Maybank IB Research

PP16832/04/2011 (029339)

Results Review

10 November 2010

Hartalega Holdings
Hold (unchanged)
Share price: Target price: RM5.53 RM5.40 (unchanged)

Testifying to nitrile gloves prospects

Results in line. 6MFY11 net profit of RM89m (+49% YoY) made up 51% of our and consensus full-year forecasts. 2QFY11 net profit (+14% QoQ) was impressive considering its latex-focused peers (Top Glove and Supermax) posted QoQ contractions of 17-30% in their respective Aug/Sept-ended quarter. However, we are maintaining our Hold rating (TP: RM5.40) as the sector lacks re-rating catalysts and Hartalegas share price has outperformed its peers by 25% since Jul 10. Higher volume and margins. Strong 2QFY10 results was driven by (i) increased sales volume (+3% QoQ to 1.8b pieces) on the addition of 2 new production lines; and (ii) higher EBIT margin (+1.7-ppt QoQ to 33%) due to cost savings from higher output and the absence of oneoff start-up expenses for its Plant 5 (already charged in the previous quarter). Additionally, net cash and FCF continue to strengthen to RM46m (+33% QoQ) and RM83m (+47% QoQ). Company has also rd declared a first interim dividend of 4sen/sh (+20% YoY, ex-23 Nov). Nitrile glove ASPs not raised yet. Since the last revision of nitrile glove ASPs in Sept 10 (-2%), there has been no change to Hartalegas nitrile ASPs. Management believes that it will be able to raise its ASPs in the coming months if synthetic rubber cost begins to trend upward (Sept: -3% MoM, Oct: -2% MoM). On a separate note, Hartalega has raised its latex glove ASPs by 10% in the past 3 months to partially offset the rising latex cost (+32% YTD).

Lee Yen Ling lee.yl@maybank-ib.com (603) 2297 8691

Description: OEM gloves manufacturer. Information: Ticker: Shares Issued (m): Market Cap (RM m): 3-mth Avg Daily Volume (m): KLCI: Major Shareholders: Hartalega Industries SB Budi Tenggara SB HART MK 363.5 2,010.0 0.52 1,526.53 % 50.6 5.1

Capacity expansion on track. Two production lines (+0.6b pieces p.a.) at Plant 5 were commissioned in 2QFY11 and the balance 4 production lines (+14% capacity growth in 2 months to 9.3b pieces p.a.) are scheduled for commissioning by Jan 11. While overcrowding has not eased, we are not unduly concerned of the take-up for Hartalegas new capacity as it is the preferred nitrile glove supplier for its superior quality gloves and economies of scale-led lower ASPs. Maintain Hold. In view of the long-term growth prospects of nitrile gloves, Hartalega is looking to increase its nitrile glove production going forward (currently 80% of total production). Though we like Hartalegas exposure in the nitrile segment, we think the sector has yet to overcome the headwinds (i.e. strengthening of the Ringgit and overcrowding), hence no changes to our forecasts and Hold rating.
Hartalega Summary Earnings Table
FYE Mar (RM m) Revenue MaMacDeDecDDeFYEMont EBITDA hAbbr (RM m) Recurring Net Profit Recurring Basic EPS (Sen) EPS growth (%) DPS (Sen) PER EV/EBITDA (x) Div Yield (%) P/BV(x) 2009A 443.2 113.3 84.5 23.3 9.2 6.7 23.8 17.9 1.2 7.9 7.7 33.2 22.5 2010A 571.9 199.9 143.1 39.4 69.3 13.3 14.0 9.9 2.4 5.7 Cash 40.4 30.0 2011F 743.7 247.0 173.7 47.8 21.4 16.7 11.6 7.8 3.0 4.3 Cash 37.2 28.8 174.0 2012F 859.0 278.9 197.1 54.2 13.5 18.4 10.2 6.6 3.3 3.4 Cash 33.0 27.3 197.5 2013F 968.0 301.4 212.4 58.4 7.8 19.8 9.5 5.8 3.6 2.7 Cash 28.8 24.6 227.3

