Analysts expect quantum leap in Hartalega’s earnings

KUCHING: Hartalega Holdings Bhd (Hartalega) is expected to record a significant increase in its earnings over the next few quarters, analysts at Kenanga Investment Bank Bhd (Kenanga Research) observed.

“Strong quarter- on- quarter (q- o- q) earnings results of glove players over the past month suggest that demand will be strong over the next few quarters with industry average selling price (ASP) higher on a weekly and monthly basis.

“Anecdotal evidence suggests that rubber glove players’ explosive quarter- on- quarter (q- o- q) earnings growth is expected to sustain over the next few quarters.

“Judging by the results of other players over the past two weeks only, we are raising our assumptions for Hartalega.

“Specifically, the industry trend of rising weekly and monthly ASPs between five per cent to 15 per cent is expected to boost its bottom-line,” the research team highlighted.

On the shortage of supply, Kenanga Research said based on its observation, in anticipation of higher demand due to the pandemic, stock piling and entrant of new users, players are raising capacities to meet the surging demand.

“Our analysis suggests that acute supply and supernormal demand could persist over the next two years.

“Interestingly, players are getting orders from new users including airlines, restaurants, retail apparel chains and hotel operators.

“If we look at the capacity expansion numbers in isolation, it looks overwhelming. But viewed against the incremental new pandemic- driven demand in addition to the annual base level demand growth, the additional capacity is not a concern.

“In fact, the estimated new yearly capacity may not actually start as scheduled and hence the supply shortage will continue to be acute in 2021,” it explained.

Typically, to cater for normal demand, it noted that glove makers essentially need to build just one plant per year.

“However, from channel checks, to cater for this current pandemic- driven demand, two to three plants are required for each glove maker (on average) annually in order to meet the supernormal demand, which takes between 12 to 24 months to complete.

“Hence, we conclude that ASP tightness will continue going into 2021. We highlight that a player in China ramping up capacity by 30 billion pieces over two to three years could take longer than expected as it typically takes eight to 10 years to build such a capacity,” it added.

Kenanga Research also expected gloves consumption per capita in China to surge sharply following the Covid-19 experience.

“For illustration purposes, assuming a population of 1.4 billion and conservative 30 gloves per capita ( from currently nine compared to developed western countries which averaged 200 pieces per capita), this implies a massive 42 billion piece (from currently 2.8 billion pieces) of rubber gloves consumption in China annually.

“Hence, any new supply from the Chinese players could be absorbed domestically.”

Strong quarter-on-quarter (q-o-q) earnings results of glove players over the past month suggest that demand will be strong over the next few quarters with industry average selling price (ASP) higher on a weekly and monthly basis. Kenanga Research