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Corporate Highlights
R e su lts N ot e

RHB Research Institute Sdn Bhd A member of the RHB Banking Group
Company No: 233327 -M


08 8 February February 2011 2011 Share Price Fair Value Recom : : : RM5.63 RM6.14 Market Perform (Maintained)
Bloomberg: HART MK EPS Growth# (%) 157.4 26.1 24.0 13.8 PER# (x) 14.3 11.4 9.2 8.1 C.EPS* (sen) 48.0 57.0 62.0 # Ex-EI

Demand For Nitrile Gloves Still Healthy

Table 1 : Investment Statistics (HARTA; Code: 5168) Net FYE Mar 2010 2011f 2012f 2013f Turnover (RMm) 571.9 720.3 975.6 1184.3 Profit (RMm) 142.9 180.2 223.4 254.2 EPS (sen) 39.3 49.6 61.5 69.9 Core EPS# (sen) 39.3 49.6 61.5 69.9

Net P/NTA (x)

3.9 3.0 2.2 1.7

Gearing (x)
0.0 0.0 0.0 0.0

ROE (%)
47.0 44.5 41.6 35.6

NDY (%)
3.3 3.6 3.6 3.6

Main Market Listing /Non- Trustee Stock / Syariah-Approved Stock By The SC

* Consensus Based On IBES Estimates RHBRI Vs. Above In Line Below Issued Capital (m shares) Market Cap (RMm) Daily Trading Vol (m shs) 52wk Price Range (RM) Major Shareholders: Hartalega Industries Budi Tenggara 363.5 2,046.4 0.4 4.07-5.73 (%) 50.4 9.0 Consensus

3Q11 core net profit up by 28.9% yoy. Hartalegas 3QFY03/11 core net profit came in slightly above our but within consensus expectations with 9M core net profit of RM135.0m (+39.6% yoy) accounting for 78% and 76% of our and consensus estimates respectively. The key variance was due to the slightly higher-than-expected utlisation rate, where 9M utilisation rate was 84% vs. our full-year FY11 utilisation rate assumption of 82%. Demand for nitrile gloves remained strong during the quarter as Hartalega continued to benefit from switching from natural rubber to nitrile gloves in view of escalating latex prices. 3Q core net profit up 5.5% qoq. Qoq, sales volume grew slightly thanks to the three new lines in Plant 5, which were commissioned during the quarter. As a result, sales revenue rose 2.1% qoq. Coupled with a lower effective tax rate of 20.9% vs. 22.8% in 2Q11, 3Q core net profit rose 5.5% qoq. Declares a second interim single-tier DPS of 5 sen. Hartalega declared a second interim single-tier DPS of 5 sen (3Q10: 5 sen), which brings total YTD net DPS of 9 sen (9MFY10: 10 sen). This translates to a net yield of 1.6%. Going ahead with Plant 6. The company is embarking on a new expansion plan (Plant 6) at a vacant piece of land adjacent to its current location of its five factories. This factory will house 12 lines (+3bn pieces), which will focus on producing nitrile gloves. Construction of this new plant will start in Jun 11, with two lines slated to start commercial production in Dec 11. Total capex needed for this expansion plan is around RM120m, to be spread out for two years and will be funded by internal generated funds. In total, the expansion plan in Plant 6 would increase Hartalegas annual production capacity from 8bn pieces currently to 9bn pieces by FY12 and 13bn pieces in FY13. Risks. 1) Higher-than-expected raw material prices, which may result in margin contraction; and 2) Appreciating RM against the US$. Forecasts. We have revised our FY11-13 revenue forecasts by 2.9-17.1% following the higher-than-expected utilisation rate achieved by Hartalega thus far and after factoring in the additional capacity from Plant 6. As such, our FY11-13 net profit forecasts have been raised by 4.1-18.4%. Investment case. We have raised our fair value for Hartalega to RM6.14 (from RM5.64), which is based on unchanged target CY11 PER of 10.5x. As the potential upside to our fair value is still in line with our expected market return, we maintain our Market Perform call on the company.
Please read important disclosures at the end of this report.