Price Performance: 52-week High/Low 1-mth 8.4 3-mth 1.8

RM5.7/RM3.65 6-mth 23.4 1-yr 47.9 YTD 33.3

Price Chart (RM5.53)

8.0 6.0 4.0 2.0 0.0 HART MK Equity

Aug-09

Nov-08

May-09

Nov-09

May-10

Aug-10

Feb-09

Feb-10

Net Gearing (%) ROE (%) ROA (%) Consensus Net Profit (RM m) Source: Maybank IB

Hartalega Holdings

Hartalega: Results Summary Table

Quarterly FY Mar (RM m) Turnover EBIT Net interest exp Pre-tax profit Tax Minority Interest Net profit 2QFY11 184.3 61.4 -0.4 61.0 -13.9 0.0 47.1 2QFY11 EBIT margin (%) Tax rate (%) Source: Company, Maybank-IB INCOME STATEMENT (RM m) FYE Mar Revenue EBITDA Depreciation & Amortisation Operating Profit (EBIT) Interest (Exp)/Inc Associates One-offs Pre-Tax Profit Tax Minority Interest Net Profit Recurring Net Profit Revenue Growth % EBITDA Growth (%) EBIT Growth (%) Net Profit Growth (%) Recurring Net Profit Growth (%) Tax Rate % 2010A 571.9 199.9 (19.8) 180.0 (2.1) 0.0 0.0 177.9 (34.7) (0.2) 143.1 143.1 29.0 76.4 84.2 69.3 69.3 19.5 2011F 743.7 247.0 (23.8) 223.1 (0.5) 0.0 0.0 222.6 (49.0) 0.0 173.7 173.7 30.0 23.6 23.9 21.4 21.4 22.0 2012F 859.0 278.9 (27.8) 251.1 1.6 0.0 0.0 252.7 (55.6) 0.0 197.1 197.1 15.5 12.9 12.5 13.5 13.5 22.0 2013F 968.0 301.4 (33.2) 268.3 4.0 0.0 0.0 272.3 (59.9) 0.0 212.4 212.4 12.7 8.1 6.8 7.8 7.8 22.0 BALANCE SHEET (RM m) FYE Mar Fixed Assets Other LT Assets Cash/ST Investments Other Current Assets Total Assets ST Debt Other Current Liabilities LT Debt Other LT Liabilities Minority Interest Shareholders' Equity Total Liabilities-Capital Share Capital (m) Net Debt/(Cash) Working capital 2010A 292.6 0.3 74.7 108.8 476.5 13.7 52.7 27.7 27.8 0.3 354.3 476.5 363.5 Cash 66.8 2011F 328.8 0.3 131.6 141.5 602.2 13.7 65.3 27.7 27.8 0.3 467.3 602.2 363.5 Cash 86.9 2012F 360.9 0.3 196.3 163.4 720.9 13.7 73.8 7.7 27.8 0.3 597.7 720.9 363.5 Cash 100.4 2013F 407.8 0.3 270.1 184.1 862.4 13.7 81.8 0.7 27.8 0.3 738.1 862.4 363.5 Cash 113.1 33.3 22.8 2QFY10 134.6 41.7 -0.5 41.2 -8.0 0.0 33.1 2QFY10 31.0 19.5 % YoY 37.0 47.2 n.m. 48.1 73.0 -16.3 42.3 +/- ppt 2.3 3.3 1QFY11 170.0 53.8 0.0 53.8 -12.3 0.0 41.5 1QFY11 31.6 22.9 % QoQ 8.4 14.2 n.m. 13.5 12.9 272.7 13.6 +/- ppt 1.7 -0.1 1HFY11 354.3 115.2 -0.4 114.8 -26.2 -0.1 88.6 1HFY11 32.5 22.8 Cumulative 1HFY10 259.9 75.1 -1.2 73.9 -14.4 -0.1 59.5 1HFY10 28.9 19.4 % YoY 36.3 53.3 n.m. 55.3 82.6 -16.1 48.9 +/- ppt 3.6 3.4

