Hartalega briefing by Maybank key highlights

• Sales volume trend continue to be volatile in FY24Q2 as Hartalega’s decision to increase ASP in FY24Q1 backfired with sales volume down in May – June 2023. As a result, Hartalega cut ASP again in-line with the declining cost of natural gas, so sales volume is reverting to the pre-hike level again. It is due to the ASP cut bringing back a slight rebound in sales volume that helped Hartalega achieved a slightly better utilization rate of 45% in FY24Q2 (FY24Q1: 40%) - based on 45 mln pieces of total production capacity
• Although competitor (Top Glove) mentioned a pick-up in sales volume in June 2023 and customers’ inventory being close to depletion pointing to an upcoming restocking, Hartalega begs to differ. Hartalega agrees excess inventories are depleting across key customers but certain geographies where governments still hold accumulated inventories purchased during the pandemic period are seeing these excess inventories coming out to the market. In effect, governments are selling to distributors their excess inventories at prices comparable to or lower than the average selling price (“ASP”) of the Chinese manufacturers. Hartalega also stressed that customers will no longer order 2 – 3 months worth of inventories on a rolling basis at least for the foreseeable future as most customers are now satisfied with just one month worth of inventories. As such, Hartalega foresees industry sales volume picking-up meaningfully only in CY24H2 when inventories bought during CY20 and CY21 will definitely expire
• Despite the above, Hartalega stated restocking demand will flow to the Chinese companies first given that pricing is now a key differentiator and the Chinese companies are the most price-competitive
• ASP gap between Chinese companies and Malaysian companies for lightweight products is currently at US$2 per 1,000 pieces, having narrowed from US$3 – US$5 per 1,000 pieces previously given the decline in raw material and natural gas costs for Malaysian companies. That said, a potential increase in natural gas cost from here onwards would mean this gap could potentially widen again (Chinese and Thailand manufacturers use coal-based energy). In the case that natural gas cost escalates, Hartalega will try its best to pass-on the additional cost to customers or experiences profitability margin compression in FY23Q4 in the worst case of being unable to pass-on the higher natural gas cost
• The share buyback conducted recently is for the purpose of ESOS instead of having the conviction that outlook has improved and valuation is low. The founding family does not want to dilute other existing shareholders for the purpose of its ESOS exercise; hence the share buyback exercise
• Hartalega’s strategy now is to achieve EBITDA breakeven and the ability to achieve this, in management’s view, is already very commendable especially with the reduced ASP currently. Once the decommissioning of Bestari Jaya facility is fully completed early CY24, EBITDA level should improve further