FYE Mar EPS chg (%) Var to Cons (%)

FY09 4.1 3.3

FY10 10.3 7.8

FY11 18.4 12.8

PE Band Chart

PER = 14x PER = 12x PER = 10x

Relative Performance To FBM KLCI

Hartalega FBM KLCI

David Chong, CFA (603) 92802179

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8 February 2011

Table 2: Earnings Review FYE Mar (RMm) Revenue 3Q10 148.6 2Q11 184.3 3Q11 188.1 QoQ (%) 2.1 YoY (%) 26.6 9MFY10 408.5 9MFY11 542.4 YoY (%) 32.8 Comments Yoy growth on the back of capacity expansion from the 9 new lines in Plant 5 while qoq growth was largely due to the increase in sales volume as three more new lines in Plant 5 were commissioned during the quarter. Stronger vis-a-vis revenue growth due to margin expansion. Total debt at end-3QFY11 was RM42.9m (2QFY11: RM47.0m and 2QFY10: RM46.7m). Relates to the gain from recognition of financial derivatives instruments. Largely filtered down from EBIT level.

EBIT Int exp Exceptionals Pre-tax profit Tax Net profit Core net profit Margins (%) EBIT

48.3 (0.8) 0.0 47.5 (10.2) 37.3 37.3

60.1 (0.6) 1.6 61.0 (13.9) 47.1 45.5

61.6 (0.6) 1.2 62.2 (13.0) 49.2 48.0

2.6 (0.5) (24.4) 1.9 (6.6) 4.5 5.5

27.7 (21.8) nm 31.0 27.1 32.1 28.9

123.9 (2.6) 0.0 121.4 (24.6) 96.7 96.7

176.1 (1.9) 2.8 177.0 (39.2) 137.8 135.0

42.1 (25.6) nm 45.8 59.5 42.5 39.6






Yoy margin expansion due to: 1) better sales mix and efficiency gains from the new Plant 5; and 2) operating leverage effects on the back of higher utilisation rate. Effective tax rate remained lower than the statutory rate due to availability of tax incentives.

Pre-tax Effective tax rate Net profit Core net profit

31.9 21.5 25.1 25.1

33.1 22.8 25.6 24.7

33.1 20.9 26.2 25.5

29.7 20.3 23.7 23.7

32.6 22.2 25.4 24.9

Source: Company data, RHBRI

Table 3: Hartalega Earnings Forecasts FYE Mar (RMm) Turnover Turnover growth (%) EBITDA EBITDA margin (%) Dep. & amort. EBIT EBIT margin (%) Net interest expense Associates Exceptionals Pretax Profit Tax Minorities Net Profit Core Net Profit FY10a 571.9 256.8 201.0 35.1 (19.8) 181.2 31.7 (3.4) 0.0 0.0 177.8 (34.7) (0.1) 142.9 142.9 FY11F 720.3 25.9 240.7 33.4 (12.7) 228.0 31.6 (2.5) 0.0 0.0 225.4 (45.1) (0.1) 180.2 180.2 FY12F 975.6 35.4 297.1 30.4 (15.1) 281.9 28.9 (2.5) 0.0 0.0 279.4 (55.9) (0.1) 223.4 223.4 FY13F 1,184.3 21.4 337.4 28.5 (17.5) 319.9 27.0 (2.0) 0.0 0.0 317.9 (63.6) (0.1) 254.2 254.2

Table 4: Forecast Assumptions FYE Mar Average capacity (bn pcs) Utilisation rate (%) Average selling price (per000 pcs) Source: RHBRI estimates FY11F FY12F FY13F

8.0 83.9

9.0 84.7

13.0 80.7

Source: Company data, RHBRI estimates

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This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad (previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time have an interest in the securities mentioned by this report. This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy will depend on an investors individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for any loss or damage arising out of the use of all or any part of this report. 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This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of the Connected Persons, including investment banking personnel. The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues. The recommendation framework for stocks and sectors are as follows : Stock Ratings Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months. Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher risks. Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months. Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months. Industry/Sector Ratings Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months. Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months. 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