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Challenging ASP outlook

ASP downtrend to continue; D/G to SELL

We believe the strong 1QFY3/22 earnings performance will not be sustainable as ASP has been trending downward since May 21 on rising competition especially in the nitrile glove segment. We lower our FY22-
24 earnings forecasts by -1% to -62% after lowering our utilisation rate and ASP assumptions. We downgrade Hartalega to SELL with a new TP of MYR3.99 (from MYR6.74) on an unchanged 19.4x CY23 PER (-1SD of historical mean).

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ASP expected to only normalise in early 2022

Hartalega have been guiding for a weaker ASP outlook since 2Q21. ASP is expected to decline 30% between 1QFY22 and 2QFY22 and may only normalize in early 2022, returning to pre-COVID levels by mid-2022. Due to the stricter SOPs, it is currently operating at only 70% of its capacity, utilizing 60% of its workforce. Due to the unexpected 2-week shut down of operations in early July and stricter SOPs under the National Recovery Plan phase 1 that led to lower production, some of its buyers have shifted some of their orders to China in order to mitigate the supply risks, we understand.

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China, a threat that cannot be ignored

Aggressive capacity expansion by the Chinese glove makers would likely lead to oversupply by 2023. To seize market share, the Chinese glove makers are pricing their gloves competitively in Europe. The Chinese glove makers are expected to contribute to 23% of the world’s glove supply by 2022 (from 16% now) while Malaysia’s market share is expected to shrink to 60% in 2022, from 67%.

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Earnings adjustments

We lower our FY22/23/24 earnings forecasts by -1%/-60%/-33% to factor in: (i) lower utilisation rate of 70% (from 80%) for 4Q21, 80% (from 85%) for FY23 and 85% (from 93%) for FY24, and (ii) lower FY22/23/24 effective ASP assumptions of USD61.4/23.9/23.2 (from USD62.6/37.2/28.5) per k pcs. Post-earnings downgrade, our TP is lowered to MYR3.99 (from MYR6.74) on an unchanged 19.4x CY23 PER.