Corporate Information

Despite the ongoing instability in the Eurozone and a weak US economy, global demand for rubber gloves remained resilient in 2012, growing by approximately 10% per annum. The trend clearly continues to shift towards synthetic rubber, with nitrile gloves now comprising more than 82% of total glove imports to the United States.

Malaysia holds the prestige of retaining its position as the world’s largest supplier of rubber gloves, commanding 63% of global market share. Total exports of both natural and synthetic Malaysian rubber gloves rose by 14.9%, chiefly led by the nitrile glove segment which saw total exports increasing by 26% during the year. This was a sharp contrast to latex glove exports, which saw a marginal increase of only 7%.

The US and Europe were the largest importers of Malaysian nitrile gloves in 2012, with 9.6 billion and 5.3 billion pairs of gloves respectively, a significant increase from the previous year. Meanwhile, greenfield markets such as China and India saw healthy demand during the year, signifying ample long-term prospects in emerging markets for the glove industry.

Easing raw material costs during the year contributed to a more conducive economic climate for the sector, spurring higher demand. This also led to a reduction in average selling prices for both latex and nitrile gloves, which further buoyed demand in 2012.

In the first quarter of 2013, an outbreak of H7N9 avian influenza in China was initially speculated to be a catalyst for the glove manufacturing industry by market observers, on par with the H1N1 pandemic in 2009. Indeed there was a spike in share prices for glove manufacturers which was attributed to this, however, cases of H7N9 have not reached the same scale as H1N1. Reports by the World Health Organisation also suggest that the extensive spread of H7N9 is unlikely.

It is our view that the glove manufacturing sector holds much potential in both the short term and long term. Growth from existing as well as greenfield markets accompanied by rising income and increasing healthcare awareness has set the pace for a bright future for the industry.

Our commitment to our shareholders is second to none as we are cognisant of the need to deliver value. One of the most tangible means to demonstrate this is via our dividends.

To this end, we have successfully paid out a dividend of 10.5 sen which is nett of tax, compared with 9 sen* during the corresponding period in the previous financial year. The Board is confident of meeting our target of a minimum payout of 45% ofthe Group’s net annual profit and we expect to announce a final dividend at the Seventh Annual General Meeting.

*Dividend figures restated following a one-for-one bonus issue on 28 May 2012.

Research and Development

Our technological innovation and manufacturing capabilities result in an end product of superior quality and at lower cost, which has spurred our competitors to do their utmost to try to emulate us. A visible demonstration of our research and development (R&D) prowess was our first mover advantage as the creator of the lightweight nitrile glove in 2005. Since then, we have gone on to blaze a trail in the area of R&D, keeping us well ahead of the curve and allowing us to build on our proprietary technologies.

This is evidenced by our continuous improvements to our line speed technology, which has already placed us as a leader in the sector in terms of creating and owning the fastest high capacity production lines in the industry. We surpassed our own R&D capabilities during the financial year by commissioning the first production line of Plant 6 with a line speed capacity of 45,000 pieces of gloves per hour. I am glad to inform that this is the fastest in the world, exceeding our previous record of 40,000 pieces of gloves per hour. What is important is that we have clearly beaten the industry average by a long shot.

For the period under review, we also improved productivity across all our plants by retrofitting and progressively commissioning our production lines for increased speed.

Additionally, the Group invested substantially to protect our repository of intellectual property by registering new patents for our products, in particular new coatings for rubber gloves. Taking a long-term view to consolidate our research endeavours and recognise our investments in research, a dedicated subsidiary has been established known as Hartalega Research Sdn Bhd.

Our research and development efforts remain the cornerstone of our success, and we will continue to leverage on the strength of our innovation capabilities to move ahead of our competition.

Environmental Performance

We are fully cognisant of our responsibility to safeguard our environment for future generations and to this end, we have gone to great lengths to actively ensure sustainability in our operations and manufacturing processes.

Our environmental controls are in line with our corporate vision for sustainable growth and development. In order to preserve our water supply and air quality, we maintain high standards of environmental compliance, adhering to the strict regulations stipulated by Jabatan Alam Sekitar (JAS). In fact, we have taken measures which are significantly more stringent, surpassing enforced standards and guidelines.

