Glove Manufacturers - DBS Research 2020-02-03: Tailwinds In Extraordinary Times


Glove Manufacturers - Tailwinds In Extraordinary Times

  • Players saw improvement in sales volumes and margins during SARS and H1N1.
  • Room to increase utilisation and production volumes; raise earnings by 3-8%.
  • Margins uplift could be earnings kicker; every 1% increase in net margins can lift TPs by 7-11%.
  • Our top pick and preferred play is Riverstone (SGX:AP4) on relative valuations.

Margin uplift to be kicker earnings.

  • The experience from SARS and H1N1 indicates that rubber glove players saw an improvement in sales volumes and margins during that time. For instance, Top Glove (SGX:BVA)’s revenue growth increased to 11-14% q-o-q during the H1N1 pandemic from the average of 8% q-o-q. Top Glove’s net profit margin also improved to 12-14% from the average of 8-9% during the same period.

Raise earnings 3-8%.

  • Based on our sensitivity analysis, every 1% increase in sales volume can increase the rubber glove manufacturers net profit by up to 1.5%. Every 1% improvement in net margin will increase these companies’ net profit by 7-13% and target prices by 7-11%.
  • We raise our utilisation rate assumptions for Top Glove, Hartalega and Kossan factoring additional orders. As a result, our FY20 net profit for these companies are higher by 3-8%.

Valuations pricing in earnings upgrades.

  • The sector’s PE is now at +2 Standard Deviation (SD) of its historical mean PE (from the period of SARS outbreak till now). This is despite the coronavirus being first reported for just over a month.
  • Ultimately, the extent of the earnings impact would depend on the severity of the outbreak.

Top Pick: Riverstone on relative valuations.

  • We raise our target price for Riverstone (SGX:AP4) to S$1.34, pegged to 20x FY20F earnings. This is equivalent to 36% discount to its bigger peers. We like Riverstone due to its relatively attractive valuations. It trades at 16.5x earnings compared to the sector average of 27.6x earnings. The stock is supported by a strong balance sheet with net cash position.
  • We upgrade Kossan to BUY with a RM5.60 Target Price.
  • We retain our HOLD for Top Glove while Hartalega remains a FULLY VALUED due to pricey valuations at 40x PE (equivalent to +1.9 SD of its 5-year historical mean).


  • Though its share price gains have receded from the peak of c.40% gain on the back of the coronavirus outbreak (to about 20% gain currently) compared to the price before the onset of the virus, we expect valuations to remain elevated in the near term.
  • We raise our Target Price to S$1.34, pegged to 20x FY20F earnings (from S$1.16 previously, based on 17.4x on FY20F earnings). This is equivalent to c.36% discount to peers. We expect Riverstone (SGX:AP4) to move in tandem with its larger peers, which are trading at an average of 28x PE on CY20F earnings.
  • Riverstone manufactures both healthcare (HC) and cleanroom (CR) gloves. Out of its five manufacturing plants, one is in China. China contributed 5.8% of total FY18 revenue. Healthcare gloves account for c.50% of the group’s total revenue and c.30% of group earnings, as margins for healthcare gloves is lower than cleanroom. We are optimistic that Riverstone can continue to generate higher volumes for both the healthcare and the high-margin cleanroom gloves. Butadiene prices, the key raw material for nitrile glove, have stabilised, which is the most ideal environment for Riverstone.
  • Going forward, Riverstone would continue to focus on the higher-margin cleanroom segment. This should lead to a further improvement in margins. For the more competitive healthcare division, the focus would be on niche products, e.g. double colour or double gloves, that can command higher margins and to differentiate itself from the many players in this space. The stock is supported by a strong balance sheet with net cash position.
  • See Riverstone Holdings Share PriceRiverstone Holdings Target PriceRiverstone Holdings Analyst ReportsRiverstone Holdings Dividend HistoryRiverstone Holdings AnnouncementsRiverstone Holdings Latest News.


  • We raise our target price to RM5.70, based on an ascribed PE of 30x CY20 earnings (from RM4.25 based on 23x CY20F EPS). The ascribed PE is based on +1 SD of its 5- year mean. Top Glove is trading at 31x forward PE, near to +1.2 SD of its 5-year mean PE or at +2.2 SD of its 10-year mean. (Using the FX rate of RM1:S$0.336, we derive target price of 1.92 in S$ term)
  • About 2% of Top Glove FY19 revenue stems from China. While Top Glove has a manufacturing plant located in China, the plant’s focus is producing vinyl gloves for industrial use. Nevertheless, Top Glove looks to expand their China market and targets their China volume to register double digit growth in FY20.
  • The company has registered commendable improvement in sales from developing markets – contributing to a 6% increase in total sales volume increase.
  • A key re-rating catalyst for Top Glove would be a faster-than-expected recovery of Aspion.
  • A potential risk for Top Glove’s net profit forecasts are further delays in capacity expansion that would lead to revenue recognition being pushed backwards.
  • Maintain HOLD. See Top Glove Share PriceTop Glove Target PriceTop Glove Analyst ReportsTop Glove Dividend HistoryTop Glove AnnouncementsTop Glove Latest News.

Kossan (BUY, Target Price: RM5.60)

  • We raise Kossan’s Target Price to RM5.60, based on 27x FY20F EPS (from RM4.00, based on 21x FY20F EPS). This is equivalent to +1 SD of its 5-year mean. Kossan is currently trading at 24x forward PE. This is at +0.6 SD of its 5-year mean PE or at +1.1 SD of its 10-year mean.
  • Kossan’s key markets are US, Europe and Scandinavian countries. The Group owns a manufacturing plant in Dongguan, China. However, the China plant is not involved in glove manufacturing. This plant undertakes secondary and value added processes on the gloves produced in Malaysia.
  • Output of the plant is mainly for electrical and electronic industry use. Kossan provides capital gain of 14% and yield of 1.7%, we upgrade Kossan to BUY (from HOLD).

Hartalega (FULLY VALUED, Target Price: RM5.05)

  • We raise our Target Price for Hartalega to RM5.05, pegged to 34x CY20F EPS (from RM4.00, based on 27x CY20F EPS of 14.8 sen). This is equivalent to +1 SD of 5-year average. In our view, its valuations are stretched at 40x forward PE, which is near to +1.9 SD of its 5-year mean PE or at +1.4 SD of its 10-year mean.
  • Hartalega has been focusing its business in developed countries since inception, although in recent years it has started to build its business in emerging markets. Most of Hartalega’s revenue are derived from developed countries such as North America, Europe, Australia (82% of total FY19 revenue). Asia (excluding Malaysia) only contributed 14% of FY19 revenue. HART set up a subsidiary in China in 2013 to distribute gloves as it believes that the per capita consumption of gloves in China is likely to increase. In view of its lofty valuations and lowest net profit 3- year CAGR of 7.6% for FY19-FY22 compared to its peers, we maintain our FULLY VALUED call.

Siti Ruzanna Mohd Faruk DBS Group Research | Malaysia Research Team DBS Research | Lee Keng Ling DBS Research | https://www.dbsvickers.com/ 2020-02-03
SGX Stock Analyst Report BUY MAINTAIN BUY 1.34 UP 1.160