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Saturday, 19 September 2020

(Tradeview 2020) - Long Term Value Pick 5 : Hartalega Holdings Berhad (5168) The King of Nitrile Gloves



Hartalega came out very strong during the recent AGM. What I like about Hartalega's message is the confidence it gives to the shareholders and market including their statement when asked on analyst earnings forecast : 

KUALA LUMPUR (Sept 16): Hartalega Holdings Bhd, which expects an additional demand for 120 billion pieces of disposable gloves in the next three years, does not foresee any sharp earnings contraction after 2021 as some analysts anticipate.

"The analysts are correct [on the earnings forecasts]. But when it comes to the third year, after 2021, they start to give us [earnings] contraction... and [it's] a very sharp contraction.

"I mean this is an opinion, right? They can be right at the end of the day. I do not know. But by my guidance, what the analysts have said cannot be right,” Hartalega's executive chairman Kuan Kam Hon told the media after the group's annual general meeting yesterday when asked to comment on analysts' earnings forecasts.

"We are on the ground. We have been in the business for the last 30 years and analysts are not able to see what we are able to see," he added.

This has been a strong point of contention in the markets between two camps - those who believe in the glove story and those who don't. Particularly, this is especially poignant when this concern was highlighted by 3 research houses namely JF Apex, Ambank and Macquarie. The 3 of this relied on this fact to give justification for their bleak outlook of the sector. So which is which? Is Mr Kuan, the industry titan correct or the analysts?

Lets have a look at this 3 minutes long video below from the AGM which gives a very good flavour :

As mentioned before, for a stock to go up and share price to rally, the majority of market participants must believe in the story in order for the buying momentum to outweigh the selling momentum. I have written extensively on glove stock and the sector so I wont repeat what was shared earlier. 

I would like to take the opportunity to zoom in and focus on Hartalega following the AGM. The few key takeaways which convinced me to consider Hartalega to be my 5th Long Term Value Pick are as below :

1. The visibility of earnings for the next 2-3 years minimum. Please note I am not citing the lock in committed order of 18-20 months. But potentially 3 years - 36 months. The issue here is no longer about ASP and deposit paid for locked in order. It is the issue of structural change in demand due to hygiene practice resulting in continuous shortage of supply against demand. 

2. Management years of experience as pioneer and market leader carries more weight than analyst. Some owners of companies' are promotional and lack credibility. Not the Kuan family. They are known to be hardworking, humble and ethical in their conduct of business. This is the market reputation and street credentials. This is what I value most in a business. Strong management running a quality business.

3. The expansion and succession plan are all in place. By his side, Mr Kuan junior demonstrate eloquence, stability and knowledge. Furthermore, with NGC 2.0, by 2027, the group's total annual installed capacity shall increase to 95 billion pieces per annum. As shareholders what we like to see is both expansion for growth and succession for stability. This will allow us to decide the investment horizon to longer term.

4. Premium valuation. Don't get me wrong, I am not recommending to buy stocks at expensive valuation. What I meant is, the market will always accord premium valuation to companies which are fantastic. Paying a fair price for a wonderful business is more important than paying a cheap price for a good business. Currently, if we compare to others, Hartalega is no longer trading at a huge premium unlike before Covid-19. In fact, if you were to consider Hartalega now, you are investing in this good business at a fair price with strong outlook and growth prospects. Top Glove and Supermax are the earliest to hike their ASP significantly. Hartalega, Kossan and Riverstone hiked the ASP much later as they value long term business relationship and committed to earlier pre-Covid 19 ASP. Hartalega and Kossan both has recently indicated that for future quarters, they will be hiking ASP significantly in the range of 30-50%. This leaves room for imagination on their potential upside.

