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Asia Pacific Equity Research29 March 2014

Hartalega Holdings BhdPreparing for the next phase of growth - Company Visit Note

Medical Supplies & Devices

Simone Yeoh AC

(60-3) 2718-0710

[email protected]

Bloomberg JPMA YEOH <GO>

JPMorgan Securities (Malaysia) Sdn. Bhd. (18146-X)

Vanice Siew

(603) 2718-0708

[email protected]

JPMorgan Securities (Malaysia) Sdn. Bhd. (18146-X)

Ebru Sener Kurumlu

(852) 2800-8521

[email protected]

J.P. Morgan Securities (Asia Pacific) Limited

See page 17 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

We met with management of Hartalega, the world’s largest nitrile glove producer with 14B pcs of glove capacity. The group does not see an overcapacity of nitrile gloves in 2014 but expects near term margin pressure mainly over FY14-15E from irrational price under-cutting by smaller players, and upfront labor and related cost for its new NGC plant or expansion. However, management is optimistic about growth prospects from FY16 onwards and expects contributions from its more efficient NGC by then.

No overcapacity in 2014E. The group sees healthy demand for the higher quality medical grade gloves (stiffer competition in the lower mass segment) and expects nitrile demand growth of 15-20% pa next 2-3 years (versus 19%/22% in 2013/12). Instead, oversupply could occur in 2015/16E if all new planned capacities are fully on-stream by then, but potential delays in industry expansion plans are possible according to the group.

Margins under pressure near term over FY14-15E due to irrational price under-cutting by smaller players willing to forego margins to gain market share or make further entry into the nitrile market, as well as upfront costs i.e. namely labor and other costs related to preparation for its upcoming expansion via the Next Generation Glove Manufacturing Complex (NGC).

Management is optimistic on growth prospects from FY16E on to be driven by positive contribution and margin expansion from its more efficient M$2.2B mega NGC plant, with the first production line expected to be commissioned by 4Q14. The NGC is expected to raise nitrile capacity by 205% to 42.4b pieces of gloves within 8 years or by FYE Mar-22.

Consensus valuation. Hartalega is currently trading at 17.9x FY15Econsensus PE, versus its historical mean of 10.5x (Glove sector's historical mean: 12.4x). The stock has outperformed the market by 24% past 12M.

NOTE: THIS DOCUMENT IS INTENDED AS INFORMATION ONLY AND NOT AS A RECOMMENDATION FOR ANY STOCK. IT CONTAINS FACTUAL INFORMATION, OBTAINED BY THE ANALYST DURING MEETINGS WITH MANAGEMENT. J.P. MORGAN DOES NOT COVER THIS COMPANY AND HAS NO RATING ON THE STOCK.

Hartalega Holdings (Reuters: HTHB.KL, Bloomberg: HART MK)

Bloomberg consensus estimatesM$ MM, Year end Mar FY12 FY13 FY14E FY15E FY16ESales 931 1,032 1,197 1,376 1,673EBITDA 288 333 377 429 510Net Income 201 233 258 284 337Diluted EPS (M$ sen) 0.28 0.32 0.34 0.38 0.44EV to T12m EBITDA 9.6 10.4 12.9 11.3 9.5Return on equity (%) 36.2 33.7 29.3 27.0 27.3Return on invested capital (%) 31.7 30.1 n.a. n.a. n.a.PE ratio (x) 24.4 21.1 19.7 17.9 15.5Price-to-book ratio (x) 36.2 33.7 5.5 4.7 4.0Dividend payout ratio (%) 45.3% 45.6% 45.0% 45.5% 46.6%Dividend yield (%) 2.7% 2.9% 2.3% 2.5% 3.0%DPS (M$ sen) 0.11 0.15 0.15 0.17 0.20

