ARSHAD AYUB GRADUATE BUSINESS SCHOOL

MASTER OF BUSINESS ADMINISTRATION

MANAGERIAL FINANCE

FIN 745

TERM PAPER:
HARTALEGA SDN BHD FINANCIAL PERFORMANCE ANALYSIS

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 HARTALEGA: FINANCIAL PERFORMANCE ANALYSIS

Table of content

1.0 Introduction 2

1.1 Executive Summary 2

1.2 Company Background – HartalegaSdnBhd 2

2.0 Trend Analysis (2017 – 2019) 3

3.0 DuPont Analysis 7

4.0 Industry Comparative Analysis 10

5.0 Cash Flow Analysis 13

6.0 Conclusion &Recommendation 15

7.0 References 17

8.0 Appendix 18

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 HARTALEGA: FINANCIAL PERFORMANCE ANALYSIS

1.0 INTRODUCTION

This term paper investigates the financial performance of a selected company

in manufacturing sector. The group had collectively selected HartalegaSdnBhd, a
competitive glove manufacturing company. Therelevant financial data is retrieved
from the Internet and other sources and prior to analyzing the company financial
performance.

1.1 Executive Summary

The financial performance analysis of HartalegaSdnBhd is aimed to provide

detailed financial statement analysis of the firm in glove manufacturing sector. The
analysis is done for the past three years (i.e. 2017 until 2019) and the firm’s financial
position is analyzed from both a cross-sectional and a time-series viewpoint. In
addition, DuPont analysis is also included, focusing on the key metrics of financial
performance individually to identify strengths and weaknesses. Further evaluations
are done on the firm’s liquidity, activity, leverage, profitability and market ratios. The
latest current development of the company is also explored in order to understand
and interpret the financial information from the ratio analysis and also the cash flow
analysis. Recommendations are provided to sum up the report with solid deduction
made as a group.

1.2 Company Background

HartalegaSdn. Bhd(Hartalega) started their production in 1988 in glove

manufacturing. They started off as a single line operation and now they evolved to a
company that has revolutionized in glove making. Research and development
regarding glove manufacturing has been their priority since 1994.Hartalegawas the
inventor of the world’s first lightweight Nitrile glove in 2005 and innovation has
always been its priority through continuous improvement. Hartalegamanaged to
maintain its position as the leader in innovations in glove manufacturing.

Hartalega now is the largest producer of nitrile gloves in the world. The company is
capable of manufacturing 34 billion gloves a year. Hartalega exports its products to
137 international clients in 39 countries including North America (75%), Europe
(12%), Asia Pacific (9%) and other regions (4%).

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 HARTALEGA: FINANCIAL PERFORMANCE ANALYSIS

Hartalega was listed in Main Board of Bursa Malaysia on 17 th April 2008. The firm’s
financial performance increased by 3.8% as the total net profit in 2019 increased to
MYR454.3 million. At the end of March 2019,its revenue increased by 17.5% to MYR
2.83billion. The firm’s earnings per share also increased, with 3.1% increment in
2019 with 13.69 sen (basic earnings perordinary share). Hartalega’s continued their
technological innovations to ensure their products are of excellent quality. Hartalega
also become the trusted OEM manufacturer for some of the world’s biggest brands.

Future plans for Hartalega includes the construction and roll out of Next
Generation Integrated Glove Manufacturing Complex (NGC), which is a mega
expansion of their production. With high engineering technology and product
innovation in NGC project, it will give impact toHartalegafinancials. Continuous R&D
initiatives will drive the firm in creating opportunities for new sources of market
growth.

2.0 TREND ANALYSIS (2017 – 2019)

Liquidity

By looking at the firm’s quick ratio for three years, the firm seems to exhibit a stably
increasingtrend. As for acid test ratio, there is a slight decrease in 2019, however it
is still satisfactory. The firm’s liquidity seems to be good.

Activity

Hartalega’s inventory appears to be efficient as the inventory turnover ratio

improvedoverthe years, which means that the inventory is efficient in generating
sales. The firms account receivable is improving, in 2019 average collection period
of 59 days is not very good though acceptable as the industry standard is in the
range of 30 to 60 days. The average payment period has improved tremendously.
From the firm’s increasing total asset turnover ratio, we conclude that assets are
productive and efficient in generating sales. Overall, the activity of the firm is in good
shape.

