October 16, 2021

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Key Takeaways From Hartalega's 2021 AGM

Annual General Meeting are opportunities for ordinary shareholders to access management of listed companies. It is particularly important for retail shareholders due to their lack of corporate access on a normal basis unlike research analysts or fund managers. Naturally, this would lead to it being a highly anticipated events just like Berkshire Hathaway's annual shareholders' meeting or in the local context, Public Bank's AGM. It is even more exciting for shareholders if the company in question performed very well for the year. 

In my view, Hartalega's AGM is one of the most important for retail investors as it provides guidance for the glove sector as a whole. It sets the tone because of its global market leadership position, trusted opinions and of course, because there is rarely opportunity to hear from the Chairman and founder himself, who is mostly low profile. This year, it becomes more crucial for ordinary shareholders to hear from the management itself as Hartalega's stock price and its earnings performance have completed decoupled in the past 1.5 years. Instead of celebrating best earnings ever in their corporate history, most shareholders would like to have their concerns addressed by management due to the weak share price performance.

To ease your reading, I shall segregate the AGM into key takeaways & my own views at the end :


Positive / Encouraging :-

1. Hartalega plans to invest more towards improving automation and this would take precedent over capacity expansion. At present, the company has begun adopting robotic packaging solutions (first of its kind in the world) which would reduce the labour required by by 17-20%. For the next stage, they are looking to invest on automated storage and delivery system.

2. To play a part towards climate change and to be ESG compliant, the company have invested in cleaner energy such as biomass generator  to reduce carbon emission. The generator has the net efficacy conversion rate of 90% and offers cost savings. With new generation high efficient burner, the cost is expected to reduce by 20%.

3. Hartalega is now able to produce 50,000+ pieces of gloves per hour from earlier 45,000 pieces of gloves per hour due to better efficiency. The industry average is about 36,000 pieces of gloves an hour. (China is not at this pace yet)

4. For their future expansion, the company intends to focus on NGC 1.5. The 250 acres (additional option of 130 acres) land in Kota Perdana Special Border Economic Zone (SBEZ), Kedah is for long term purposes. There are no plans for US expansion despite the national PPE policy as the cost of production of glove in US is estimated to be USD 50/1000 gloves, while in South East Asia, the cost is about USD 20/1000 gloves. (An interesting point raised by Hartalega in reference to the US government using allocated budget to purchase PPE at pricing based on the US production cost, however, it is unlikely that it will be sustainable in the long run)

5. The company takes the US Customs Border Protection (CBP) concern very seriously, hence it has engaged invigilators, CBP USA and Canada as well as embassy and foreign diplomats especially countries where Hartalega is doing business. The company also provided substantial evidence to show proof there are no force labour in operation and compliant with standards. Majority are convinced there are no concerns here with Hartalega being the best performer. In a way, it is a blessing in disguise as these allegations are the chances for Hartalega to prove they are good employers.

6. China's claim on cost efficiency is unlikely given that despite the coal price has fallen, the overall cost per watt is still higher than the natural gas price in Malaysia. In addition, Hartalega has long term partnership with Petronas for the natural gas supply hence it will have price advantage. Furthermore, as carbon reduction is a key ESG performance indicator, China's Government has also been pushing for carbon reduction, indicating a shift away from coal for power generation (which is the cheapest energy source in China), it is not ideal.

Negative / Concerns :-

1. EMCO has caused Hartalega to lose 5% annual sales as it is the first time that the company was categorised as a non-essential. The current net production capacity is about 70% for the first 2 months (July & August 2021) of Q2FY22. Due to the EMCO uncertainty, some customers in order to hedge their risk in securing supply has moved their orders to other manufacturers outside of Malaysia such as China and Thailand.

2. ASP has reduced by about 30% QoQ and the normalization of margin will continue for the coming 1 year. Hartalega expects by Q1 in 2022 that ASP will normalise but it will remain above pre-pandemic level due to different higher cost structure. ("For example, nitrile gloves' raw material cost is still higher than pre-pandemic levels. So, the price should not be anything below US$35 per thousand pieces. Otherwise, this doesn't make sense in terms of margins.")

3. Aggressive expansion from China manufacturers are of concern and the management acknowledges that from 2019-2022 , capacity growth of gloves in Malaysia was about 28% per year relative to China's expansion of 60% per year based on their announce expansion. For the long term, IF the Chinese manufacturers were to fully execute their expansion plan, the market share of Malaysia's glove makers may drop below 60% and oversupply will happen. 

4. Despite Delta variant globally, the market trend has not pushed ASP higher due to adequate supply / stockpile at the moment. It is clear that customers wants to deplete their existing inventories while waiting for ASP to normalise before stepping up purchase again in coming months. (Expect to see the buyers to increase in coming months). This has also cause the expansion slowdown on major China manufacturers. Under such circumstances , the most realistic way forward would be cost rationalization, increased automation and reduction of dependence on labour.

__________________________________

"It is my view that the China factor has been overplayed. Many failed to take into account of China's cost structure, efficiency, ESG, quality & actual slowdown in recent expansion. What matters most is not announced expansion but actual execution."



My humble view :


1. I believe that Hartalega management has answered this as professionally and objective as possible to provide the necessary guidance within the ambit of the law for ordinary shareholders. I am appreciative and I am glad to be a shareholder.

2. Many of the positives and concerns shared are known to investors too. The question has always been the extent. To what extent and to what degree would it affect the prospect of glove makers future? I believe all negatives are fully priced into Hartalega's share price as what Hartalega is trading currently at RM 6.91 would mean the coming quarters and years are lost making which doesn't make sense. 

3.  What concerns me most, is how Hartalega would deploy or make use of their cash hoard meaningfully for the shareholders. This will set the tone and actual prospect of Hartalega moving forward.

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Author of "Once Upon A Time In Bursa", please click MPH Bookstore / Popular Bookstore / Shopee

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This  information should not and cannot be construed as or relied on and (for  all intents and purposes) does not constitute financial, investment or  any other form of advice. Any investment involves the taking of  substantial risks, including (but not limited to) complete loss of  capital. Every investor has different strategies, risk tolerances and  time frames. You are advised to perform your own independent checks,  research or study; and you should contact a licensed professional before  making any investment decisions.

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