on it for sure.

1) Common sense and logical thinking is one of the best way in stock investing. If you ever read Peter Lynch's book ( in fact if you didn't, i highly recommended you to read), you knew that you can make money in the stock market by using what you already know. How and why? Please remember, the keyword here is "what you already know", that means you do not buy into a company which you have problem to speak out what is the business, nor do you understand the business well. Now, let me take a bursa stock as an example in a scenario. Few years back, if you went to any shopping mall, or visit to any department stores, you will start to notice that there is a home grown brand call Padini been expanding in Malaysia. It is not hard to notice that their existence is getting more and more popular and if you have a quick check on their report, you knew that they are growing real fast. I believe many people have been visited to Padini Concept Stores or Brand Outlets, but how many have actually bought into this shares? If you bought Padini shares few years back and hold until now, you have earned multi-baggers. Is it hard? Everyone could possibly know that Padini is doing good, the staff knew it, those shoppers knew it, their supplier knew it, the passerby knew it, the management of the shopping mall knew it too. If you do not like to shop and seldom pay a visit to any shopping mall, you can  know it from newspaper?from social network? from your friends who always wear SEED shirt? All you have to do is to check their report to ensure that the aggressive growing of outlets derived into good earnings too. You do not need any professional knowledge to spot on this, you do not need any tips or rumors, you do not need any insider news too to find out this great company. 

2)Looking on your edge. What is your edge when comes to stock investing? If you have a great accounting background, you can read and understand a company thoroughly from its financial report, and thus avoid to invest into those companies with unhealthy balance sheet, or possibly those with accounting frauds? If you have been working into steel industry, you knew that this industry is cyclical and competitive, you knew that the supply is overwhelming, and if one day the steel price starts to pick up i am sure you know better than the others right? Likewise, those working in plantation industry, furniture industry or drug industry? We don't listen to an engineer talks about how good the plantation will be on this year, nor do we listen to a doctor to tell you that oil & gas will be the best theme of this year? Invest what you know best and be confident with will be a better choice i believe.

3) Do not try to time the market. If you always wait for the best moment to get into the market, you might end up buying nothing. No doubt that some people are real good in timing, they can make money in a short time. If you able to consistently do it, it is a great achievement and congratulations to you. However, if you are the one who failed to do it, you might need to reconsider your strategies. Stock investment can be easy can be tough, it is depending on one's philosophy of investing. 

Basically the lists do not end here, there are still long to go if you really were to list down one by one. The abovementioned methods are powerful for me and often overlooked by many investors. As an amateur investor, we can do well in stock market too, sometimes even better than the fund managers.