• Downgraded to SELL (TP: RM2.90). Hartalega’s 1HFY25 core PATAMI of RM73.8mn was within our in-house expectation (53.5%) but below consensus estimate (44.9%). A first interim DPS of 0.56sen was declared (46.7% payout) and we estimate total FY25 DPS of 2.4sen, translating into 0.7% dividend yield. Hartalega’s 2QFY25 revenue surged by 11.7% QoQ, thanks to higher sales volumes despite global shipment delays. However, the group registered core LBT of RM13mn during this quarter (excluding unrealised forex losses), due to higher operating costs from ramping up of new production lines. We believe there is potential for a shift in customer demand towards Malaysian manufacturers due to the new tariff imposed on Chinese glove players. However, the overall recovery of the rubber glove industry to pre-COVID levels remains constrained by structural issues and oversupply from Chinese manufacturers. Due to recent rally in share price, we downgrade our call to a SELL call from HOLD but with a higher TP of RM2.90 (RM2.60 previously) as we rolled over our valuation to FY27F. Our new valuation is based on a 3-year average pre-COVID forward PE of 27x, pegged to FY27F EPS of 10.7sen.

• Key Highlight. The surge in sales volume during this period was not from the impact of the new tariff hike on Chinese glove manufacturers but rather because Chinese were operating at full capacity, driven by restocking activities. Consequently, some orders were shifted to Malaysian glove manufacturers. Hartalega mentioned that their pricing for US customers is approximately USD 22-23 per 1k pieces, while the pricing for non-US customers is around USD 1-2 per 1k pieces compared to US pricing.

• Earnings Revision. Unchanged.

• Outlook. We are optimistic about near-term stock replenishment by customers, which is expected to boost Hartalega’s sales volumes and drive a commendable utilization rate. Additionally, we view positively the US announcement in September 24 to raise tariffs on Chinese medical and surgical gloves from the current 7.5% to 50% in January 2025, with a further increase to 100% by January 2026. This development could potentially shift customer demand towards Malaysian manufacturers. However, we remain cautious about the broader rubber glove industry's recovery to pre-COVID levels as structural challenges, particularly the oversupply caused by massive production from Chinese manufacturers continue to present significant obstacles.

Source: BIMB Securities Research - 13 Nov 2024