One such measure we have taken the initiative to implement is the more rigorous Standard A as our internal target for effluent water discharge, which is a voluntary upgrade as we are located in a Standard B area. In addition, the emission levels of the scrubber towers in each of our plants are 10 times lower than the regulatory requirements set for emission levels.

Furthermore, our state-of-the-art waste water and eco-friendly biomass plants contribute extensively to our conservation efforts. They are constantly monitored by an advanced computerised system, which enables us to do our utmost to protect the environment.

In the coming financial year and beyond, we will continue to undertake environmentally conscious measures which ensure that safe and sustainable practices are utilised.

Marketing

The Group’s marketing strategy is driven by our corporate vision to be the glove manufacturer of choice, delivering innovative gloves of the highest quality. Our sterling performance during this period brought us a step closer to realising this goal.

This was made possible on the back of our strong sales volume growth in the financial year, which jumped by 20% to 9.9 billion pieces of gloves from 8.2 billion in the previous fiscal year. Today our installed capacity exceeds 13 billion pieces of gloves per annum, giving us the leverage to supply approximately 23%ofthe global demand for nitrile gloves which comprises 56 billion pieces per annum.

The United States was the Group’s largest market during the financial year, comprising 59% of our total nitrile glove exports. Sales to the US market grew to a record high of 5.4 billion pieces, a 28% hike compared to 4.2 billion pieces in the last financial year.

We also saw a marked increase in sales to Europe, which represents 28%ofthe Group’stotal nitrile glove exports. Sales in the European region rose by 16% to 2.8 billion pieces in the period under review, up from 2.4 billion pieces in the previous year.

The Group continues to expand its reach, unlocking untapped potential for growth. In this vein, we successfully brought in new customers from the Middle East and African region. We also made further inroads into India and given our bullish prospects for this huge market, we have incorporated our subsidiary Pharmatex Healthcare Pte Ltd in the country.

Human Capital

The Group’s healthy track record and consistent growth over the years are testament to the excellent calibre of our human capital. To this end, we have been ever conscious of the need to continually develop and strengthen our talent pool.

With the aim of improving performance and productivity on a Group-wide scale, we reinforced the Group’s core value system by creating an acronym to better engage our employees. Our core values are now embodied in the acronym SHIELD, which stands for Synergy, Honesty, Innovativeness, Excellence in Quality, Learning, and Dedication. These values represent the qualities that our employees must strive for in order to progress, while capturing Hartalega’s vision to deliver the best possible protection via our high quality products. In the period under review, we successfully executed initiatives in terms of employee engagement to further inculcate these values in our employees.

As a reflection of our drive towards building a workforce capable of propelling the Group forward, we have undertaken steps to plan for our future expansion by increasing our workforce. This will enable us to cater for the Group’s long-term talent needs, cultivating a skilled workforce not only for Plant 6 which is due to be completed soon, but also for our expansion plans in the years to come, which will require that our employees possess the skills and capabilities to manage advanced technologies and operations.

With our Human Resources Transformation Programme as well as our comprehensive training and talent development initiatives, we provide our employees with opportunities for career advancement along with personal growth. Our top performers were also able to travel to international trade exhibitions in Germany, China, India, South Korea and the Middle East. With these experiences, they were able to deepen their understanding of the industry and utilise these insights to create greater value for the Group.

In addition to this, we have revised our remuneration structures based on global best practices to ensure our employees are justly rewarded. Furthermore, in line with the minimum wage policy effective January 2013, we have adjusted our salary structure accordingly. Though some manufacturers have been hit hard by this policy, the impact on the Group has been mitigated due to our high levels of automation and superior operational efficiency.

Your Group is not one to rest on its laurels. Our continuous improvements to top line and bottom line growth illustrates our longterm strategy to build a formidable company in the highly competitive glove manufacturing industry.

The next financial year will be all the more memorable as we will commemorate our 25th anniversary. We have much to celebrate, not only our accomplishments but equally important, the fact that we have outpaced the sector in productivity, innovation and financial expectations. This would not have been achievable if not for our strategies and foresight to remain the world’s largest nitrile glove manufacturer.

