KUALA LUMPUR: Hartalega Holdings Bhd, which has been enjoying supernormal profits since the onset of the pandemic last year, expects margins to start normalising by early 2022 as average selling prices (ASPs) for gloves continue to fall.
Despite the downtrend in ASPs, Hartalega chief business officer Kuan Mun Keng said prices are unlikely to return to pre-pandemic levels any time soon.
“ASPs have been falling since the peak in the first quarter of this financial year. They have been dropping around 30% every quarter, so our margins should start normalising by the first quarter of calendar year 2022,” he said during a virtual media briefing yesterday.Mun Keng emphasised that ASPs will not be lower than pre-pandemic levels as the cost structure has since changed.
“We’re experiencing additional costs from social compliance. Furthermore, the material cost that we’re paying today is also higher. So ASPs will be higher but margins will normalise.”
Hartalega Kuan Mun Keng
He said a reasonable price point would be above US$30 (RM124).
“Anything below that would result in very low margins, but I don’t think we’ll head in that direction.”
Hartalega chief executive officer Kuan Mun Leong said the floor price for gloves will be relative to cost.
“Right now, the cost of nitrile raw materials is still higher than pre-pandemic levels, so prices of gloves should not be anything below US$35 (RM145.16). Otherwise it doesn’t make sense in terms of margins.”
At the moment, Mun Leong said Hartalega is operating at 70% capacity, as only 60% of its workforce are allowed to be on the premises.
Hartalega Kuan Mun Leong
“The Covid-19 disruption in Malaysia is certainly not in favour of the Malaysian glove sector. During the Enhanced Movement Control Order, glove factories were not allowed to operate and there was some impact to the business.
“We lost 5% of our annual capacity. Because of the shutdown order, we saw some buyers moving to other producing countries such as China and Thailand.”
With more local companies diversifying into glove production, Mun Leong said Hartalega is more than ready to handle the competition.
On the global front, with China aggressively expanding their glove production capacity, Mun Leong said it is important for Malaysia to have a conducive operating environment, especially for the glove sector.
“Malaysia has been the leading producer of gloves, globally. We command over 60% of the global supply. It has always been a very competitive industry and we’re used to the competition.
“However, what is changing now is that China has set very ambitious expansion plans and they are becoming a force to be reckoned with.”
From 2019 to 2022, Mun Leong said China is expected to add 136 billion pieces of gloves to its production capacity.
“In 2021,we estimate the Chinese’s share of the global glove market to be around 16%, while Malaysia’s will be 67%.
“We expect China’s share to increase to 23% by next year.”
However, Mun Leong says this projection may or may not happen.
“This is not cast in stone as plans can change. Right now there is a downtrend on ASPs and because of that, buyers are reducing their orders and adjusting their inventories.
“In view of this, the Chinese manufacturers are also slowing down their expansion and so is Malaysia, due to the Covid-19 restrictions.”
Mun Leong said demand should start to pick up again towards the end of the year once prices start to stabilise.
“The opening of economies in the west is also resulting in new cases rising and demand for gloves should start to pick up.
In terms of operations, Mun Leong said Hartalega is already prepared to return to 100% capacity.
“We have vaccinated nearly 90% of our workforce and can actually resume back to 100%. However, the government requires us to do screening of all our workers every two weeks and this is difficult to manage.
“Testing 9,000 workers every two weeks is very disruptive to our operations and we’re engaging the government to see if there is a better way to do this.”
In terms of expansion plans, Mun Leong said Hartalega has earmarked RM1.5bil in capital expenditure (capex) for the development of four new factories.
“Right now, our focus is on our next-generation Integrated Glove Manufacturing Complex (NGC) 1.5, which is the construction of four new plants next to our existing seven factories in Sepang (NGC 1.0).
“We’ve earmarked RM1.5bil in total capex for these four factories to add 19 billion pieces of gloves, on top of the current 44 billion pieces. That’s about 43% additional capacity.”
Mun Leong said construction of the first two factories had already begun and will commence production next year.
“For the next two subsequent plants, we plan to start commissioning by the beginning of 2023.
“For financial year 2022, we have allocated capex of RM660mil. Over the next four years, we’ve earmarked RM1.3bil. This will be for the construction of new plants, automation, digitalisation and research and development.”
Mun Leong said Hartalega has also successfully developed an auto-packing machine.
“Together with our other automation initiatives, we will be able to reduce between 17% and 20% of our manual labour over the next three years, to ensure that we remain competitive.”
For its first quarter ended June 30, 2021, Hartalega posted a whopping 928.4% year-on-year jump in net profit to RM2.26bil from RM219.7mil, while revenue rose 324.2% year-on-year to RM3.9bil from RM920.1mil.
On a quarter-on-quarter basis, net profit rose 101.9% while revenue was 69.1% higher.
The company’s higher sales revenue was mainly due to the increase in glove ASPs as well as improved sales volume, while net profit also benefited from lower utilities expenses, partly offset by the increase in raw material prices.
Mun Leong said Hartalega has remained committed to a 60% dividend payout, while Mun Keng said the glovemaker will be paying out RM1.7bil in dividends to shareholders this year.