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 HARTALEGA: FINANCIAL PERFORMANCE ANALYSIS

Leverage

Hartalega’sindebtness decreased in 2018 but in 2019, it has a slight increase. The

firm’s time interest earnings (TIE) ratio decreased over the span of three years but it
is still acceptable as 5.74 ratio in 2019 is considered good. The TIE ratio indicates
that thefirm is relatively free from the constraints of debt.A company's capitalization
is raised by issuing stock or debt, and those choices impact its TIE ratio. Hartalega
balanced the two and weightage is placed more on issuing stocks.

Profitability

Hartalegagross profit margin ison a decreasing trend however, its net profit margin
increased over the 2017 – 2019 period.The operating profit margin behaved much as
its net profit margin did in the same duration. This may be due to higher costs and
expenses incurred like lease expense, new plant costs, equipment and other
operating costs.

The firm’s earning per share, return on total assets and return on common equity
increased sharply in 2018 but decreased slightly in 2019. Hartalega appears to have
experience a rapid expansion in assets in 2018. The exceptionally high return on
equity suggests that the firm is performing quite well.

Market

Market ratios are helpful in assessing risks. Investor confidence in the firm’s is
plummeting as reflected in the price/earnings (P/E) ratio. Hartalega’s market/book
(M/B) ratio almost doubled in 2018, which implies that investors are optimistic about
the firm’s future performance though it decreased a little in 2019. The P/E and M/B
ratios reflect the firm’s profitability in the 2017 – 2019 period.

In summary, the firm appears to be growing and is undergoing an expansion

of assets while minimizing its debts. Hartalega sales, profits and other performance
factors seem to be growing with the increasing in the size of the operation. In short,
the firm seems to have done well in 2019.

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 HARTALEGA: FINANCIAL PERFORMANCE ANALYSIS

Trend Analysis for Hartalega (2017 – 2019)

Category Ratios 2017 2018 2019 Trend Remarks

Liquidity Current Ratio 1.9 2.09 2.17 Increasing steadily Increasing degree of liquidity
Ratio
Quick Ratio 1.16 1.50 1.39 Increased in 2018 but Good overall
decreased in 2019
Activity Inventory Turnover 4.92 6.14 7.69 Increasing Good trend
Ratio
Average Collection 60.1 61.5 59.1 Improving slightly Satisfactory, however may need to improve
Period as the common payment term is 30-60 days
Average Payment 81 63.6 63.8 Sharp improvement in Good, ability to utilized collection to recover
Period 2018 and stable in 2019 payment
Total Asset Turnover 0.79 0.93 0.94 Increasing Improvement in utilizing assets in generating
sales
Leverage Debt ratio (%) 26.32 24.10 24.50 Decreased in 2018 Good, reducing in liabilities due to less
Ratio butincreased slightly in outstanding of borrowings, however slightly
2019 increased due to cost of new plant
Time Interest Earning 7.29 6.05 5.74 Decreasing Though decreasing, it is still good. A value of
at least 3.0 – and preferably closer to 5.0 is
often suggested
Profitability Gross Profit Margin (%) 26.92 25.60 25.04 Decreasing a little Seems stable although it is on a decreasing
Ratio trend
Operating Profit Margin 19.20 22.20 19.80 Increased substantially Good. Operating costs increased in 2019
(%) in 2018 and slight which impacted the OPM
decrease in 2019
Net Profit Margin (%) 15.43 17.80 16.00 Increased substantially Good. Operating costs including interest
in 2018 and slight increased in 2019 which impacted the NPM
decrease in 2019

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 HARTALEGA: FINANCIAL PERFORMANCE ANALYSIS

Category Ratios 2017 2018 2019 Trend Remarks

Profitability Earning Per Shares 17.24 13.28 13.69 Decreased substantially Almost consistent in 2018 and 2019, with the
ratio (sen) in 2018 and slight highest value in 2017. EPS is considered as
increase in 2019 an indicator of corporate success.
Return on Assets (%) 12.38 16.70 15.21 Increased considerably Effective in generating profits with available
in 2018 and slight assets.
decrease in 2019
Return on Equity (%) 16.28 22.01 20.17 Increased considerably Good. The return earn on common stock
in 2018 and slight holders’ investment is on the high side. The
decrease in 2019 firm earned the highest on the common stock
holders’ investment in 2018.
Market Price/Earnings Ratio 37.73 34.59 30.96 Decreasing The degree of confidence that investors have
in the firm’s future performance is declining.
However, P/E ratio is most informative when
applied in a cross-sectional analysis.
Market/Book Ratio 5.06 9.78 7.47 Increased greatly, The firm’s stocks are sold at a highest price in
almost doubled in 2018 2018. The firm’s future prospects are being
and decreased a little in viewed favourably by investors. M/B ratio is
2019 typically assessed cross-sectionally.