5. Prominent substantial shareholders including their major client Medline Industries Inc. As per the latest list of 30 largest shareholders in the 2020 annual report, we can spot big names like Great Eastern, AIA, GIC, EPF, Norges Bank, Vanguard Emerging Market Index Fund, Australia Employees Superannuation Trust, Prudential amongst others. Big names aside, what impressed me most, is the fact that Medline Industries Inc from US which is one of the biggest privately held manufacturer and distributor of medical supplies is the 7th largest shareholder of Hartalega. Just imagine, if your major client have so much faith in you that they want to take a stake in your company. That not only signifies confidence the company but also rightly guarantees continuous order flow. Your client essentially ties his interest with the company and believe in growing hand in hand for the long term.

6. Hartalega is steadfast to remain the world leader along with other Malaysian glove makers. Be it China or the new entrants recently announced in the news, in my view, will not be a substantial threat to the Big 6 players. This is because of their ability to deliver, capacity, R&D & technology innovation. 

Let me cite this example, Hartalega came up with the Anti-microbial gloves which is the first in the world. It is now pending approval with the FDA and in our view, it is a game changer that cements their leadership position in Nitrile Gloves. We must remember, to be a leader, capacity is not the only metric. Technology and innovation are key to ensuring you maintain your pole position. From a 2018 news report, Hartalega spent US$10 million in R&D on this gloves with Chemical Intelligence UK. This is before the pandemic. With heightened awareness, this product of Hartalega will differentiate them from other industry players.

Comparing to my past writing on Long Term Value Picks, this time it is slightly different. The reason is because I have covered extensively on glove stocks and sectors which you can read from my earlier posts. For me, when all is said and done, when choosing a long term stock to be in your portfolio for many years, it must meet my 5 metrics :

1. Strong, honest and capable management team / owner
2. Consistent Growth, Earnings & Dividend payout
3. Strong balance sheet & cash position / cash flow
4.Can hold across decades / generations without risk of delisting or bankruptcy
5. Undervalued & lack of appreciation from investors

At this juncture, Hartalega meets all the metrics even at RM14.16 


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Food for thought: 


  1. How do you calculate intrinsic value of Harta ? What are the valuation methods you use ?

    1. Intrinsic Value is calculated based on the assumptions you made. If we look at 20 research house, you will see 20 different intrinsic value or they call it fair value for the next one year, they call it TP. You can only has rough estimates, a range of value. Recent chat rooms, youtube, telegrams, facebooks, you will see a lot of "sifus" giving gloves with all types of valuations and it also "shows" that their "lack of understanding" of using PE (at least as a guide) when there is such a huge Supernormal Profits. What you can do, use the consensus of all the research forecasts for next 3 years, i.e. 2021, 2022, 2023 and also do your own CAGR from the earnings prior to covid and give the PAT a CAGR of 10%-12% for next 10 years (use the forecast for year 4 to 10 as their normal profits). So, you will now have 10 years forecasts (3 years from analysts) and 7 years your rough estimates. Give a weighting to all the earnings, first 3 years give it 3 points, next 4 years 2 points and and last 3 years 1 point. So, each year you will multiply with the points of each year forecast, and total all the profits and divide by the total points (3+3+3+2+2+2+2+1+1+1). This will give you a weighted average earnings per year for next 10 years. Then you multiply with average PE of that counter for last 10 years. Give it a 10-15% premium on the PE because gloves demand fundamental has improved globally. Example, last 5 years, PE of Top Glove is 25x, now you get PE of 29x. My personal calculation using CIMB analysts and my personal projection of normal profit, Top Glove is worth about RM70bil to RM80bil (today 19 Nov 2020 it is about RM55bil). I like to emphasize that valuation is for reference only, short term, market is based on sentiment. This valuation has consider 3 major points, Supernormal profit, back to mean ASPs and also improved demand globally as a result of pandemic.

  2. 请问comfort前景如何?有机会上升破4.5吗

    1. 我认为是有可能的如果龙头手套股都反弹。但是主要问题您应该问为什么您要投资Comfort,如果您投资的理论有根据那就不必怕市场的波动。甚至说,股票下跌是机会,不是危机。共勉之。

  3. 我认为是有可能的如果龙头手套股都反弹。但是主要问题您应该问为什么您要投资Comfort,如果您投资的理论有根据那就不必怕市场的波动。甚至说,股票下跌是机会,不是危机。共勉之。