Hartalega bets on anti-microbial gloves as the new game changer

ABOUT a decade ago, Hartalega Holdings Bhd created some new waves in the global glove industry.

The group was the first company in the world in 2005 to come up with lightweight nitrile gloves that eventually changed the landscape of the industry.

Once dominated by rubber gloves, the gradual switch to nitrile gloves began to take place, and today, it accounts for about 60% of global consumption.

Today, Hartalega, the world’s largest nitrile glove producer, hopes such revolution can be replicated through its newly created antimicrobial gloves (AMG).

Touting the new product as a “game changer” that could elevate Malaysia’s glove manufacturing industry, Hartalega managing director Kuan Mun Leong ( pic) says the group aims to make its AMG the new standard globally.

“We want almost all the nitrile gloves that we produce to be replaced by AMG in the future,” Kuan says.

What’s so special about the AMG is that it is the world’s first non-leaching glove that effective in killing prevalent and antibiotic resistant microbes in five minutes. This is useful in the global healthcare industry that has for long been bogged down by healthcare-associated infections (HAIs).

HAIs are infections that patients can get while receiving medical treatment in a healthcare facility. It costs the healthcare industry billions of US dollars each year to address the problem.

According to Kuan, it took Hartalega about six years to develop the AMG via a collaboration with antimicrobial research and development company Chemical Intelligence UK, and more than US$10mil (RM40.8mil) in investments to bring the product to the market.

Kuan says the group is confident in the ability of the AMG to revolutionise the global healthcare sector, as well as bring success to the company.

“This new product is cost-efficient to produce; and the price premium attached to it is not too forbidding for the gloves to be adopted globally,” Kuan says.

“What’s more, the product can help solve one of the biggest problems in the global healthcare industry,” he adds.

To encourage greater adoption of the AMG, Kuan says, the glove will be offered to the market at competitive prices.

He reveals the product will be priced at 5% premium to the selling price of nitrile gloves.

“We think the premium is low considering the costs of tackling HAIs,” Kuan explains.

Citing data from World Health Organisation, it costs the European Union seven billion euros (RM32.75bil) each year to tackle HAIs that affect 4.1 million of its people and cause 37,000 deaths. In the US, the annual cost is US$6.5bil to deal with HAIs that affect 1.7 million of its people, and cause about 100,00 deaths.

“We’ve been receiving good response from our customers in Europe... the next market for us is the United States,” Kuan says of the prospects of AMG.

Hartalega launched the AMG in Europe in May and it will begin its shipment of the AMG to Europe next month.

As for the US market, the group expects to secure the US Federal Drug Administration (FDA) approval for the distribution of AMG in the world’s largest economy within the first half of 2019.

“Once we get FDA, we expect the AMG to begin selling like hot cakes,” Kuan says.

From the business standpoint, it makes sense for Hartalega to push the AMG in the European Union (EU) and the United States due to their huge market potential.

For instance, in the United States, annual glove consumption is around 200 pieces per capita, while in EU, it is 100-150 pieces per capita. This compares with that of Asia at only seven to 10 pieces per capita per year.

Kuan notes it is easy for Hartalega to convert its manufacturing process from nitrile gloves to AMG as the produc is molecularly designed to be very compatible with rubber polymers.

“The technology can be easily added into the glove-manufacturing process. This translates it into a cost-efficient addition to our existing glove-manufacturing process,” he explains.

RHB Research in its recent report says that it expects AMG to help drive margin expansion for Hartalega in the mid to longer term.

“Its focus on product innovation should allow the company to sustain inelatic demand for its products and create technological barriers to entry,” the brokerage says.

Normalised demand

Hartalega had a strong start to its financial year ending March 31, 2019.

It registered a 30% year-on-year (yoy) growth in net profit to RM124.87mil for the

first quarter ended June 30. The growth was driven by favourable demand and additional production capacity. The lower costs of nitrile, chemicals and upkeep of plant and machinery also contributed to the higher earnings.

During the quarter in review, Hartalega’s revenue grew 17.5% yoy to RM706.3mil, in tandem with growing demand for nitrile gloves and continuous expansion in improving production capacity.

Kuan acknowledged that the strong first-quarter earnings seen was partly attributable to the interruption of vinyl glove supply from China, which resulted in significantly higher demand for rubber gloves.

“Our first-quarter is at the tail-end of the surge in demand for rubber gloves due to the interruption of vinyl glove supply from China... now the market is well balanced, we think the supply and demand has normalised,” Kuan says.

On the impending minimum wage policy, Kuan says, Hartalega is not too concerned about it, as he expects the resultant rise in production costs can be passed on to its customers.

Organic growth

Kuan remains optimistic on the growth prospects of the rubber glove industry, and continues to expect increasing demand arising from the switching trends to nitrile gloves. At present, nitrile gloves account for about 60% of global glove consumption, he notes.“In the mid to long term, we think there will be no oversupply situation. We’ve done some studies which show that demand will continue to outpace supply,” he explains.

To put that into perspective, Kuan says, for the next three years, global glove demand is expected to be 59 billion pieces. This com- pares against the total combined capacity of the Top Big 4 glove manufacturers at only 36 billion pieces in the next three years.

For Hartalega, Kuan says, the group will remain focused on building its own capacity to sustain growth.

Since 2013, Hartalega has allocated a total of RM2.5bil to establish its next-generation integrated glove manufacturing complex (NGC), which will come with seven plants.

“With this expansion plan, we’re looking at an average growth rate of 15% yoy for the next five years,” Kuan says.

At present, four out of the seven plants are already fully operational.

Plant 5 began commissioning this month, while the construction of Plant 6 has just started, and will begin operating from the middle of next year.

Affin Hwang Capital Research expects Plant 5 to boost Hartalega’s earnings.

“As Hartalega continues to operate at more 90% utilisation rate, we believe that the new Plant 5 which was recently commissioned, will be earnings-accretive. The new lines can also help to reduce the current high utilisation rate of its current lines, as operating at above 90% for an extended period of time

could lead to longer downtime for maintenance,” the brokerage explains.

Plant 5 and 6 will each come with an annual installed capacity of 4.7 billion pieces. Kuan says the construction of Plant 7 will begin in the next few months, with some capacity up and running by the second half of next year. Plant 7 will come with an annual installed capacity of 2.6 billion pieces.

Hartalega’s shares rose 22 sen yesterday to close at RM6.60, representing 43 times its forward earnings.

The counter’s relatively rich valuation has most analysts recommending a “neutral” stance on the counter. A check on Bloomberg poll of analysts shows there are three “buy” recommendations on Hartalega’s shares, nine “hold” and seven “sell”.