• Chinese glovemakers shifting their focus to European market is expected to benefit Hartalega, allowing it to capture a large share of the US market

• Management expects 3QFY25 to record a higher 7bn sales volume (2QFY25:6.8bn) on stronger customer demand

• Maintain BUY rating with a higher target price of RM4.55 (from RM3.65 previously)

Additional capacity to support surging demand

We came away from our visit to Hartalega’s facility with greater assurance in its growth trajectory. NGC1.5 began operations in Sept24, adding 5bn pieces of capacity via 12 production lines and effectively increasing the group’s total annual capacity to 37bn pieces. Hartalega is currently running at close to 90% utilisation rate, and expects 3QFY25 sales volume to record 7bn pieces (2QFY25:6.8bn), driven by strong US demand and customer restocking activity. Current average selling prices (ASP) range from US$21-22/k pieces, with room to increase by another US$1-2 on improved bargaining power. Hartalega holds an edge over Chinese glovemakers with a shorter lead time of 1-2 months, compared to the 4-6 months for its Chinese counterparts. We gathered that Malaysia has overtaken China in the US glove market, commanding a 43% market share compared to China’s 34%.

Chinese players shifting orders to Europe

Affected by the US tariffs, Chinese glovemakers are redirecting their focus to the European market at a lower ASP of US$17-18/k piece to sustain volumes. Hartalega continues to prioritize the US market, which accounts for c.60% of its total sales, while Europe contributes c.20%. Management believes that any loss of volume in Europe to Chinese competitors should be offset by increasing demand from the US market. Furthermore, expanding operations outside China to mitigate tariff impacts could result in Chinese glovemakers losing their cost advantage. The softer raw material and natural gas costs this quarter would likely drive further margin expansions.

Reiterate BUY; lift our TP to RM4.55 (from RM3.65)

We are switching our valuation method from P/E to P/BV (slightly above its 3-year mean or 3.2x) on FY26E book value. Our TP is raised to RM4.55 (from RM3.65) and maintain our BUY rating. We remain positive on Hartalega due to its strong execution track record, efficient cost structure, and solid balance sheet with high cash reserves. Key risks to our BUY call include sharp appreciation in RM, and weaker-than-expected sales volumes and ASPs.

Source: Philip Capital Research - 6 Dec 2024