Source: Bloomberg, Company data

HART MK, Not Covered

RM 6.74, March 28, 2014One-year price performance

Source: Bloomberg

One-year price performance

YTD 1m 3m 12m

Abs (%) -6.8 -3.7 -7.4 36.7

Rel (%) -6.0 -4.5 -6.9 23.7

Source: Bloomberg

Company data

52-wk range (M$) 4.82 - 7.69Market cap (M$mn) 5,034Market cap (US$mn) 1,538Shares outstanding (mn) 747Free float (%) 36.33m trading volume (mn) 0.73m trading value (M$mn) 5.23m trading value (US$mn) 1.6KLCI Index 1,851Exchange rate 3.27

Source: Bloomberg, Company

4.8

6.8

8.8

Mar-13 Jun-13 Sep-13 Dec-13 Mar-14

HART MK KLCI

2


Simone Yeoh(60-3) [email protected]

Feedback from company meeting

Below key feedback from our meeting with Hartalega:-

No overcapacity issues in 2014 for nitrile gloves with demand anticipated to rise by 15-20% pa next 2-3 years, according to management. This is contrary to the views of some its domestic peers (i.e. Top Glove). Hartalega indicated that the medical grade/higher quality gloves are still seeing healthy demand growth while competition is stiffer in the lower quality mass segment where there are more producers with lower barriers to entry.

Instead, oversupply could occur in 2015/16 only if all new planned capacities are fully on-stream, but potential delays in industry expansion plans are possible according to the group due to time lag for production line commissioning, authority approvals, and groundwork infrastructure.

Margins under pressure shorter term over FY14-15E (Mar-31 year-end).The group is seeing some pricing pressure in its ASPs which it attributes to irrational smaller players willing to forego margins to gain more price sensitive customers or to make further entry into the nitrile market. With easing ASPs and upfront costs i.e. namely labor and other costs related to its upcoming expansion via the Next Generation Glove Manufacturing Complex (NGC), margins are expected to remain under pressure in the near term over FY14-15E. Net margins eased by 1ppt Q/Q and 1.7ppt Y/Y to 21.6% for 3QFY14 (22.3% for 9MFY14) but this was partly dragged down also by maintenance overhaul on all production lines which caused production downtime.

Aggressive expansion plan in NGC to progress ahead. While its peer Top Glove has slowed its pace of expansion, Hartalega is pressing ahead with its M$2.2B NGC facility which will house 8 factories with total additional capacity of 28.5b pcs of gloves or 205% rise in capacity to 42.4b pcs of gloves upon completion within 8 years or by FYE Mar-22. Management is targeting to commence its first production line by 4Q14.

Management is optimistic on growth prospects from FY16E onwards to be driven by positive contribution and margin expansion from its more efficient NGC facility by then, as well as its strategy to diversify its product range to higher yielding margin gloves such as surgical and clean-room gloves. The new NGC facility will leverage on the latest technology and greater usage of renewable energy i.e. biomass, as well as with faster speed production lines.

Expects raw material prices to remain depressed. Management expects raw material price, latex to remain weak for the following reasons: 1) Large oncoming supply due to simultaneous rubber plantings in 2008 by the major producing countries i.e. Thailand, Vietnam and Cambodia which are mature for tapping by 2013/14. 2) This is substantiated by analysis done by the International Rubber Study Group (IRSG) which concludes an oversupply of latex in the market for the three-year period over 2013-15E amid also less than robust demand from China (i.e. the world’s largest consumer for rubber). On the same note, management does not anticipate any major recovery in nitrile butadiene (NBR) price (i.e. raw material for nitrile) which is strongly correlated to latex prices, given ample supply and low utilization levels of existing production plants at 50-60% (See charts below for trends in raw material prices).

Hartalega Holdings Bhd has an annual production capacity of

13.6B pcs of gloves across its 6

production plants located at Batang Berjuntai, Selangor in

Malaysia, with a current product

mix comprising 90% nitrile and 10% latex gloves. Based on

utilization levels of 80-90%, it

hence produces about 10-11b pcs of nitrile gloves pa, or

translating to a global market

share of 17-18%, the largest in the world.

Hartalega's glove products are predominantly sold to the

healthcare (74%) and laboratory

(17%) sectors.

