Top Glove - Maybank Kim Eng 2019-10-07: Trying To Maintain Grip


Top Glove - Trying To Maintain Grip

Earnings recovery priced-in; Maintain HOLD

  • We believe the earnings recovery is priced in and maintain estimates and HOLD rating post TOP GLOVE CORPORATION BHD (SGX:BVA)'s management analyst briefing. We forecast a 20% q-o-q increase in 1QFY8/20 net profit driven by higher sales volume and profit margins for latex gloves due to eased competition.
  • Maintain HOLD and Target Price of MYR4.30 based on an unchanged 26x P/E on CY20F (10% discount to our target P/E for Hartalega).
  • Our preferred pick is Kossan (BUY, Target Price MYR5.10) for its exposure to the non-medical segment and undemanding CY20F P/E of 22x.

Strong sales volume, latex ASP competition eased

  • Key takeaways from the analyst briefing:
    1. Latex glove demand has improved on better global demand and more disciplined pricing by competitor Sri Trang Agro-Industry (SGX:NC2);
    2. Demand for nitrile gloves is strong with sales lead time 50-60 days from 30-45 days;
    3. Management targets PBT margin of 10-12% for Aspion in 6-12 months (FY19: 1%) on cost reductions and slightly higher plant utilisation rate (sub-60% now);
    4. New vinyl glove plant in Vietnam will commence its first line in 2Q20 (capacity of 4b pcs p.a.) and the production cost is c.20% lower than its China’s vinyl glove plant (4QFY19: MYR4m EBIT loss).

Has China re-routed its supply to other markets?

  • The strong demand for nitrile gloves could be due to stronger U.S. imports following its 15% tariff on China’s rubber examination gloves since Sep 2019. The U.S. tariff may also result in China re-routing its supply to other markets (e.g. Europe).
  • While Top Glove has yet to feel any ASP pressure in other markets, we understand from certain local player that there is already some ASP pressure in Europe.

ASP competition in latex segment may recur

  • We also caution that intense ASP competition may recur as Sri Trang is still ramping up its new capacity of 3b pcs p.a. (+14% to 24b pcs p.a.), with the full commercialisation targeted for 4Q19. It also plans to add another 6b pcs p.a. capacity (+25% to 30b pcs p.a.) by end-2020.

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-10-07
SGX Stock Analyst Report HOLD MAINTAIN HOLD 4.300 SAME 4.300