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.