Table 1: Trend Analysis of Hartalega Sdn Bhd from 2017 to 2019

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2.0 DuPont Analysis

A DuPont analysis allows evaluation to be made on the component parts of a

company's return on equity (ROE). This method allows means to assess which financial
activities are contributing the most to the changes in ROE. With DuPont analysis, an
investor can compare the operational efficiency of two similar firms and managers can
identify strengths or weaknesses that should be addressed.

 Return on Equity (ROE)

The ROE of Hartalega for the past three years has been improving significantly and
currently is well above the industry average. In this Dupont analysis on Hartalega, we can
dig into what drives changes in ROE, or why the ROE is increasing andconsidered high. 

 Net Profit Margin (NPM)

NPM is the ratio of net income compared to total revenue. The upward trend of NPM
with significant improvement in 2018 is due to the improvement in net income
attributable to new marketing initiatives and also opening of a new plant.

 Total Asset Turnover Ratio (TAT)

The TAT ratio measures how efficiently Hartalega uses its assets to generate
revenue.Trend-wise, the TAT ratio is improving with significant increase in 2018 due to an
increase in sales volume. When a company's asset turnover rises, its ROE will improve
subsequently.

 Return on Assets (ROA)

The firm’s ROA has improved significantly, and it is above the industry average. We can
concur this with the high NPM and TAT ratio, which means improvement in the profit
margin and asset turnover brought forth higher ROA. Hartalega gained better use of its
assets in generating more income or sales.
 HARTALEGA: FINANCIAL PERFORMANCE ANALYSIS

 Financial Leverage Multiplier (FLM)

FLM is an indirect indicator of a company's use of debt to finance its assets.FLM for
Hartalega has been stable for the past three years albeit expanding its business. Most
companies uses debt with equity to fund operations and growth. However, increased
ROE by using too much debt (high financial leverage ratio) can create disproportionate
risks.Hartalegahas an upward trend in share issuance where most of the fund for its
business expansion is coming from.

In a nutshell, the firm’s good financial performance is due to improved profit

margins by increasing net income proportionally with its increased total assets. It can
deduce from the information that Hartalega also did not add more borrowing and
reduced some of its debt since the financial leverage multiplier maintained almost the
same value. The firm’s focal source of fund for growth is coming fromshare issuance.This
Dupont analysis helps deduce the profitability of the firm is from the use of assets and
not debt that’s driving its ROE.

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 DuPont Analysis Table

Industry
Ratio 2017 2018 2019 Evaluation
Average

Net Income Upward trend with significant improvement in 2018

284,563,375 437,944,897 454,357,049 -
(RM) due to new marketing initiative and a new plant

Revenue Improving significant increase in 2018 due to an

1,821,873,353 2,405,638,106 2,827,218,410 -
(RM) increase in sales volume

Assets (RM) 2,286,773,755 2,631,979,152 2,992,095,353 - Increasing with new plants opened in 2018 & 2019

Equity (RM) 1,684,786,085 1,997,391,254 2,259,230,061 - Upward trend in share issuance

Net Profit
15.43% 17.89% 16.01% 8.35% Excellent and well above industry average
Margin (%)

Total Asset Although slightly below industry average, but it is

0.80 0.94 0.95 0.97
Turnover steadily increasing

Return on
12.39% 16.78% 15.20% 13.78% Significant improvement due increased in sales
Assets (%)
Financial
Leverage 1.357 1.318 1.324 - Stable value for three years
Multiplier
Return on Significant improvement in ROE due to increase in
16.82% 22.11% 20.14% 19.35%
Equity (%) profit

Table 2: DuPont Analysis of Hartalega Sdn Bhd from 2017 to 2019

4.0 Industry Comparative Analysis

Liquidity Ratio Comparison

Based on liquidity ratio, Hartalega’s liquidity performance is quite good which it is

almost the same as industry average. Compared to Top Glove and Supermax in year
2018; Hartalega had a better liquidity performance as shown in current ratio, with 2.09
times liquidity compared than 1.11 and 1.01 times for both competitors. The current
ratio is more than 1.0 and keeps increasing year by year. Hartalega is known as the
largest nitrile gloves producer in world, therefore it is evident thatHartalega has
sufficient current asset to meet company’s obligations.