3



Figure 1: Consensus earnings forecasts

Source: Bloomberg

Figure 2: Consensus profitability margin forecasts

Source: Bloomberg

Figure 3: Raw material – latex prices

Source: Bloomberg

Figure 4: Raw material - nitrile butadiene (NBR) price

Source: Company

1,0321,202

1,387

1,676

333 379 434 513

235 258 285 340

0

250

500

750

1,000

1,250

1,500

1,750

2,000

FY13 FY14F FY15F FY16F

M$MM

Revenue EBITDA Net profit

32.3%31.5% 31.3% 30.6%

22.7%21.5%

20.6% 20.3%

18.0%

20.0%

22.0%

24.0%

26.0%

28.0%

30.0%

32.0%

34.0%

FY13 FY14F FY15F FY16F

EBITDA margin Net profit margin

4.0

4.55.0

5.5

6.06.5

7.0

7.58.0

8.5

M$/kg

Spot price: M$5.00/kg

800900

1,0001,1001,2001,3001,4001,5001,6001,7001,800

US$/tonne

Feb: US$1,022/tonne

Management expects its margins to remain under pressure in the

near term over FY14-15E, but is

optimistic of a recovery in profitability/margins by FY16E

once contributions from its NGC

expansion come on-stream

4



Read through for Top Glove & the sector

We provide below a read through from our meeting with Hartalega for its peer, Top Glove and on the sector. We cover Top Glove and have a Neutral rating on the stock. The key read through is that the outlook for Top Glove and the sector remains challenging over the next 6-12 months in view of margin pressure from price under-cutting in the nitrile segment by smaller players. This is already evident in Top Glove’s recent below market results as per our 20th Mar-14 published note on the company titled '2HFY14 disappoints; Downgrade to Neutral'.

More detailed read through on Top Glove and the sector as follows:

Hartalega's feedback of no overcapacity for nitrile gloves in 2014E, but risk of oversupply by 2015/16E is consistent with our own analysis on the DD-SS dynamics for nitrile gloves. As published in our recent Top Glove note dated 20th Mar-14 and presented again in the tables below (Table 1 and 2), we see an estimated supply growth in nitrile gloves of 17% in 2014E and 27% in 2015E assuming no delays in expansion plans of industry players. Compared to the expected demand growth of 15-20% for nitrile gloves in the next 2-3 years, the supply growth broadly matches demand growth in 2014E, but lags behind it in 2015E.

So, why price competition now if no overcapacity yet? As discussed in our Top Glove note dated 20th Mar-14, we believe this is likely the result of smaller/newer players willing to forego part of the 4-6ppt higher margins for nitrile vs latex gloves to gain more price sensitive customers from existing established players – i.e. for illustration purposes even if 50% of the incremental margin for nitrile versus latex is foregone, margins are still higher by 2-3ppt. This should hurt the purer nitrile player the most, while the other players with a mix of nitrile/latex moving up the value chain could ideally still see better margins overall though smaller than the said optimal levels. Also price competition in nitrile may have arisen we believe due to the interchangeability between nitrile and latex production lines for some players which may have resulted in an accelerated shift towards production of nitrile products given weak demand for latex gloves (nevertheless the percentage of interchangeability of production lines as a percentage of total capacity for the smaller players is not signficant we believe).

Contradictions on expansion plans. While Top Glove is slowing the pace of its nitrile expansion, Hartalega is pressing ahead with its own expansion via its new upcoming NGC plant. We reiterate that from its recently released disappointing results, we believe that Top Glove is still lagging overall in terms of the learning curve for nitrile or not yet fully realizing the better profitability for nitrile. Hence, the delay in its expansion may be due to the need to refine its product quality and production processes. This is evident from Top Glove’s stated plans to focus now on profitability/margins as well as product quality, instead of top line expansion for now. Note that competition is stiffer in the lower quality mass nitrile glove segment where there are more producers with lower barriers to entry, as opposed to healthier demand for higher quality grade medical gloves.

https://jpmm.com/research/content/GPS-1349615-0

5



We reproduce below our assessment on the industry demand and supply dynamics for nitrile gloves in our recent Top Glove note dated 20th Mar-2014

Demand & supply dynamics for nitrile gloves

Glove demand (as measured by Malaysian exports) rose 6.7% Y/Y for 9M13, supported by 18.7% growth in the nitrile glove segment, while the latex segment recorded a 3.3% Y/Y contraction. Malaysia's nitrile glove exports/demand also grew strongly by 22% Y/Y in 2012 (29% in 2011, and a CAGR of 43% over 2008-12).

