Hartalega’s Next Generation Complex (NGC), a RM2.2 billion expansion project located in Sepang, Selangor, will more than double its current production capacity from 16 billion gloves a year to 42 billion in 2020. The flagship project is expected to provide earnings growth over the next five years and cement its position as the leader in the nitrile glove market.

In tandem with the progressive commissioning of production lines at Plants 1 and 2, Hartalega’s revenue for the fourth quarter ended March 31 (4QFY2016) jumped RM95 million or 31% year on year to RM400.4 million. The RM95 million increase in the top line makes Hartalega the biggest contributor to the sector’s revenue growth in the first quarter of CY2016 vis-à-vis Kossan Rubber Industries Bhd’s RM43 million, Top Glove Corp Bhd’s RM11.1 million and Supermax Corp Bhd’s RM1.8 million.

Nonetheless, net profit for 4QFY2016 grew by a smaller 12% to RM61.7 million as a result of a 9.1 percentage point contraction in operating profit margin to 13%. The company attributed the margin compression to more competitive pricing, increased raw material price and labour costs, higher electricity and natural gas tariffs as well as the high start-up cost of NGC.

The weaker margins could indicate more intense competition and oversupply of gloves in the market, especially in the nitrile glove sector. Top Glove, the world’s largest rubber glove manufacturer by sales volume, has set its sights on becoming the world’s largest nitrile glove manufacturer by adding capacity.

Indeed, Hartalega’s quarterly margins fell below the industry average for the first time since its listing in 2008, according to TA Securities. Additional nitrile glove capacity aside, analysts believe that the downward price pressure is due to its concentrated customer base with its top 10 customers accounting for more than 60% of its sales. Hartalega ramped up its sales force to broaden its client base, which resulted in higher utilisation rates and better economies of scale.

Amid the rising cost environment, management undertook several measures to help ease the pressures on margins, including revising its product pricing to factor in the movement of the ringgit against the greenback.

Hartalega is not concerned about oversupply as it sees any mismatch as temporary. It is also researching and developing three new types of gloves and plans to launch a new product by end-2016, which it believes is less susceptible to price competition.

Success could bring forth new growth for Hartalega, whose return on equity (ROE) has declined from 36.16% in FY2012 to 18.97% in FY2015. On a three-year basis, however, Hartalega’s weighted ROE still points to the company making decent returns on every shareholder dollar it has — enough to win the award for “Highest ROE over three years” in the Industrial Products Sector.