Efficiency Ratio Comparison

Inventory Turnover of Top Glove is the highest among these three companies with
6.62, which is 0.48 higher than Hartalega. However, the value on Inventory Turnover is
still above the industry average.Hartalega improved its efficiency in Inventory Turnover
with the inventory costs decreasing year by year. Eventhough the Inventory Turnover of
Hartalega is lower than Top Glove, but Hartalega has highest Total Asset Turnover with
0.93 which nearly hit the industry average of 0.97. It is an indicator that Hartalega has a
fully utilization of its assets in operating and making profit.

In term of Average Collection Paid (ACP), Hartalega has higher ACP period than
competitors. It tends to prolong the receivables period up until 61.5 days; it is below
industry average. However, Hartalega has the lowest Average Payment Period (APP)
with 63.5 days compared to others and it is way lower than 85.3 days as the industry
average. This APP ratio indicates that Hartalega has enough cashflow and there is no
problem for Hartalega to pay their payment.

Leverage Ratio Comparison

Meanwhile, Hartalega had a good leverage ratio which it is lower than industry
average and its competitors for year 2018.Hartalega has the lowest Debt Ratio with
24.10% by having 8% gearing ratio. In terms of Time Interest Earning Ratio, Hartalega
has the highest value with 6.06. The industry average is 5; it is favorable to have higher
Time Interest Earned Ratio as it indicates that the company presents less risk to
investors and creditors upon solvency. Lower Debt Ratio with optimal gearing ratio and
 HARTALEGA: FINANCIAL PERFORMANCE ANALYSIS

higher Time Interest Earned Ratio shows that Hartalega is managing their debts well in
order to boost their development and profit. A good leverage ratio will cause higher
Return of Equity, hence it made sense that Hartalega managed to pay higher dividends
from year to year.

Profitability Ratio Comparison

Hartalegahas a stable gross profit margin, operating profit margin and net profit
margin with 25.6%, 22.2% and 18.2% respectively. Eventhough the gross profit margin
is below industry average, but Hartalega managed to gain high profitability in both
operating and net profit margin as compared to the industry average.These values show
minimal changes as Hartalega managed to minimize their operating cost by applying
Goodpac packaging technology where they even managed to get high Net Profit after
operation cost deduction.

With regards to EPS value, Hartalega has the lowest EPS compared to its
competitors and industry as well. However, a positive EPS value is valuable, hence
investors would just stick to Hartalega as it has a long track records of profit making with
its popularity to be known as the largest nitrile gloves manufacturer in the world.

ROA and ROE values indicate well how companies making profit based on their
available facilities and assets. Hartalega has higher value in both ROA and ROE in
comparison to industry average. It is a clear projection where Hartalega has fully utilized
their assets in making profit which then resulted in higher ROE which enables it to give
higher equity to shareholders.

Market Ratio Comparison

Based on Price/Earnings Ratio value, Hartalega has excellent value, well above
the industry average for both Price Earnings Ratio and Market to Book ratio. It shows
that Hartalega is actively making profit. However, if we referred back to EPS value, the
P/E ratio is high with low EPS value; it could mean that the stock’s price is possibly
overvalued. Hartalega’s value of Market/Book quite high which means that investors are
optimistic about the future earnings of the company.