Figure 5: Malaysia total rubber gloves export volumes

Source: MREPC

Figure 6: Malaysia nitrile rubber gloves export volumes

Source: MREPC

While there are concerns of large expansion and oncoming supply of nitrile gloves, the new capacities from the top 4 local producers will come on-stream gradually and not all at once (i.e. over a period of 3-8 years for the larger new capacities by Hartalega and potentially Kossan), there has been some delays (i.e. Supermax), and overall expansion we believe can be accelerated or phased out depending on demand.

The total production capacities of nitrile gloves by the top four local producers is estimated at 39b pcs of gloves p.a. as at end 2013 with industry utilization levels of about 90%. We estimate additional new capacity of 14.9b in 2014E and 9.3B in 2015E. Based on these estimates, we expect supply growth from the top four local producers to rise by a CAGR of 21.5% over 2014-16E (17% in 2014E, 27% in 2015E and 16% in 2016E) as per estimates in table below.

Hence, compared to the expected demand growth of 15-20% for nitrile gloves in the next 2-3 years, the supply growth broadly matches demand growth in 2014E, but lags behind it in 2015E.

48

50

52

54

56

58

60

62

64

66

9M11 9M12 9M13

B' pcs

20

22

24

26

28

30

32

34

9M11 9M12 9M13

B' pcs

6



Table 1: Nitrile glove production capacity expansion plans of top four local producers

Company 2013 capacity(b pcs of gloves)

2014 additional capacity(b pcs of gloves)

Expansion plans comments

Supermax 5.4 6.9 Planned 6.9B new capacity in 2014

Hartalega 13.6 0.8 New generation plant to add 28.5B new capacity over an 8-year period starting from 4Q14. Expect additional 1.4B pieces by FY15.

Top Glove 10.5 2.2 To add 2.2B pieces by Dec-14. No stated plans beyond that but we have assumed an expansion in capacity by 1.5B pa after 2014.

Kossan Rubber

9.6 5.0 To fully commission new capacity of 5B pieces pa by July 14. Beyond that, the group plans to expand on its newly acquired land over a 3-year period to add 70 lines, translating to an estimated 14.4B new capacity over 2015/17 or an addition of 4.8B pa (given prospects for delays and gradual commissioning, we have assumed 50% of this to come on-stream in our estimates for 2015/16).

Total 39.1 14.9

Source: Companies, J.P. Morgan

Table 2: Nitrile glove supply estimates from top four local producers (Malaysia)

2013 2014E 2015E* 2016E*Company b pcs of gloves b pcs of gloves b pcs of gloves b pcs of gloves

Supermax 6.9 1.0 1.0Hartalega 0.8 4.4 4.8Top Glove 2.2 1.5 1.5Kossan Rubber 5.0 2.4 2.4Total additional industry installed capacity by YE 14.9 9.3 9.7Total industry installed capacity by YE 39.1 54.0 63.3 72.9

Growth in capacity 14.9 9.3 9.7% growth in new installed capacity 38% 17% 15%

Utilization 90% 76% 83% 83%Supply (Exports)** 35.2 41.2 52.3 60.8Growth in supply (volumes) 6.0 11.2 8.5% growth in supply 17% 27% 16%CAGR in supply over 2014-2016 21.5%

* *Assuming the top four local producers account for 80% of Malaysia’s exports.

Source: Companies, *J.P. Morgan estimates.

