Hartalega vows to sacrifice profit margins to sustain earnings growth and increase market share - Managing Director Kuan Kam Hon

(HARTA closing stock price today (4.5.2012) was RM 7.91 )

Hartalega Holdings Bhd, the world’s largest synthetic rubber glove maker, is prepared to narrow its profit margin to generate stronger earnings growth once its new plant is ready.

The RM1.5 billion next generation integrated glove manufacturing complex (NGC) project, which was announced last month, will be constructed in two four-year phases. The first phase (2013-2017) will involve the building of 40 production lines with an annual capacity of 14 billion gloves. Phase two (2017-2021) will add another 30 production lines with an annual capacity of 10.5 billion pieces.

The new capacity coming on from the NGC would allow room for Hartalega to map out its marketing strategy on gaining volume. The complex will be located in Sepang.

Its managing director Kuan Kam Hon said a right pricing is needed to increase the company’s market share. This would lead to compression in profit margins, but Hartalega’s earnings per share would grow, he added.

“As a public listed company, the most important thing is growth on earnings per share. There is no point holding on to the [profit] margins if it does not benefit shareholders” he said.

Kuan does not believe the market is oversupplied.

“But we are not going to hold on to that [higher profit margins], we are going to give it away by reducing our selling price,” he told reporters after the company EGM yesterday.

Upon completion of the NGC, Kuan said Hartalega would have an annual capacity of 38 billion gloves, compared with 10 billion gloves currently.

According to Kuan, the NGC is expected to increase Hartalega’s sales per employee to RM516,000 a year from RM302,000 currently. The industry’s average is around RM190,000.

“Hypothetically, let’s say that if our sales reaches RM2.2 billion by 2016 and we maintain our current margin of over 20%, [our profit] will be around RM450 million. But we don’t need RM450 million... we need to allow the margin to contract. We would be happy with about RM400 million, [which would mean a] 19% margin and our shareholders will go ecstatic,” he added.

For the nine months ended December 2011, Hartalega achieved a net profit of RM151.6 million compared with RM137.76 million a year earlier. Revenue came in at RM690.86 million versus RM542.39 million in the previous corresponding period.

Its net profit grew to RM190.32 million for FY11 ended March 31 from RM143.06 million. Revenue was higher at RM734.92 million from RM571.89 million the year before.

On the landscape of the glove industry, Kuan does not believe that the market is oversupplied. “We are not experiencing excess capacity and we have not seen other players like Kossan , Supermax or Top Glove targeting our customers.”

Kuan said there is demand for gloves, which is why Hartalega constructed a new plant in February. The production plant, which is expected to be completed in June next year in Batang Berjuntai (now called Bestari Jaya), will boost Hartalega’s current capacity by another 3.5 billion gloves.

On the price of nitrile, a major raw material used in Hartalega’s gloves, Kuan believes prices will fall by about 5% in the next four months, on the back of a softening global demand for the material.

He noted that nitrile prices are less volatile than natural rubber (latex) prices, as nitrile is not a traded commodity and thus not subject to speculative activity.

On the recently announced new minimum wage order, Kuan said it is still uncertain how it would impact Hartalega as not much details were provided. But, all other things being equal, the new wage policy could potentially erode Hartalega’s bottom line by 5%, he added.

Source: www.theedgemalaysia.com