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| Cover Story: Hartalega focuses on technology and automation |
| Features | |||
| Written by The Edge Malaysia | |||
| Monday, 03 August 2009 00:00 | |||
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Top Glove was for a long time the industry leader in terms of the size of its profits and market value. It was the first glove company to cross RM1 billion in market value. The next to break the barrier was expected to be either Supermax or Kossan. Thus, early last month, when Hartalega Holdings Bhd became the second glove company to have a current market value of above RM1 billion, it came as a surprise. It achieved this in spite of being the last of the large glove companies to be listed on Bursa Malaysia, making its debut just last year. It also commands the second highest market valuation in the industry. Hartalega trades at a price/earnings ratio (PE) of about 12 times its current year’s earnings. This is just below Top Glove’s PE of about 13 times. It’s quite a feat for a newly-listed company to approach PE level of Top Glove, which has long commanded a large premium over the PEs of other glove makers. Fund managers became enamoured with Hartalega because it has proven it can maintain its superior profit margins and return on equity (ROE). Hartalega was one of the earliest glove-making SMEs. Its managing director and major shareholder Kuan Kam Hon recalls the company was among the first 20 to obtain a licence to manufacture rubber gloves. Like most of the pioneers, the company imported its first machine from Taiwan. Although it was new machinery, Kuan found it to be “ancient” technology, with rejection rates of 30% to 40% in the output. In the history of Hartalega, the company bought that one machine and two used ones in the industry’s first bust cycle of 1990, he says in a telephone interview. designed and developed in-house. “The technology was not available to be purchased that can ensure we’d become a successful manufacturer,” he says. Hence, Hartalega’s R&D department designed equipment it required for the whole chain of manufacturing, including double-former dipping, robotic glove stripping and its packing and stacking system. That enabled the company to progressively employ fewer workers. It needs just 250 workers, for instance, to produce one billion pieces of gloves compared with an industry average of about 450 workers. That produces a lot of cost savings, according to a fund manager. In addition, Hartalega’s revenue per worker is also the highest in the industry as the company runs the fastest lines due to its automation and high-speed lines. Its double-former dipping lines produce 30,000 piece of gloves an hour compared with an industry average of about 13,000 with single former lines. In terms of in-house productivity, Kuan says about 10 years ago, he had to employ about 1,200 workers to produce RM100 million of revenue. Today, the company has a total workforce of 2,000, less twice that of 10 years ago, to generate revenue of RM500 million, or five times more. The reduction in unit operating costs comes at a much higher cost of capital expenditure. Hartalega has to spend more than RM5 million for each production line while some of its competitors can have a new line for less than RM2 million. Kuan points out that it’s not the cost of machinery that makes the difference. “If you put in cheap machinery, it doesn’t mean you’ll have a high return. It’s the return on capital employed, and more importantly, return on assets that matters,” he said. This article appeared in Cover Story page, The Edge Malaysia, Issue 766, Aug 3-9, 2009.
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