7



Hartalega: World’s leading nitrile gloves producer

According to Hartalega, total global glove demand currently stands at 160b pcs, of which nitrile gloves accounts for 35-40% or at about 60b pcs pa (latex gloves accounts for the remaining 60-65% of demand). Malaysian producers control about 63-64% of the global glove demand. The mix of Malaysia’s rubber gloves export sales volume has evolved with the drop in natural rubber gloves share of total exports from 83% in 2008 to 49% for 9M13. This has been due to the switch from latex tonitrile gloves. This substitution took place as nitrile gloves is seen as a solution to protein allergies found in natural/latex rubber gloves.

Hartalega Holdings Bhd has an annual production capacity of 13.6B pcs of gloves across its 6 production plants located at Batang Berjuntai, Selangor in Malaysia, with a current product mix comprising 90% nitrile and 10% latex gloves. Based on utilization levels of 80-90%, it hence produces about 10-11b pcs of nitrile gloves pa, or translating to a global market share of 17-18%, the largest in the world according to the group.

As a pioneer in the nitrile glove manufacturing segment, Hartalega has been enjoying supernormal EBITDA margin averaging at 32% historically since 2010 (Figure 12), well above historical EBITDA margin of 15-18% over the same period for its peers which have only ventured into this segment in recent years. This is helped by its superior product innovation and quality, having spearheaded the automation technology in its production processes since its operation in 1994, according to the company. Also, Hartalega’s total 55 production lines are 100% interchangeable between nitrile and latex gloves, providing it greater flexibility to cater to changes in demand trends quickly. Hartalega’s production lines are operating at an overallaverage speed of 25,000 pcs/line/hour though its latest Plant 6 is more efficient, with a production line speed of 45,000 pcs/hour/line, currently the fastest in the industry.

Hartalega’s production capacity has grown by a 9-year CAGR of 30.1% from FY05 to 9MFY14 (Mar-31 year-end) and the group targets another 17.3% CAGR in 8 years. This will include expansion in capacity from its M$2.2B mega Next Generation Glove Manufacturing Complex (NGC) which will house 8 factories with total additional capacity of 29b pcs of gloves or a 205% rise to 42.4b pieces of gloves upon completion.

Figure 7: Hartalega’s annual production capacity

Source: Company

1 2 3 35 6 8 10 11

14 15

2225

3033

36

42 42

0

510

15

2025

3035

40

45

B pcs

Hartalega's glove products are

predominantly sold to the

healthcare (74%) and laboratory (17%) sectors.

8



Robust earnings growth track record

Hartalega registered 8-year CAGR revenue and net profit growth of 32% and 44% respectively from FY05 to FY13. This was driven largely by strong sales volumes i.e. 5-year CAGR growth of 44.4% over the period. The rubber glove sector flourished in 2009-10 during the H1N1 epidemic, when earnings grew by 26-69% Y/Y for the Malaysian listed glove producers. Malaysia’s rubber glove export volumes increased by 30%/13% Y/Y in 2009/10.

However, the sector took a hit in 2011 when demand weakened due to the de-stocking period among consumers/hospitals after a period of over-stocking during the HINI epidemic in the prior years amid a peak in latex prices in February 2011 of RM10.90/kg. Nevertheless, Hartalega's earnings remained resilient in 2011, with +6.3% Y/Y net profit growth vs the 20-35% Y/Y earnings contraction among the other three domestic listed glove producers, helped by its favorable product mix (largely nitrile) and customer base.

