• 2QFY25 could see improved sales volumes and ASPs, but weighed down by forex

• Higher tariffs imposed on China could lead to increase in orders diversion from US

• Cut earnings by 5–12%. Maintain BUY rating with a lower target price of RM3.65

Expect improvements ahead with increasing US contribution

We anticipate a 32% QoQ sales volume increase to 2.6bn pieces per month in 2QFY25. Hartalega is experiencing an uptick in orders from its US customers, driven by heightened demand from inventory restocking activities, as well as early order diversions in anticipation of import tariff hikes on Chinese glovemakers expected to increase to 50% in 2025 and 100% in 2026 (from 25% in 2026). Hartalega stands to benefit from US-China trade tensions, with the potential for increased market share in the US as customers seek alternatives to Chinese gloves. Management shared that the US market could account for 75% of the group’s revenue from the current 50%. ASPs are expected to improve by 10% QoQ to US$23/k pieces on better bargaining power. With raw material costs remaining largely steady and natural gas prices declining by c.5% QoQ, we expect the margin to decline in 2QFY25 after taking into account the negative forex impact.

Recommencing NGC1.5; adding 4bn capacity

Hartalega is currently operating at a higher 80% plant utilization rate, an increase from 78% in 1QFY25, driven by higher sales orders. To cater the expected higher demand, management will recommence operations at the NGC1.5 plant, starting with five lines that will add 2bn pieces capacity. This is expected to ramp up by an additional 2bn by the end of FY25, bringing the total annual capacity to c.36bn pieces (+13% from the current c.32bn capacity). With the newly added capacity, we expect Hartalega’s lead time to reduce to 1–2 months (from the current 2–3 months). Chinese glovemakers are reportedly shifting focus away from the US market to other regions, undercutting competitors to maintain volume. While they can establish new plants outside China, they may not achieve the same cost efficiencies.

Reiterate BUY with a lower TP of RM3.65 (from RM4.10)

The recent appreciation of RM against the US$ will likely weigh on the upcoming 2QFY25 results, although stronger volumes and ASP will cushion the impact. We cut FY25-27E earnings by 5–12% to account for the stronger RM while keeping the rest of our assumptions unchanged. We maintain our BUY rating with a lower TP of RM3.65 (from RM4.10), based on an unchanged PE multiple of 32x on FY26 EPS. Key downside risks to our BUY call include continued RM strength, weaker-than-expected sales volume, and ASPs.

Source: Philip Capital Research - 1 Oct 2024