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 Industry Comparative Analysis (Hartalega – Top Glove – Supermax)

HARTALEG TOP INDUSTRY

PERFORMANCE AREA SUPERMAX EVALUATION
A GLOVE AVERAGE

Liquidity Good

Current Ratio 2.09 1.11 1.01 2.23 Good

Acid Test 1.50 0.76 0.67 1.57 Good

Activity Excellent

Inventory Turnover 6.14 6.62 4.46 5.74 Above average

ACP 61.5 Days 55.9 Days 52.6 Days 56.7 Days Below average

APP 63.5 Days 77.3 Days 115 Days 85.3 Days Good APP

Total Asset Turnover 0.93 0.809 0.767 0.97 Excellent

Leverage Excellent

Debt Ratio 24.10% 54.58% 54.58% 29.48% Good

Time Interest Earned

6.06 5.82 3.12 5.00 Above average
Ratio

Profitability Good

Gross Profit Margin 25.60% 20.00% 64.34% 36.65% Below average

Operating Profit High

22.20% 12.54% 13.40% 16.05%
Margin profitability

High
Net Profit Margin 18.20% 8.90% 8.44% 11.85%
profitability

EPS 13.28 cent 16.97 cent 16.18 cent 15.48 cent Below average

ROA 16.70% 7.13% 6.40% 13.78% High ROA

ROE 22.01% 15.71% 10.76% 19.35% High ROE

Market Excellent

P/E 34.59 31.00 11.92 20.90 Above average

M/B 9.78 2.78 1.23 3.68 Above average

Table 3: Industry Comparative Analysis

5.0 Cash Flow Analysis

Operating Activities Cashflow

In 2017, the company has started to generate more sales and profit whereby
they launched world’s first non-leaching antimicrobial gloves. The introduction of this
non-leaching antimicrobial gloves has increased its profit before tax by 110% to RM 348
million. Concurrently, the company has applied the Goodpac packaging technology
which minimized the packaging cost, hence increasing profit with lower operation cost.

In the audited financial statement 2018, it shows a significant improvement in

their inventories efficiency where improvement of 69.76% is recorded
fromRM68,897,623 to RM20,839,278. The inventories management gets better year by
year where positive amount of RM 15,746,337 recorded in Year 2019.

On the other hand, due to improvement of inventories management, the

company also managed to increase their effectiveness in account receivables where the
amount pending for receivables in Year 2019 is RM 47,714,437 which is 63.5% efficient
than before.

Investing Activities Cash flow

Investing activities is an indicator how the company utilized their cash in

developing to boost their company performance. A negative cash is a norm due to
expenses being spent on company’s fixed assets for development.
 HARTALEGA: FINANCIAL PERFORMANCE ANALYSIS

In Year 2017 to 2018, there is a slight change in amount of investing cash flow in
Year 2018 as Hartalega collaborated with 9 Dots Consulting and invested roughly about
RM 14 million to upgrade its Enterprise Resource Planning (ERP) system. This is an
essential initiative in moving forward to achieve Industry 4.0 seeing that it enables the
company to reduce costs and wastage of production process.

Whereas for Year 2019, higher negative cash flow reflected is mainly due to the
development of an additional plant which is tailored to cater towards various specialty
products in expanding company’s portfolio and strengthening their market position.

Financing Activities Cash flow

The financing activities showed negative cash flow due to the settlement or
repayment of company’s borrowings. Although the firm has negative financing cash, but
it has positive cash balance in every opening years. It is mainly due to large profit
gained through sales to sustain its operations, therefore positive operating cash is
reported.

There is drawdown of term loans occurred in Year 2017 and 2018 where big
amount of debt payments is discounted in both years. However, the drawdown of term
loans caused increasing value of interest being paid.

Via cash flow, we can see that Hartalega is managing its finances well as the firm
extended the company's Employee Share Options Scheme(ESOS) remunerations to
non-executives level in Year 2019 which costedthe firm RM 68,809,365; 31% increased
from previous Year, RM 52,294,952. Besides, Hartalega also able to pay dividends to
its shareholders with 44% higher as compared to Year 2018.

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 HARTALEGA: FINANCIAL PERFORMANCE ANALYSIS

6.0 Conclusion &Recommendation

In conclusion, the financial performance on Hartalega is strong with revenue

growth of 16.6% year-on-year to RM2.8 billion in 2019. Net profit also increased by a
smaller percentage of 3.5% year-on-year to RM454.9 million in 2019.As a result,
Hartalega’stotal payout of dividend is RM274.0 million in 2019 which translates to a
dividend payout ratio of 60.2%, in line with the firm’s dividend policy to distribute a
minimum of 60% of the annual net profit.Hartalega is pursuing its expansion in
production capacity via Next Generation Integrated Glove Manufacturing Complex
(NGC). Currently, Plant 5 is its final stage of construction and will begin operation soon,
while the construction of Plant 6 and Plant 7 is still ongoing. The plants will commence
productions by early and end-2020 respectively, thereby marking the completion of the
entire complex. With this addition of plants, Hartalega plans to increase its productivity
and sales volume, catering to global demands. Despite the firm had achieved a strong
financial year, driven by improved sales volume coupled with growing demand for nitrile
gloves, there is always room for improvement. Below are recommendations for the firm:

