Hartalega Holdings Berhad MSWG Q&A 2020

Growing Global

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Hartalega Holdings BerhadMSWG Q&A2020

Growing Global


MSWG Q&A – Strategic & Financial Matters

Existing customers are put on fixed volume

allocation based on pre-Covid purchase trend. For

additional allocation, customer are offered

Pandemic allocation or spot orders, mainly arising

from new capacity built. And this allocation are

fully booked for the next 12 months.

Utilisation rate is currently above 95%

Due to the strong order flow, we are expecting

further upward revisions of average selling price

in the coming quarters.

1. The Covid 19 pandemic has resulted in

incessant demand for gloves. The Company

has benefited from strong sales and demand

for gloves does not seem to be waning as the

pandemic continues to spread globally.

a) What is the sales lead time for the

Company’s products?

b) What is the current plant utilisation rate of

the Company?

c) What is the current order backlog of the

Company?

d) What is the expected trend of average

selling prices (ASPs) for the next 12

months?

Growing Global



We believe there is a structural step up in demand

for gloves due to new usage and heightened hand

hygiene compliance in developed market and

doubling of glove usage as a result of new policy

requiring caregivers to don up before attending to

patients in developing countries.

We are of the opinion that the discovery of a

vaccine will not affect the abovementioned factors.

2. Does the demand for gloves expected to

recede drastically if a vaccine is discovered

for the virus?

Growing Global



In line with our strong business ethics and core values, we have put in various initiatives

and comprehensive policies in place to safeguard our Hartanians as detailed in the

following slide:

3. The issue of unfair treatment of migrant labour employed in glove companies had been in the

spotlight after a major producer of gloves was sanctioned for these practices by the United States.

What measures has the company taken to ensure that its migrant labour is treated equitably?

Growing Global



Our social compliance policies are aligned with international benchmarks against child labour and young

workers, workplace discrimination, as well as forced labour

We have a RM95mil workers’ accommodation which meets ILO requirements

Social compliance audits in accordance with internationally recognized standards are carried out regularly

Gained membership with the Supplier Ethical Data Exchange (SEDEX)

Implemented Zero Recruitment Cost Policy since April 2019 and committed to remediate past recruitment fees

amounting to RM40m for existing workers.

All workers keep their own passports at their personal lockable cabinets in their respective dorms

We strictly regulate working hours and overtime to ensure overtime remain far below the monthly limit of 104

hours set by Malaysian laws.

Worker representatives are elected in each dorm via a formalized and transparent nomination and election

process, whereby all dorms and nationalities are represented

Grievance channel available handled by global audit firm, Deloitte, via the whistle blower program.

Social Responsibility

Growing Global



The planned CAPEX for FYE21 is estimated to

be RM997 million

This will be largely utilized for ongoing capacity

expansion at Plant 6 & 7 and acquisition of

land for NGC 1.5 & NGC 2.0

4. The Company allocated RM251 million in

capex for FYE 2020. What is the planned

capex for FYE 21 and what would it be

utilised for? (Page 28, AR 2020)

Growing Global



The AMG glove contribution as a percentage of

total sales expected to remain small until

relevant FDA and EN approvals are obtained.

As part of ongoing innovation process, the

company is currently leveraging on our R&D

expertise to look into various product innovation

and glove feature enhancements.

5. The Company had launched the world’s non-

leaching antimicrobial glove (AMG) in 2018.

(Page 28, AR 2020)

a) What has been the response to this

product since its inception in terms of

sales demand?

b) What are the other products that the

company has in its pipeline?

Growing Global



6. What is the status of the construction of

Plant 7 of the NGC which was slated to

commence production by late 2020?

(Page 30, AR 2020)

We intend to commission the first production line

towards Q4 of CY2020.

Plant 7 will consist of 6 examination gloves

production lines and 4 surgical glove lines.

The 6 examination gloves lines is expected to be

completed by Q1 of CY2021.

Growing Global



7. What was the cost of acquiring the land for the

Company’s next phase of expansion, NGC 2.0

in Banting? (Page 31, AR 2020)

a) What is the cost of development of NGC

2.0? How much is the total capex

expected to be?

b) When is the development expected to be

completed?

The land acquisition cost is RM 263 million

The expected total capex for NGC 2.0 amounts to

RM3.0 billion

The development is expected to be completed by

2027

Growing Global



8. Operating Expenses have increased

substantially to RM39.6 million in FYE 2020

from RM20.9 million in FYE 2019. (Page 83,

AR 2020). What were the reasons for the

sharp increase?

Hartalega entered into forward hedging contract to

mitigate the risk of foreign currency fluctuation.

The increase in other operating expenses by RM

18.7 million is due to unrealized marked-to-market

fair value losses arising from forward currency

hedging entered amounting to RM 37.2 million

(FY2019 : RM 11.1 million).

This unrealized losses is attributed to the

weakened Malaysia Ringgit after announcement of

MCO on 16th Mar’2020. On 31st Mar’20, the

Malaysia Ringgit and US Dollar pair closed at 4.30,

dropped by 3% vs. Feb’20 average.

We have recently revamped our hedging

framework to mitigate actual financial losses.