CASH FLOW (RM m) FYE Mar Profit before taxation Depreciation Net interest receipts/(payments) Working capital change Cash tax paid Others (incl'd exceptional items) Cash flow from operations Capex Disposal/(purchase) Others Cash flow from investing Debt raised/(repaid) Equity raised/(repaid) Dividends (paid) Interest payments Others Cash flow from financing Change in cash Sources: Company, Maybank IB 10 November 2010 Page 2 of 3 2010A 177.9 19.8 2.1 (12.9) (22.5) 0.7 165.1 (66.9) 0.3 0.0 (66.6) (16.4) 0.0 (43.6) (2.1) 0.0 (62.1) 36.5 2011F 222.6 23.8 0.5 (20.1) (49.0) 0.0 177.9 (60.0) 0.0 0.0 (60.0) 0.0 1.0 (60.6) (0.5) (1.0) (61.1) 56.8 2012F 252.7 27.8 (1.6) (13.5) (55.6) 0.0 209.9 (60.0) 0.0 0.0 (60.0) (20.0) 2.0 (66.7) 1.6 (2.0) (85.2) 64.7 2013F 272.3 33.2 (4.0) (12.7) (59.9) 0.0 228.8 (80.0) 0.0 0.0 (80.0) (7.0) 3.0 (71.9) 4.0 (3.0) (74.9) 73.9

RATES & RATIOS FYE Mar EBITDA Margin % Op. Profit Margin % Net Profit Margin % ROE % ROA % Net Margin Ex. El % Dividend Cover (x) Interest Cover (x) Asset Turnover (x) Asset/Debt (x) Debtors Turn (days) Creditors Turn (days) Inventory Turn (days) Net Gearing % Debt/EBITDA (x) Debt/Market Cap (x) 2010A 34.9 31.5 25.0 40.4 30.0 25.0 3.0 42.4 1.2 11.5 51.5 26.8 17.9 Cash 0.2 0.0 2011F 33.2 30.0 23.3 37.2 28.8 23.3 2.9 61.7 1.2 14.5 51.5 26.8 17.9 Cash 0.2 0.0 2012F 32.5 29.2 22.9 33.0 27.3 22.9 3.0 92.3 1.2 33.7 51.5 26.8 17.9 Cash 0.1 0.0 2013F 31.1 27.7 21.9 28.8 24.6 21.9 3.0 174.4 1.1 59.9 51.5 26.8 17.9 Cash 0.0 0.0

Hartalega Holdings

Definition of Ratings
Maybank Investment Bank Research uses the following rating system: BUY HOLD SELL Total return is expected to be above 10% in the next 12 months Total return is expected to be between -5% to 10% in the next 12 months Total return is expected to be below -5% in the next 12 months

Applicability of Ratings
The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.

Some common terms abbreviated in this report (where they appear):

Adex = Advertising Expenditure BV = Book Value CAGR = Compounded Annual Growth Rate Capex = Capital Expenditure CY = Calendar Year DCF = Discounted Cashflow DPS = Dividend Per Share EBIT = Earnings Before Interest And Tax EBITDA = EBIT, Depreciation And Amortisation EPS = Earnings Per Share EV = Enterprise Value FCF = Free Cashflow FV = Fair Value FY = Financial Year FYE = Financial Year End MoM = Month-On-Month NAV = Net Asset Value NTA = Net Tangible Asset P = Price P.A. = Per Annum PAT = Profit After Tax PBT = Profit Before Tax PE = Price Earnings PEG = PE Ratio To Growth PER = PE Ratio QoQ = Quarter-On-Quarter ROA = Return On Asset ROE = Return On Equity ROSF = Return On Shareholders Funds WACC = Weighted Average Cost Of Capital YoY = Year-On-Year YTD = Year-To-Date

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