Prolonged challenges ahead for Hartalega

KUALA LUMPUR: There are limited venues for Hartalega Holdings Bhd to mitigate the escalation in raw material prices with a price hike being unlikely given the significant price gap between the glove maker and its Chinese rivals.

Nitril butadiene raw material prices have been on the rise since September as feedstock prices climbed.

However, any attempt to raise glove prices could be met by resistance from buyers as the market continues to struggle with excess supplies, said Hong Leong Investment Bank (HLIB) Research.

“In our opinion, attempts in raising prices would negatively impact sales volume, as buyers have the flexibility to shift to more cost efficient suppliers.

“This was evident in 1QFY24, whereby Hartalega’s sales volume plummeted by 26% QoQ when it passed on the higher natural gas costs to the buyers,” said the research firm in a company update.

Hartalega’s October deliveries were priced at US$18 per thousand prices as compared to US$20 per thousand pieces in July, which boosted the utilisation rate marginally to 40% to 45% as compared to 41% in 1QFY24.

Meanwhile, Chinese glove makers maintained their prices at about US$15 per thousand pieces.

While Hartalega has been leading Chinese glove makers in terms of product quality, HLIB said the latter have been making recent improvements to narrow the quality gap.

“We believe glove buyers would only be more inclined to shift back to Malaysian suppliers only when the pricing gap narrows to USD1/k pieces (current gap: c. USD3/k pieces).

“In order for Hartalega to recapture market share, it would necessitate a reduction in ASP to c.USD16/k pieces to see a meaningful shift in orders back to local manufacturers,” said HLIB.

However, the research firm does not expect Hartalega to engage in a price war to drive up its sales volume.

HLIB maintained its “sell” call on Hartalega with a target price of RM1.15.

“Operations should continue to bleed in the near term, and we expect Hartalega to only return to profitability in FY25,” it said.