Figure 8: Hartalega’s historical earnings

Source: Company

Figure 9: Hartalega's nitrile gloves sales volume

Source: Company

13 19 37 40 85146 190 202 234

110 160240 282

443572

735

9211,032

0

200

400

600

800

1,000

1,200

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

M$ MM

PAT Revenue

0

1

2

3

4

5

6

7

89

10

FY08 FY09 FY10 FY11 FY12 FY13

B' pcs

5Y CAGR: 44.4%

9



Figure 10: NBR raw material price peaked in Aug 2011

Source: Company

Hartalega’s customer base comprises largely developed countries in the higher-end segment of the nitrile market with more stringent product quality entry requirements into their markets. According to the group, its high manufacturing consistency with low reject rates also ensures ability to deliver products of optimum quality resulting in high customer retention rate. As of 3QFY14, the US and Europe make up about 76% of Hartalega's total exported sales volume. Hartalega’s nitrile glove sales growth has grown in tandem with US nitrile glove imports, with the group commanding about 18% market share in the US. Recently, Hartalega’s sales volumes of latex gloves to Brazil has also grown from 2% to 6% of its total sales due to the liberalization in healthcare sector here with the government increasing the healthcare budget and opening up entry of foreign medical staff into Brazil.

Figure 11: 3QFY14 sales breakdown by geography

Source: Company

Historically, the group also enjoyed significantly higher EBITDA margin averaging at 32% since 2010 compared to average EBITDA margin of 15-18% over the same period for its local peers. This reflects its plant efficiency and favorable product mix (i.e. higher exposure to nitrile) compared to its peers over the period, according to the company.

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

US$/tonne

Peak in Aug 11: US$2,085/tonne

North America, 48%

Latin America, 7%

Europe/Scandanavia, 28%

Asia, 14%

Oceania, 4%

10



Figure 12: Hartalega’s EBITDA margin remains well above its peers

Source: Company

Mega NGC plant to drive growth

Figure 13: Hartalega’s NGC expansion plan

Source: Company

Hartalega’s Next Generation Glove Manufacturing Complex (NGC) will drive future capacity growth with an estimated total investment value of M$2.2B. This facility is structured to house a total of six manufacturing plants on a112-acre site in Sepang, Selangor.

This mega project is expected to triple Hartalega’s existing production capacity of 13.6Bpcs of gloves to a total of 42.4B pcs by FY22. According to Hartalega, its efficiency and productivity will be further enhanced with the contribution from NGC as the facility will leverage on the latest technology and greater usage of renewable energy i.e. biomass. The total 72 new production lines at NGC, is projected to generate an average output of 45, 000 pcs/hour/line vs. the average industry line speed of 20,000 pcs/hour/line, according to the group (its peer, Top Glove’s line production speed for nitrile gloves is 17,000 pcs/hour/line).

The construction of NGC plant is in progress with the first production line to commence operations in 4Q14. According to management, it expects to see meaningful positive contribution to Hartalega's earnings from the NGC from FY16 onwards.

Mean: 32%

15%

20%

25%

30%

35%

40%

45%

50%

55%

11 14 15

2225

3033

3642 42

0

10

20

30

40

50

60

70

80

FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22

B' pcs

Bestari Plant (Plant 1-6) NGC

11



Figure 14: NGC plant construction progress

Source: Company


Source: Company

12




Source: Company


Source: Company

13



Financials & dividend track record

According to the group, its strong positive FCFs and net cash position as at end-FY13 (as shown in the charts below) will help in the funding of its M$2.2B NGC or expansion to be completed over 8 years of by FY22.

Figure 18: FCF vs. net gearing

Source: Company

Figure 19: Capex trend

Note: A surge in CAPEX in FY13 was due to M$97MM land purchase for the NGC plant; Source: Company

Hartalega has been consistently paying out dividends since listing in 2008 with improving payout ratio from 10.4% in FY08 to 45.5% in FY13. In Aug 2011, Hartalega established a dividend policy of 45% payout ratio starting FY12. This works out to dividend yield of 2.5%/3.0% for FY15/FY16E (Mar-31 year-end) based on consensus estimates.

(30)

(20)

(10)

0

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30

30

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150


%M$MM

FCF (LHS) Net gearing (RHS)

0

20

40

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80

100

120

140

160 180

200


M$MM

14



Figure 20: Hartalega’s historical dividend growth

Source: Company

Valuations & share price performance

Based on consensus estimates, Hartalega is now trading at a FYE Mar-15 PE of 17.9x versus its historical mean of 10.5x (Sector’s 5YR historical mean of 12.4x).

