By Thomas Chua - September 19, 2018
Hartalega Holdings Berhad (KLSE: 5168) begin its operation in year 1988 and is listed in the Main Market of Bursa Stock Exchange in year 2008. The company engaged in the manufacturing and sale of Nitrile gloves that are used in laboratories and healthcare facilities (i.e. examination gloves and surgical gloves). Approximately 99% of its revenue are mainly contributed from foreign countries in North America, Europe and Asia.
One of the key competitive advantage that Hartalega has is economies of scale, driving down its cost per unit of glove manufactured. As a result, they enjoyed a higher net profit margin of 18.2% for the financial year ended 2018 while its peers have an average net profit margin of approx. 9.5%. Not surprising, Hartalega’s share price performance has a CAGR of 48.28% since 2008.
We attended the company’s 2018 Annual General Meeting (“AGM”) on 24 August 2018 and here are the 11 key insights that we learned from the AGM:
Hartalega FYE 2018 Financial Performance
#1: For the financial year-ended (“FYE”) 2018, revenue has grown by 32.0% y-o-y and profit after tax has increased significantly by 55.2% y-o-y. According to the Chairman, the improved y-o-y performance was due to increased sales volume as a result of strong global demand for nitrile glove.
(Source: Company’s Website)
#2: Since FYE 2005, the company’s revenue and profit after tax have consistently increase at a CAGR of 26.7% and 31.0% respectively. The key highlights is despite bonus issue was announced in 2012, 2015 and in March 2018, Hartalega’s EPS was not diluted. Instead, it was consistently increase at a CAGR of 17.4% since FYE 2008.
(Source: Company’s Website)
#3: For the FYE 2018, the company implemented a dividend policy with a minimum payout ratio of 60%. In the past 9 years (i.e. from FYE 2009 to 2017), Hartalega has been consistently paying dividend at an average payout ratio of 44.1%.
(Source: Company’s Website)
#4: A shareholder asked whether the company are able to repeat the FYE 2018 outstanding performance for the next few years and the Managing Director replied that there is no guarantee as it depends on the market dynamic.However, what the company can do is to constantly seek for ways to increase its efficiency by increasing its production capacity at a target growth in capacity of 15% per annum.
Glove Industry Outlook
#5: According to the company’s Executive Director, the world demand for rubber gloves grow at an average 6% to 8% per annum. This growth trend is likely to continue given that the demand for glove is a basic necessity in healthcare and other sectors that need hand protection.
In addition, there are still countries with low per capita consumption of gloves which have huge population (i.e. China, India, Indonesia, etc.). This indicate big opportunities for demand growth for gloves.
#6: One shareholder asked whether the recent increase in oil prices will affect the company’s financial performance and the Chairman replied that the main raw material used in the production of nitrile gloves is butadiene which is a by-product of crude oil. However, both butadiene and oil prices doesn’t corelate. There are times where crude oil prices increased but butadiene prices decreased as both has its own supply and demand. Nevertheless, any increase or decrease in butadiene costs will definitely pass on to the buyers.
Hartalega Future Plans
#7: According to the Executive Director, the company will continue to increase its production capacity by adding new production lines. Currently, the construction for plant 6 and plant 7 is still in progress with a target to start operation in 1H 2019 and 2H 2019 respectively. To date, 49 production lines are running at their NGC plant.
#8: One shareholder raised his concern on whether the US-China trade war will have any effect on Hartalega’s future performance. The Chairman commented that the company’s export to China market is only a small percentage. As such, there will be no major impact at this moment.
#9: Another shareholder asked whether Hartalega will consider any mergers and acquisition (“M&A”) activities in the future and the Managing Director (“MD”) commented that the management will not consider any M&A. This is because the company does not have the capabilities of doing so.
The MD further adds that acquiring a company is not easy because one has to find ways to integrate the culture of the acquired company into their own. Failure to do so would destroy value rather than creating value. As such, it is far better to just focus on what Hartalega is good at.
#10: Another key highlight in the company’s 2018 AGM is its new product, Antimicrobial Gloves (“AMG”).This is the world’s first non-leeching antimicrobial gloves that aim to reduce infections that patients get while receiving treatment for medical or surgical condition, known as “Healthcare Associated Infections”. The company plans to make AMG the new standard of glove globally.
#11: One shareholder asked whether the AMG will be copied by the company’s competitors and the Chairman replied that there will always be competitors coming up with new antimicrobial gloves. However, the AMG that Hartalega and Chemical Intelligence jointly developed has been patented. As such, it would be difficult for them to copy.
The Chairman further commented that the selling price for AMG is only about 2% higher than the company’s existing glove prices. As such, not many companies would want to spend approx. $10 mil over 8 to 10 years of R&D to develop a new anti-microbial glove just to charge a very low price and compete against Hartalega.