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Three questions for Hartalega boss at the group's media briefing today

KUALA LUMPUR (Sept 7): Hartalega Holdings Bhd is holding its first corporate results media briefing for this year today. It comes after a similar briefing by its larger rival Top Glove Corp Bhd in June.

Rubber glove makers have been in the limelight since the onset of Covid-19 early last year amid the surge in demand for their products, which resulted in the companies posting record profits.

Hartalega, for its part, announced its best-ever quarterly results last month, on higher sales volume and average selling price. Its net profit doubled to RM2.26 billion for the first quarter ended June 30, 2021 (1QFY22), from RM1.12 billion in the immediate preceding quarter, as  revenue expanded 69% to RM3.9 billion from RM2.3 billion.

The group has said that while the average selling prices (ASPs) of nitrile gloves have been declining from their peak, global demand is expected to remain strong amid fresh waves of Covid-19 infections, driven by the Delta and other variants of concern.

In terms of share price, Hartalega has recouped some lost ground, closing at RM6.91 on Monday, some 4% above its lowest level for this year of RM6.63 recorded on Aug 6. Nonetheless, the counter has fallen 43% year-to-date from RM12.14 on Dec 31, 2020.

While the market has already priced in the main downside risk factor — falling ASPs going forward — there are at least three other issues that Hartalega chief executive officer Kuan Mun Leong is expected to address at the media briefing.
1. Lower demand amid competition or higher orders due to Delta's onslaught?

With the highly contagious Delta variant driving a resurgence of Covid-19 cases around the world, Hartalega could expect more orders for its nitrile gloves.

On the other hand, glove makers have been ramping up their production capacity since the outbreak of the pandemic, and new players have come onboard. Against this backdrop, Kuan may want to address the overcapacity issue in the market.

Also, will the company need to slow down its capacity expansion in order to maintain its margin?
2. How much will the ASP decline?

The ASP for gloves has fallen from the level seen last year. Recently, both Top Glove and another major producer, Supermax Corp Bhd, had posted weaker quarter-on-quarter performance, partly due to the lower ASP.

The sustainability of Hartalega’s earnings needs to be emphasized by Kuan at the media briefing, in light of the softer ASP moving forward. Kuan may have to give an indication of how much the ASP will drop in the coming quarters, and when prices are expected to hit the bottom.
3. Status of production following closure of plants due to EMCO in July

Gloves factories have temporarily halted their operations to comply with the enhanced movement control orders (EMCO) directive in July.  The EMCO for 34 districts in Selangor and 14 localities in Kuala Lumpur was in force from July 3 to July 16.

Hartalega was reported to have initiated a full shutdown of its manufacturing facilities in Bestari Jaya and Sepang.

“Regrettably, this will have a significant impact on both the local and international healthcare value chain in terms of disruption to availability of supply, as Hartalega is a key manufacturer of nitrile gloves for hospitals globally," Hartalega had said in a written reply to The Edge at that time.

Amid the temporary stoppage of operations, Kuan would need to tell the investment fraternity as to how much losses the company incurred as a result of the closure.

He is also expected to shed light on the company's operation status, following the resumption of production activities.

Hartalega should also provide the latest vaccination rate among its workforce.

Analysts contacted told The Edge that the ASP for gloves is expected to fall in the coming quarters and may only stabilise by the first quarter of next year, depending on the rate of the decline.

“We think that recent earnings have peaked and we are expecting a 20%-30% q-o-q decline in ASP in subsequent quarters, as ASP starts to normalise from now on, given the influx of new capacities from other players.

“For instance, a box of 1,000 pieces of gloves sold at about US$95 previously. Current quarter (3Q21) may see about a 20%-30% decline, which would be between US$65-US$75 and for 4Q21, it may drop to around US$45-US$50. After that, the price may likely to stabilise around that level,” said Malacca Securities Sdn Bhd senior analyst Kenneth Leong.

Meanwhile, JF Apex Research analyst Nursuhaiza Hashim expects Hartalega’s earnings to have peaked in 1QFY22, given the expected continuing decline in ASP moving forward, in tandem with lower utilisation rate due to the recent shutdown in July, as well as limited production capacity during National Recovery Plan (NRP) Phase 1, which hampered both its topline and bottomline.

Nursuhaiza also believes that the ASP for gloves will go back to pre-pandemic level, as more capacity on stream will adjust the pricing level.

She opined that orders may have dwindled, mainly due to new players that have come on board.

“Currently, China rubber gloves players are fulfilling the insufficient demand from postponed orders from Hartalega. We expect orders from China to continue to sustain amid the limited Hartalega production. We reckon the demand from China will be prolonged, assuming customers are satisfied with the pricing and quality,” Nursuhaiza added.

Rakuten Trade Research vice-president Thong Pak Leng said demand for gloves will remain strong, even after the pandemic ends.

“Global consumption is still growing and the company’s order may not slow down, as it is still in need of medical applications,” said Thong.

He said the excess supply of rubber gloves leading to a compression of the ASP is expected to remain in the short term, but believes that the overcapacity issue appears overplayed and is a normal cycle, judging by past oversupply experiences of industry players.

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