Figure 21: Hartalega’s share price performance relative to FBMKLCI

Source: Bloomberg

Figure 22: Hartalega’s PE band (based on historical numbers and consensus forecast)

Source: Bloomberg (Historicals and based on consensus estimates)

10%

23%

34%

40%45% 46%

0%

10%

20%

30%

40%

50%

0

2

4

6

8

10

12

14

16


M$ sen

DPS (LHS) Payout ratio (RHS)

90100110120130140150160170

FBMKLCI Hartalega

Mean = 10.5x

-2SD = 1.0x

-1SD = 5.8x

+1SD = 15.3x

+2SD = 20.1x

0

5

10

15

20

25

Hartalega’s share price surged

by 52% Y/Y in 2013

15



Figure 23: Top Glove’s PE band

Source: Bloomberg, J.P. Morgan estimates

Figure 24: Glove sector forward PE band (based on historical numbers and consensus forecast)

Note: Sector peers include Top Glove, Hartalega, Kossan and Supermax. Non-rated companies' valuation is based on consensus

forecasts. Source: Bloomberg, J.P. Morgan estimates

Table 3: Local glove makers: Peer comparison valuation

As at: 28 Mar-14 Ticker Mkt cap Price Rating Target 2yr EPS CAGR

P/E (x) ROE (%) Div Yld P/B (x)

(US$mn) (LC) (LC) 2013-15 CY14E CY15E FY14E FY15E FY14E FY15E FY14E FY15E

Top Glove Corp TOPG MK 937 4.94 N 5.40 8.6% 15.3 13.4 13.9 14.7 3.1% 3.6% 2.1 2.0Hartalega Holdings HART MK 1,538 6.74 NC - 14.9% 18.3 16.0 27.0 27.3 2.5% 3.0% 4.7 4.0Kossan Rubber KRI MK 827 4.23 NC - 22.3% 15.2 12.9 22.3 23.1 2.6% 3.0% 3.3 2.9Supermax Corp SUCB MK 538 2.59 NC - 15.4% 11.5 10.3 15.3 15.4 2.5% 2.8% 1.7 1.5Weighted average 3,839 15.0% 15.9 13.9 21.1 21.7 2.7% 3.1% 3.3 2.9

Source: Bloomberg, Bloomberg consensus for companies Not Covered (NC); J.P. Morgan estimates

Mean = 15.1x

-2SD = 2.5x

-1SD = 8.8x

+1SD = 21.5x

+2SD = 27.8x

0

5

10

15

20

25

30

35

40

Mean = 12.4x

-2SD = 4.0x

-1SD = 8.2x

+1SD = 16.6x

+2SD = 20.7x

0

5

10

15

20

25

16



Hartalega Holdings Bhd: Summary of historical financials

Profit and loss statement

M$ in millions, year-end March

FY09 FY10 FY11 FY12 FY13Revenue 443 572 735 931 1,032% change Y/Y 72.1 29.0 28.5 26.7 10.8Gross margin (%) 24.9 36.4 32.1 27.7 29.1EBITDA 113 207 274 299 339% change Y/Y 31.5 82.4 32.6 8.9 13.4EBITDA margin (%) 25.6 36.2 37.3 32.1 32.8EBIT 98 181 245 260 307% change Y/Y 27.6 85.0 34.3 6.1 18.1EBIT margin (%) 22.1 31.7 33.4 28.0 29.7Earnings before tax 95 178 243 259 306% change Y/Y 25.6 86.2 36.6 6.5 18.3Tax (11) (35) (35) (53) (57)as % of PBT 11.5 19.5 14.4 20.5 18.6Net income (reported) 85 143 190 202 235% change Y/Y 21.5 69.3 32.6 6.2 16.4Shares O/S (MM) 727 727 727 727 727Diluted EPS (M$) 11.6 19.7 26.1 27.7 32.1

Source: Company reports.