Indeed, the ever-increasing global demand for nitrile gloves coupled with our long-term expansion strategy certainly bodes well for our outlook. The primary drivers of this will be our ongoing organic growth plans. For the short term, this will be led by the successful completion of Plant 6 which will see a 30% hike in our total installed production capacity. Plant 6 is set to be fully on-stream in July 2013 with a total of 10 high capacity production lines capable of producing 45,000 pieces of gloves per hour, a new benchmark for the industry.

At the same time, as I had highlighted in last year’s annual report, we have embarked on a new stage of progress with our Next Generation Integrated Glove Manufacturing Complex (NGC). With a capital expenditure in the region of RM1.5 billion to RM1.9 billion, this will be our most significant investment to date. It will ensure our continued long-term growth and when completed, it will quadruple our installed capacity to over 42 billion pieces of gloves per annum.

Given this considerable undertaking, we are cognisant that as we build the facilities for the NGC, we must simultaneously develop the capabilities to successfully execute this substantial phase of growth. To achieve this, we have a holistic plan in place which also reflects the theme of this year’s annual report, ‘Timeless Fundamentals’. This refers to the underlying building blocks of the Group, which have been the driving force of our progress for over two decades.

One of our most crucial fundamentals is our human resource. The success of the Group is underpinned by the strength of our employees; hence, we are firmly committed to employee engagement in order to unlock potential and maximize performance. We are also taking steps to improve our talent management, with the aim of widening our talent pool and establishing a succession planning programme, in line with our expansion strategy.

Another key area of focus is to continuously improve our productivity. This applies to our ongoing capacity expansion efforts as well as utilising industry best practices in our manufacturing operations. By implementing measures such as lean manufacturing and supply chain management, we are able to boost productivity and at the same time instill a culture of best practices within our operations, ensuring lasting and sustainable growth for the Group.

At the core of the Group’s progress is our passion for innovation in our product and production technologies. As part of our ‘Timeless Fundamentals’ philosophy, we aim to expand this innovative mindset to all levels of the Group, to develop a repository of ideas and tap into new technologies.

Furthermore, during the year under review we embarked on our global branding exercise. By adopting an integrated approach to our branding and marketing strategy for our international brands and our offices across the globe, we aim to increase the presence of our branded gloves in emerging markets such as China and India.

With our dedicated focus on these four fundamentals, namely human resource, productivity, innovation, and international branding efforts, we will strive to broaden our capabilities with a view to ensuring the longterm growth of the Group.

As our expansion plans are firmly underway, we will seek further prospects to advance in all areas, especially our R&D. As competition heightens, we will steadfastly hold on to our proprietary technology and stand our ground. These are our in-house technology and patents, and during the year under review we went to great lengths to protect our intellectual property. This is not only for the benefit of the Group but also safeguards our shareholders’ interests as it protects future earnings and allows us to maintain our competitive advantage.

As we look towards the new financial year and beyond, we are confident that the switching trend to nitrile will gain further traction, which augurs well for your Group. In terms of raw material costs for nitrile, we predict that they will remain stable, allowing us to better control costs. Meanwhile, due to our high level of automation and continuous R&D efforts, we do not expect manpower costs to escalate as a result of the implementation of the minimum wage policy compared with other glove manufacturers.

As we have made significant progress operationally, on the corporate front we are glad to note that investors have been receptive to our efforts and successes. Our market capitalisation has grown and in addition to being part of the FTSE Bursa Malaysia Top 70 Index, during the fiscal year we were accorded the honour of beingadmittedtothe FTSEBursaMalaysia Hijrah Shariah Index as well. This is in recognition of Hartalega’s Shariah-compliant principal activities and investment products, low gearing, strong market capitalisation and positive growth prospects.

Without a doubt, the period under review was an excellent one for Hartalega as we enhanced our capabilities and amplified our long-term prospects by establishing new avenues for growth. With these concrete plans in place, we are indeed assured that we will maintain our upward trajectory as we forge ahead in the industry

As the Group continues to progress, I would like to express my sincere appreciation to the Board as well as the management team and our employees for their unswerving dedication and steadfast commitment.

My gratitude as well to all our shareholders, financiers, business partners, consultants and relevant approving authorities for their support, which has enabled the Group to advance and become a formidable entity. We look forward to strengthening these bonds as we move forward in the coming years ahead.

Kuan Kam Hon
Executive Chairman