Top Glove Corporation - CIMB Research 2018-03-19: Plans To Stay At The Top

TOP GLOVE CORPORATION BHD BVA.SI

Top Glove Corporation - Plans To Stay At The Top

We remain positive following Top Glove (TOPG)’s briefing as the group indicated that glove demand remains robust and it plans to expand capacity further.
Its strong 2QFY18 core net profit of RM109m (+7.9% q-o-q) was mainly attributed to higher sales volume, decline in latex prices and higher average selling prices (ASPs).
TOPG plans to expand its vinyl glove production capacity by setting up a factory in Vietnam (~1-2bn pcs p.a.). Management is still in the midst of finalising this venture.
For its new condom manufacturing plant (estimated 1bn capacity), TOPG is currently installing production lines and aims to begin operations by June or July 2018.

Maintain ADD and Target Price of RM10.80 (22.6x CY19F P/E, a 20% discount to Hartalega’s target P/E).

Last Friday, we attended Top Glove (TOPG)’s 1HFY8/18 briefing to analysts, media and bankers.
TOPG was represented by Chairman Tan Sri Lim Wee Chai, Managing Director Mr. Lee Kim Meow and Executive Director Mr. Lim Cheong Guan. No surprises from the briefing, while the highlights were:
1. rubber glove demand expected to remain robust,
2. plans to build a vinyl glove plant in Vietnam and
3. condom production to begin by Jun-Jul 2018.

The 7.9% q-o-q growth in TOPG’s 2QFY18 net profit to RM109m can be attributed to:
1. higher glove sales (+3% q-o-q) on the back of robust demand from emerging markets,
2. lower raw material prices, especially latex (-7.1% q-o-q), and
3. higher selling prices (+4% qoq).
These help to offset the impact from a weaker US$/RM (-5% q-o-q) and a spike in natural gas prices (+15% q-o-q).

Top Glove (TOPG) stated its plans to build a glove production factory in Vietnam (1-2bn pcs p.a.), mainly to expand its vinyl gloves production. Currently it has 1 vinyl glove plant (2.2bn pcs p.a.) in China. Given rising operating costs in China, TOPG plans to capitalise on lower manufacturing costs in Vietnam such as labour costs and natural gas prices.
Although this venture is still in early planning stages, capex planned for this venture is ~RM100m. Note that we have yet to incorporate any potential earnings from this venture.

On its venture into condoms, Top Glove (TOPG) is currently installing condom production lines in its maiden facility. Operations of this plant are slated to begin in Jun-Jul 2018, with an initial capacity of ~1bn pcs p.a.
TOPG plans to structure its condom manufacturing business similar to its rubber glove business, with key focus on OEM production. At this juncture, TOPG has no plans to venture into own-brand manufacturing (OBM).

We project Top Glove (TOPG) to post stronger earnings in 2HFY18, in tandem with:
1. more capacity coming onstream from its new plants – F30 (began in Aug 17) and F31 (3bn unit capacity p.a.) which is targeted to begin operations in Jun-18;
2. contributions from Aspion to be incorporated beg-3QFY18; and
3. ability to raise ASPs.
Moving forward, TOPG expects the demand for gloves to remain strong in 2HFY18.

No changes to our earnings forecasts. Our ADD call and Target Price of RM10.80 (22.6x CY19F P/E) are also retained. In our view, TOPG remains attractive given its:
1. prime position to capitalise on strong glove demand as the world’s largest glove producer, and
2. sequentially strong earnings ahead from capacity expansion plans and contribution from Aspion.
Downside risks: strong pricing competition and a sharp weakening of US$/RM.

Walter AW CIMB Research | http://research.itradecimb.com/ 2018-03-19

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