Recommendation 1:

The management of Hartalega may want to direct their attention on improving accounts
receivable as the average collection period for the firm is 61.5 days which is longer than
the industrial average of 56.7 days. Effective contract with penalties can be of a
solution, however, too stringent and inflexible collection can deter customers or
vendors. Efficientcollection can assist in boosting the net profit from other sources as
the holding cash can be utilized to generated income for the firm.

Recommendation 2:

The management can focus on means to cut operating costs and expenses in order to
maximize profits. Pursuing cost leadership strategy as a competitive advantage, the firm
needs to maintain its high net profit margin. Hartalega can exercise some cost
optimization and increase automation in the new production plants in line with the

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 HARTALEGA: FINANCIAL PERFORMANCE ANALYSIS

anticipated Industry 4.0. In addition, with the additional plants in the near future,
production volume is expected to increase substantially and through economies of
scale, costs can be reduced as well.As a result of reduced costs and increased in
profitability, earnings per share (EPS) will indirectly improve.

Recommendation 3:

Hartalega is top exporter of gloves as global demand continues to shift toward nitrile
gloves. As a global player, lower gains from foreign exchangeaffects the firmespecially
with the sharp strengthening of the ringgit in a short time frame. In limiting or offsetting
probability of loss from fluctuations in the prices of commodities or currencies, Hartalega
can form a team of experts to manage hedging in order to ensure foreign exchange
factor is mitigated or reduced. Alternatively, to combat the economic risk, the firm can
include an effective buy and sell contract that addresses price fluctuation.

Recommendation 4:

Export growth in nitrile gloves is growing and the glove industry, including Hartalega, is
not spared from the uncertainty caused by the U.S.-China trade war. After tariffs are
imposed on China’s medical glove exports some two months ago, customers from the
U.S. may source their gloves from Malaysia and Hartalega may have to compete
against competitors like Top Glove and Supermax. Furthermore, Hartalega may face
stiffer competition in other markets other than U.S., as China’s glove manufacturers will
promote their products aggressively to compensate for their loss of the U.S. market. It is
therefore recommended that Hartalega intensifiesits R&D initiatives to stay ahead and
maintains innovation as a competitive advantage. The marketing team of Hartalegacan
do some detailed market research especially on pricing, so that Hartalega can also
compete price-wise and in terms of flexibility and responsiveness.

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 HARTALEGA: FINANCIAL PERFORMANCE ANALYSIS

7.0 References

Barone, A., (2019). Comparative Market Analysis.Retrievedonline

fromhttps://www.investopedia.com/terms/c/comparative-market-analysis.asp

Chad J.Z. and Scott B.S. (2018), Principles of Managerial Finance, Global Edition, 15th
edition, Pearson Education

Hargrave, M., (2019). DuPont Analysis.Retrievedonline

fromhttps://www.investopedia.com/terms/d/dupontanalysis.asp

HartalegaSdn. Bhd (2017).Hartalega Annual Report 2017. Retrievedonline from

https://www.klsescreener.com/v2/announcements/view/10091503

HartalegaSdn. Bhd (2018).Hartalega Annual Report 2018. Retrieved online from

https://www.klsescreener.com/v2/announcements/view/28907124

HartalegaSdn. Bhd (2019).Hartalega Annual Report 2019. Retrievedonline from

https://www.klsescreener.com/v2/announcements/view/29091426

Hayes, A., (2019). Technical Analysis: Trend Analysis.Retrieved online

fromhttps://www.investopedia.com/terms/t/trendanalysis.asp

Loth, R., (2019). Analyze Cash Flow the Easy Way.Retrieved online from
https://www.investopedia.com/articles/stocks/07/easycashflow.asp

Trading Economics (2019).Hartalega Holdings. Retrieved online from

https://tradingeconomics.com/hart:mk:pe

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