The Top 3 Risks Of Hartalega Holdings Bhd
This week, we went on a field trip organized by the Yale-NUS Investment Mastermind Club and The Fifth Person, to visit Hartalega Holdings Berhad in Sepang, Malaysia. Hartalega Holdings Bhd is currently the world largest producer and exporter of Nitrile gloves, owning about 18% of the global nitrile glove production. We went to visit its newest but partially finished factory, which cost about RM2.0 billion to build in Sepang, Malaysia, to better understand both the company and the gloves industry.
Here are the top 3 risks we learn about the company.
- It is still a commodity product. Although Hartalega Holdings is one of the largest glove maker in the world, it does not have control over the pricing of the gloves. Currently latex gloves are similarly priced to nitrile gloves, thus the demand of nitrile gloves are not very affected. However, one can only imagine what happen if the price of latex gloves fell to just half of nitrile gloves, it is hard to imagine customers not tempted to switch over to the cheaper options. One might argue that it is impossible for latex gloves to fall so drastically. I would say to that, “look at the oil price”
- Hartalega is spending about RM2.0 billion to build its new factory. However, the company currently only has a total asset base of about RM1.4 billion and only RM85.7 million in cash. Although the company is generating about RM200 to RM300 million of operating cash flow a year, it might still not be enough to fund the expansion. Most likely, the company should be using some debt financing to complete the expansion. Thus, investors need to watch out how the company managed the debt.
- It is not only Hartalega Holdings expanding its capacity. Most of its competitors are actively increasing their capacity as well. There is a real risk of oversupply in the future when all the production comes online. No one knows how that will affect the market, but most likely gross margins of the company should be heading downwards in the future.
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Some of these risks are not immediate and might only have a small possibility of occurring. Nonetheless, as investors, we need to know of all the risks that might impact the company, however small the probability might be.
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in Stanley Lim’s personal capacity and do not in any way represent those of his employer and other related entities. Stanley Lim does not own any companies mentioned.
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Yes, interesting to see this industry evolve, with an increasing number of applications for protective gloves.
One of the leading players in the industry is Ansell (ASX: ANN). They recently relocated a medical glove production facility from Shah Alam, Malaysia to an existing facility in Melaka Malaysia to improve efficiencies. They also have manufacturing facilities in many other countries.
Ansell have reduced their number of brands by 30, in an effort to focus on strengthening their core brands. This is important because this is where companies are attempting to gain a competitive edge over rivals. It seems customer needs can vary greatly and be very specific, and a supplier’s ability to meet that need with a strong brand can garner customer loyalty.
I note that Ansell’s EBIT margins were up solidly in their recently released 1H2015 result. Another feature was the sales growth of hand protection gloves to China of 32%. This could imply favourable industry dynamics at the moment!
Will keep watching!
Paul
Thanks for the article Stanley, interesting to hear about Hartalega Holdings and their expansion plans, along with the actions of competitors. As a holder in Riverstone Holdings, it is useful to hear what rivals are planning!
Nitrile gloves may not necessarily be substituted with latex gloves. I believe that nitrile gloves, being synthetic rubber, offer anti-allergy advantages. Additionally, nitrile gloves offer the advantage of being of superior strength, and more resistant to oils and acids. This makes them ideal for use in industries such as automotive, footwear and moulded goods applications where there is exposure to sealants and adhesives.
Riverstone have pointed to an ‘increasingly competitive environment’ as well ‘growing global demand for nitrile gloves’. I think it is wise to keep an eye on the supply / demand characteristics of this industry and closely scrutinise profit margins. What I like about Riverstone is their measure approach to expansion, their net cash position, and excellent record on capital management. Nonetheless, it is forever important to watch developments in this dynamic industry.
Paul
Hi Paul,
I see you are well informed in this industry. Yes, Riverstone is another interesting company in this field.
Do keep us updated on that.
Cheers
Stan