News

Hartalega Ups the Stakes in the Nitrile Gloves Business

Posted Date : 07^th April, 2012

By JAGDEV SINGH SIDHU of [email protected]

KUAN Kam Hon, the managing director of Hartalega Holdings Bhd, sits patiently in a meeting room in his office and asks his son Kuan Mun Keng, who is a director in the same company, to tell the contractors busy refurnishing the upper levels of its office to cease their work for a moment while he speaks about something that is of great importance to the future of the company.

The contractors were getting ready the upper floors of the Hartalega office in Bandar Sri Damansara in preparation for more office space needed to cater for the massive investment the company is about to undertake. A move that is more about the future of Hartalega than the now.

Hartalega announced yesterday it is spending RM1.5bil to nearly triple the output of nitrile gloves it produces in eight years, an investment that it sees will not only reinforce its position as the largest nitrile glove manufacturer in the country but also fend off growing competition that has steadily eaten into the profit margin the glove maker has been enjoying over its peers.

Kuan Mun Keng (left), and Kam Hon at the company headquarters.

When rivals take a piece of Hartalega's business, the company is then forced to go elsewhere looking for new customers. Often when prices are thrown, that has to be met. But Kuan senior knows there is a limit to that.

"We have been doing that for some time and we reckon if we continue to do that, one day there is no more business for me to grab from the marketplace," he tells StarBizWeek, giving an insight into the reason for the huge investment announced yesterday that has been given EPP status by Pemandu for its impact on gross national income (GNI). Hartalega calculates that the new plant's contribution to GNI is RM921mil a year.

Hartalega calls its new nitrile glove factory the Next Generation Integrated Glove Manufacturing Complex (NGC).

The new investment, cumulatively is the largest Hartalega has done but Kuan says it's really not that much of a difference than what the company has been investing in recent years.

It just stretches the committed amount over a longer horizon but its end result will see Hartalega, which is scheduled to see production capacity hit 13.7 billion glove pieces after its Plant 6 is completed, churn out 38 billion pieces by its financial year 2022. The first gloves from the plant are expected out in 2013.

The first phase of NGC will be between 2013 and 2017, where 40 production lines with total annual capacity of 14 billion will be installed.

The second phase of NGC, from 2017 to 2021, will see the commissioning of 30 production lines with total annual capacity of 10.5 billion gloves.

Part of the reason for bumping up production by that much is also to meet orders the company simply cannot meet. Its production is running at full speed and demand is such that orders are being deferred.

"We have perpetually oversold and never had excess capacity waiting for customers," he says.

NGC will be built on 100 acres and will require an additional 4,600 workers. Hartalega needs the new land because the current factory in Batang Berjuntai has used up all its available land.

The number of lines NGC will house once fully completed will be 70, and those lines will produce 40,000 pieces of gloves per hour. It's the fastest production lines Hartalega has and that will boost productivity of Hartalega by 60% over the average of its current production run.

Hartalega's existing plants have 45 lines, but 15 of which are old and slow. Plant 6 will see an additional 10 lines being built that are capable of producing 40,000 piece of gloves per hour.

The old lines average about 8,000 pieces of gloves per hour and is holding down the average speed of the plant at Batang Berjuntai to 22,000 pieces per hour.

Hartalega intends to mothball those old lines, which are needed to meet demand, once NGC is up and running.

To fund the start-up of NGC, Hartalega will borrow RM100mil but is banking on the conversion of warrants issued in a recent bonus exercise to eventuallly pay off its initial borrowing.

"Currently, the net cash of Hartalega is over RM100mil. We are not borrowing a lot for this project. The plant will be mostly paid from the warrants issued and it's convertible in the first anniversary up to the third year," says Kuan.

"We will need the cash in 2013. We have the intention of borrowing RM100mil to take care of the front loading and when the warrants are converted, we will pay down all the loans. After the third year, we are home free."

The ongoing operations of the business and the cashflow generated by Hartalega will then take care of the investment needs of NGC thereafter.

The cost of starting the operations, Kuan says, will probably not affect the profitability of the company which he says appears to pause from time to time. He says that is because of the cost incurred to prepare for the next phase of growth before a new plant is ready to deliver on capacity.

"As production goes up, the cost per thousand pieces of gloves should come down and profitability should improve."

With production projected to rise to 38 billion pieces of gloves when NGC is fully completed, Hartalega feels its revenue should correspondingly rise.

It has forecast revenue to grow to RM3.5bil when NGC is 100% up and running, but the margins the company is enjoying will inevitably drop.

That will be due to competition. Its competitors are ramping up nitrile production as demand from the developed economies of Europe and the US shift towards consuming nitrile gloves instead of latex gloves. Furthermore, the automation process within its rivals is seen to be picking up with machines from China now capable of running at 26,000 pieces of gloves per hour, he claims.

With Hartalega's proprietary machines which are capable of making 40,000 gloves per hour, NGC should see productivity increase.

Output per worker is estimated to increase to 4.7 million of gloves per worker from the current 2.9 million and staff cost as a percentage of sales should drop from the estimated 6.2% for its 2012 financial year to 4.5%.

The improvement in productivity is a consequence of two reason more automation being put into the plant and the need for less labour in the more modern manufacturing process.

Hartalega is also planning to introduce new technologies in NGC that will lead to an improvement in productivity.

Productivity per worker as a result of it all is projected to rise to RM516,000 from the current RM306,000.

Dealing with competition

Furthermore, Kuan says natural gas consumption to produce a thousand pieces of gloves will also fall when NGC is in operation. The new complex will use biomass energy with an installed capacity of 58MW, which will account for 22% of NGC's energy needs.

Hartalega feels that the productivity improvements will lead to a margin expansion should everything remain the same but is cognisant of the current trends of the market where prices are being thrown to get new business.

Despite the margin competition, Hartalega feels it is more than able to compete with the other giants of the industry that are moving towards the nitrile glove market thinking there are superior margins to be had by doing so.

"When the numbers finally come in, I am projecting a 19% net margin. Shareholders will be happy with that margin when the size of the business grows," says Kuan, who is focusing on earnings per share growth which should come as a result of the growth in volume.

What will all of this mean to the competition the industry is currently facing?

Kuan says industry players thinking there is more money to be made from nitrile gloves will be in for a tough time.

"Everyone assumes nitrile delivers better margins because they take our numbers. But when they start doing costing, they take a blended cost, but most operations are not sophisticated to do costing on each and every product," he says.

Furthermore, he says, as companies shift the product mix towards nitrile, they may find their costs will also rise. That, he thinks, is why Hartalega's rivals are not seeing the expansion in margins even though the are aggressively moving into the nitrile glove market.

"Nitrile production cost is actually higher than latex but because of the material savings, the selling price is low."

Will the world's leader of nitrile rubber gloves on day go back to making latex gloves?

"When the day comes when we need to do latex, we will but we believe our margins then will be in the teens. The same lines will be used but we can run the lines faster and our yields will increase."

Source: http://biz.thestar.com.my/news/story.asp?file=/2012/4/7/business/11064003&sec=business