Fitting the Hand – Hartalega Holdings Bhd

Middle-East Respiratory Syndrome Coronavirus

Gloves are hot. With healthcare spending at record levels and projected to increase in the future in line with the world’s aging population above 80 growing at 3% per year, greater awareness and regulation about occupational safety, and the phenomenon of heightened disease paranoia due to virus outbreaks such as H1N1 bird flu and SARS, gloves are definitely an “in” sector. The global glove export market is worth around US$4.1 billion per year, with around 70 billion pairs of gloves exported. Malaysia dominates the world gloves market, exporting 61% of the world’s needs. Thailand follows with 17%, China with 6.8%, and Indonesia with 5%. The global glove market is set to grow at a healthy rate of 8% to 10% per annum, fuelled by demand growth in the two largest import markets, the USA and Europe, despite the financial crisis. Demand is also rising as countries like China, India, Vietnam and Brazil have greater health and hygiene concerns as a substantial middle-class emerges. Demand for lower-end powdered latex gloves is more popular among developing countries with end-users more cost-conscious, whilst powder-free latex and nitrile (synthetic rubber) gloves are preferred in developed countries. 

Nitrile Gloves

As the largest glove manufacturer in Malaysia, Hartalega Holdings Bhd knows what it takes to fit a glove to the hand. The volatile natural gas and latex (the major input for gloves) prices have hit smaller manufacturers harder as they now face higher operational costs. However large glove manufacturers, such as Hartalega Holdings Bhd, have been helped by the prices as they can take advantage of higher selling prices whilst benefiting from their cost economies of scale. Furthermore, Malaysia’s comparative advantage in glove manufacturing is its productive labour with each worker in the sector estimated to be three times more productive than Thai labour and two times more productive than Indonesian labour. Hartalega’s vision is to be the number one glove manufacturer in the world, whilst producing the best and most innovative gloves and being recognized as caring for the community and environment. This vision is behind their targeting replacing natural latex rubber gloves with nitrile gloves, which are safer for end-users. There is huge potential for Hartalega Holdings in Europe as nitrile gloves consumption was only 23% in 2012, with the remaining 77% utilizing natural latex rubber gloves. They already have a headstart on their global competition as they are the world’s largest synthetic nitrile glove producer. In fact, of the 13 billion gloves produced each year, 90% are made up of nitrile gloves. Hartalega Holdings have also invested MYR1.9 billion to develop its next-generation glove manufacturing complex, which will boost its production capacity by more than 300% from 13 billion gloves per year to 42 billion pieces. 42 production lines with 16.5 billion pieces capacity will be finished by 2017 with an additional 30 production lines (12 billion pieces) finished by 2021. The project will also enhance productivity and efficiencies and reduce costs through greater automation and technological innovation.

Hartalega Holdings currently trades on the Kuala Lumpur stock exchange at MYR6.850 per share with a one year return of 58%. Last year they boasted revenues of US$333 million and currently have a market capitalization of US$1.52 billion. They have come a long way since their founding in 1988. In the past five years, its share price has climbed from MYR0.60 in January 2009. Its profits have also grown in tandem, with profit for 2009 amounting to MYR95.5 million and MYR258.4 million for 2012. They now possess 53 production lines and capacity to produce 12 billion gloves annually (out of Malaysia’s 70 billion gloves exported). They were the first in the glove industry globally to:

·         Develop polymer coated powder-free examination gloves in 1994;

·         Use industrial barcoding for product traceability and stock management with RFID Tags;

·         Commercially produce high-stress-relaxation NBR examination and surgical gloves in 2002 and 2006 respectively;

·         Use oil palm empty fruit bunches as biomass fuel to generate heat for production processes;

·         Successfully registered their biomass energy plants to the United Nations Framework Convention on Climate Change or Kyoto Protocol.

Advanced Glove Manufacturing Technology

The company offers the following gloves: examination, surgical, laboratory, clean room packed class 100, atomic power plant, emergency medical service, food grade, and automotive. Their manufacturing process also utilizes world-class production technology. They have patented double former mounting design, their newest high speed production lines capable of producing 40,000 pieces of gloves per hour per line, the highest in the industry. Even at high speeds, the quality of gloves is not compromised by monitoring through the Supervisory Control and Data Acquisition (SCADA) system. The company has also challenged the norm of glove manufacturing as a labour intensive process by utilizing automation to reduce reliance on manual workforce. In 1995, they developed an automatic globe removal system, designed to remove gloves from hand moulds at a speed of 30,000 pieces of gloves per hour. Hartalega’s business is export-driven with Europe and the USA accounting for 28% and 55% of overall sales revenues respectively. With greater revenues, Hartalega Holdings have announced a policy to pay a minimum 45% of its annual net profit as dividends starting from 2012, which is a great sweetener for this investment. Not that it needs one when its profit has increased in Q1 2013 (MYR63 million) by 31% from Q1 2012 (MYR53.4 million), driven by a switch to focusing on producing nitrile gloves.

Malaysian Rubber Plantation

Hartalega Holdings will be the global glove industry’s outstanding performer over the next ten years, particularly once its next-generation glove manufacturing complex begins production in August 2014, with its promised yield of 6% extra profit margin due to better efficiency. This would enable the company to grow its market share as well as have the capacity to edge out lower-margin competitors with lower selling prices. In addition, Hartalega’s 12-month enterprise value/EBITDA as well as P/CF ratios currently beat sector averages by 2% and 9% respectively. Watch out! Here is a company intent on gloval domination.