Hartalega registered a flat profit growth of RM64.5 million for the 4th quarter of FY2012 against RM66.3 million PAT in corresponding period. This is despite a 25% increase in its revenue.
Here are its comments:
The global demand for nitrile gloves continued to grow by 29% for the year 2011 due mainly to switching momentum from natural rubber gloves to nitrile gloves. This has spurred a significant increase in nitrile gloves production capacity by the industry which we are confident would be more than matched by resilient demand dynamics. Furthermore, we do not expect a price war from the second half of 2012, as claimed by certain quarters as global demand growth continues to outpace growth in industry capacity.
Comment: What they claimed of no price war (probably referring to claims from Supermax's CEO) is not quite true. If there is no price war, they could have passed the higher costs to its customers. Revenue registered increase of 25%, however profit remained flat. There may not be price war, but margin erosion is definitely faced by the industry.
On the contrary, we had to put some of our customers on allocation for their April 2012 purchase and beyond despite adding two new production lines in plant 5 to meet escalating demand. Based on our experiences, there are no expectations for a price war in the foreseeable future. Rather, the continued expansion in global demand for nitrile rubber gloves would be satisfied by industry capacity increase. This would only generate healthy competition among competitive rubber glove manufacturers.
Comment: Hartalega is leader in nitrile gloves, but as you can see most glove manufacturers are gearing up to produce more nitrile gloves from their new or existing plants. Capacity is definitely increasing, and it is difficult to estimate the increased capacity from the other players. As Hartalega is the largest and leader in nitrile gloves producing, customers shifting from them to other players will take time. I certainly expect the industry to consolidate after this with nitrile gloves making to be key focus to many of these players. Notice the comment from Hartalega is to alleviate shareholders fear of a price war.
We anticipate demand growth for nitrile gloves should be sustainable at 20% annually for the mid term. To meet the increasing export demands of nitrile gloves, our new plant, namely Plant 6, have begun construction in February 2012 with its first production line targeted to commence operations in August 2012. Plant 6 will commission 10 production lines in total and is expected to give at least a 30% boost to our production capacity which translates to a further 3.5 billion pieces per annum. The construction of the 10 production lines in Plant 6 is expected to be fully completed in June 2013.
Comment: If you read reports from the listed gloves manufacturer, all of them are talking of increasing capacities. This may definitely put pressure to price. While there may not be glut but all of the big players are definitely in the race towards larger capacity especially for nitrile gloves manufacturing. Over here, the one with healthiest balance sheet and strongest margin will prevail.
In view of current and anticipated bullish market conditions, we are making concerted efforts to put in place the foundation for long term sustainable growth. On this note, we have already strategized to beef up our human resource training facilities and manpower numbers. We view that the concerted long term planning and efforts should bear fruit due to productivity gains and benefits of economies of scale derived from building capacity and leveraging on in-house technological competence to countervail the potential margin compression arising from greater competition. Faced also with the systemic challenges of weak US Dollar and strong nitrile raw material pricing, we remained resilient and continued to grow our top line and bottom line.
Comment: Hartelega is definitely one of the bigger and better surviving player, but if you read their comment, I feel it is a little bit careless. It is common that in a competitive industry such as rubber gloves, players will move to areas that has large demand. With the demand for nitrile gloves expanding fast, it would be difficult to project the capacity expansion by all the players. These kind of competition is healthy and may allow another round of consolidation among the players. Small ones may not be able to survive or compete.
The Group has achieved the internal target growth for both sales revenue and net profit for the financial year ended 31 March 2012. The Board of Directors is optimistic that the Group will achieve continuous growth and securing better results for the next financial year.
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