Balance sheet


FY09 FY10 FY11 FY12 FY13Cash and cash equivalents 38 75 117 163 182Accounts receivable 66 78 94 106 125Inventories 25 28 65 98 87Others 0 3 6 5 0Current assets 128 184 282 372 394LT investments 0 0 0 0 0Net fixed assets 246 293 349 398 543Total assets 375 476 631 752 936LiabilitiesST loans 15 14 15 13 8Payables 36 24 34 54 93Others 2 29 27 13 15Total current liabilities 53 66 61 52 55Long-term debt 43 28 24 12 5Other liabilities 25 28 37 40 50Total liabilities 120 122 137 132 170Shareholders' equity 254 354 494 620 766BVPS (M$) 0.35 0.49 0.68 0.85 1.05


Cash flow statement


FY09 FY10 FY11 FY12 FY13Net income 85 143 190 202 235Depreciation & Amort. 15.5 25.8 39.1 38.3 31.8Change in working capital (22.7) (28.2) (43) (25) 31Taxes (11) (35) (35) (53) (57)Net interest (2.4) (3.4) (2.5) (1.7) (0.9)Cash flow from operations 85 163 183 201 317Capex (61) (67) (81) (35) (194)Others 0 0 0 (25) 0Cash flow from investing (61) (67) (81) (60) (194)

Equity raised/(repaid) 0.0 0.0 0 0 7Debt raised/(repaid) 26 (16) (4) (14) (13)Other (12) (0) 1 7 0Dividends (8) (44) (57) (87) (99)Cash flow from financing 6 (60) (59) (95) (104)Beginning cash 8 38 75 117 163Change in cash Flow 57 20 42 46 19Ending cash 65 58 117 163 183DPS (M$ sen) 4.5 7.5 7.9 9.4 10.5


Ratio analysis

%, year-end March

FY09 FY10 FY11 FY12 FY13EBITDA margin 25.6 36.2 37.3 32.1 32.8Operating margin 22.1 31.7 33.4 28.0 29.7Net profit margin 19.1 25.0 25.8 21.7 22.7Opex/sales 77.9 68.3 66.6 72.0 70.3

Sales growth 72.1 29.0 28.5 26.7 10.8

Net profit growth 21.5 69.3 32.6 6.2 16.4Sales per share growth (%) 72.1 29.0 28.5 26.7 10.2EPS growth 21.5 69.3 32.6 6.2 15.7Interest coverage (x) 46.7 61.4 111.1 171.9 375Gross debt to equity (%) 22.7 11.7 7.9 4.0 1.6Net debt to equity (%) 7.7 Net cash Net cash Net cash Net cashSales/assets 118 120 116 124 110

ROIC (%) 32.6 41.4 41.4 34.5 33.1

Assets/equity (x) 1.5 1.3 1.3 1.2 1.2ROA 26.2 33.6 34.3 29.2 27.8ROE 39.0 47.0 44.7 36.2 33.9Dividend payout ratio 38.7 38.1 30.2 33.8 32.7Source: Company reports.

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Coverage Universe: Yeoh, Simone Xenia: CapitaMalls Malaysia Trust (CAMA.KL), IGB Corporation (IGBS.KL), IGB REIT (IGRE.KL), IHH Healthcare Bhd (IHHH.KL), IJM Land (IJML.KL), KLCC Property Holdings (KLCC.KL), KPJ Healthcare Berhad (KPJH.KL), MISC Berhad (MISC.KL), Mah Sing Group Berhad (MAHS.KL), Media Prima Berhad (MPRM.KL), SP Setia (SETI.KL), Sunway Bhd (SWAY.KL), Sunway REIT (SUNW.KL), Top Glove Corporation (TPGC.KL), UEM Sunrise Bhd (UMSB.KL)

J.P. Morgan Equity Research Ratings Distribution, as of January 1, 2014

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 43% 45% 12%IB clients* 57% 49% 36%

JPMS Equity Research Coverage 43% 50% 7%IB clients* 75% 66% 59%

*Percentage of investment banking clients in each rating category.For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.

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