9. Derivatives financial liabilities increased

significantly to RM39 million in FYE 2020

compared to RM1.8 million in FYE 2019.

(Page 86, AR 2020). In view of the sharp rise

in these liabilities, has the Company taken

adequate measures to hedge its derivative

exposure?

Growing Global


MSWG Q&A – Corporate Governance Matters

The Company takes notes of MSWG’s comment and will review the Company’s readiness to

adopt integrated reporting based on globally recognized framework within 3 years.

The Company has indicated on Page 38 of its CG Report that it has not adopted integrated reporting

for its latest financial year.

Please note that Practice 11.2 encourages large companies to adopt integrated reporting which

enhance the quality of reporting. Is there a specific timeline for the adoption of integrated reporting.

Growing Global


Questions from

shareholders

via email AQ

Growing Global


Questions from shareholders

We have received 22 questions via email from various shareholders

before the AGM

Similar questions will be grouped together in some of our responses

Growing Global



New entrants may not be able to compete with

the major glove makers which has various

competitive advantage such as economies of

scale and technical know-hows.

It is very unlikely for ASPs to revert back to

levels seen before the pandemic

The management views that there will be a

structural step up in demand for gloves post

pandemic due to new usage and heightened

hand hygiene compliance in developed market

and doubling of glove usage as a result of new

policy requiring caregivers to don up before

attending to patients in developing countries.

The step up in demand is expected to outstrip

supply in the next 2-3 years

1. Due to the increased demand for gloves to

cope with the Covid-19 pandemic, many

glove manufacturers are increasing their

production capacity. There are also

announcements of new entrants coming into

the market. The increased capacity will

likely lead to a reduction of ASPs from

current levels. What is the likelihood that

the ASPs will revert back to the levels seen

before the pandemic? How long will it take

for this to happen?

Growing Global



From time to time, we have studied the

feasibility of starting a glove manufacturing

facility outside Malaysia, including US.

From our perspective, it is more cost

competitive to start a facility in Malaysia

compared to US as Malaysia has built a

conducive ecosystem for the glove industry

over the past 30 years

Factors such as competitive input costs &

availability of production technology in

Malaysia allows Malaysian glove makers to

compete effectively on a global scale

2. The US can break their dependence on the

Malaysian glove supply chain by starting

their own domestic glove manufacturing. I

understand that SHOWA will be building a

glove manufacturing facility in Alabama.

Your customers could shift to purchase from

US domestic manufacturers instead. Can

Hartalega use its profits this year for

expansion in the US? Would building a NGC

plant in the US to be closer to your customer

base make business sense?

Growing Global



The company currently has OBM presence in

China, India & Australia and committed to grow

them

Once relevant approvals are obtained for our

AMG, we could leverage on it to grow these

subsidiaries in the future

3. The OBM business model has shown to

have superior profit margins especially

during this period. Can the management

share the plans to grow the OBM segment,

especially with the AMG gloves coming in?

Growing Global



The company does not enter into long term

contracts with the existing customers

Existing customers are put on fixed volume

allocation based on precovid purchase trend

Pandemic allocation/spot orders, mainly arising

from new capacity built, are offered to customers

who like to purchase additional allocation

Prices for this allocation are determined on case-

to-case basis, typically 2x of base glove prices.

Base pricing has also been increasing. Both

contributes to an increasing ASP trend.

Pandemic allocation will make up approximately

7% of FY21 sales volume

4. What is the breakdown between the long

term contracted customers vs spot

pricing currently? How frequent are spot

price revised in the industry?

5. Indication of spot pricing?

Growing Global



Covid-19 has caused a critical shortage of

gloves globally due to demand surge from

various countries

In this critical shortage scenario, customers are

desperately buying any available glove capacity

in the market and are indifferent towards

products with better features such as AMG

While the company continues to sell AMG to

existing customers which have AMG as part of

their product line, our focus is to continue to

manufacture and sell the core product range

Currently, AMG are contributing approximately

2% of overall revenue

6. The company launched the world's first

non-leaching antimicrobial gloves (AMG) in

2018. Can the Board share with us the

response of the market to these gloves,

especially in light of the Covid-19 outbreak?

What is the contribution of these gloves to

the overall revenue?

Antimicrobial glove (AMG) related

Growing Global



Gloves are generally considered clinical waste

in the medical sector and are mostly

incinerated after usage

In a landfill, the degradation period of AMG is

expected to be similar to that of a normal nitrile

glove as the photosensitizer on the outer glove

surface is unlikely to be activated

The degradation period is unlikely to be a factor

for approval consideration

7. I wish to know, after the AMG has been used,

if this type of medical waste is sent for

landfilling, would the nature of AMG hinder the

microbes in landfill to bio-degrade the AMG ?

(i.e. will the degradation period of AMG longer

than a normal nitrile glove ?)

8. If the degradation period of AMG is longer than

a normal nitrile glove, would it be the reason

for AMG to take longer time in obtaining FDA

approval ?


Growing Global



Currently, due to the sharp increase in base

prices of gloves, the incremental profit margin

% from AMG is insignificant to the overall

profit margin.

9. When switching nitrile glove to AMG, what will

be the increment % to profit margin ?


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Hartalega Holdings Berhad MSWG Q&A 2020

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