Malaysia Gloves Sector - Maybank Kim Eng 2020-06-09: A Look At The ASP Hikes


Malaysia Gloves Sector - A Look At The ASP Hikes

Highly sensitive to ASP hikes; top pick is Top Glove

  • Earnings are most sensitive to the changes in ASPs, compared to sales volume and costs. Prior to the ASP hikes in Mar 2020, we estimate that every 1% increase in medical glove ASP would result in 5-8% increase in net profits for stocks under our coverage. Additionally, the reopening of economies may exacerbate the acute shortage with the emergence of new glove users (retail, F&B, airlines) and the potential COVID-19 second wave.
  • Our top pick is Top Glove (SGX:BVA) (BUY, Target Price MYR20.00, see Top Glove Share Price) for its steeper ASP hikes and faster sales volume growth.

Earnings explosion in the coming quarters

  • 2Q20 will mark the beginning of the ASP up-cycle with Top Glove scheduled to release its 3QFY8/20 results (Mar-May) on 11 Jun. We believe all glove players will see stronger earnings in 2Q20 and the bigger explosion will take place in 2H20.
  • For Top Glove and Kossan, we maintain our BUY ratings, target prices and earnings forecasts. As for Hartalega, we raise our FY3/21-23E EPS by 40%/30%/9% as we extend the ASP hikes until 4Q20 (from 3Q20 previously) and also include the contribution from the spot orders in 2H20. Consequently, our target price for Hartalega is now raised to MYR12.15 (+34%; 41x CY21E P/E) and the stock remains a HOLD.

US market: Inventories and latest retail ASPs

Gloves out of stock in US

  • The severe shortage can be seen on the websites of the healthcare distributors (eg. Medline), retailers (eg. Amazon, Walmart) and pharmacies (eg. Walgreens, Bartell Drugs, CVS, Rite Aid). For the medical grade nitrile exam gloves, these websites have listed the nitrile exam gloves as “out of stock”. Though certain nitrile exam gloves are available on some of these websites, these are largely limited to the odd-sized gloves (i.e. extra-large).

ASP hikes by different players

  • For players that has more flexibility in raising ASPs (eg. Top GloveSri Trang Agro (SGX:NC2)), the confirmed ASPs for Jul 2020 is already > 40% higher than pre-COVID 19 level in Feb 2020.
  • As for players that have bigger exposure to the big distributors (eg. Hartalega, Kossan), we think the current blended ASP could also be > 10% higher than pre-COVID 19 level. This is because the big distributors only account for 30-50% of the sales volume, leaving the remaining 50-70% of volume available for faster upward ASP adjustments. Comparatively, none of Top Glove’s customer accounts for > 4% of its sales.
  • As for Supermax (a unique manufacturer-OBM player), the ASP hike is much steeper than the abovementioned OEM players. In addition to enjoying the ASP hikes at its manufacturing division, Supermax also streamlined its supply chain (eliminating all the middlemen), in order to maximize its profit. The management has guided that its ASPs (including distribution) has jumped 2.5x to USD150/k pieces (from USD60/k pieces before COVID-19).

Our ASP assumptions

  • Our CY20E blended ASP assumptions are more aggressive for Top Glove (+24%), compared to our blended ASP assumptions for Hartalega (CY20E: +8%) and Kossan (+9%). In our view, Top Glove has a more diverse customer base which gives it more leeway to push through steeper ASP hikes. Moreover, it is the biggest OEM player in the sector (24% global market share) and hence, it could be leading the sector in ASP hikes.
  • Additionally, we have also assumed for a higher spot ASP of USD100/k pieces for Top Glove (present spot ASP is USD100-120/k pieces) and only USD50/k pieces for Hartalega and Kossan, as we try to be more conservative on the latter. For the 3 stocks under our coverage, we have assumed for 10% of sales volume derived from the spot market in 2H20.
  • Our blended ASP assumptions have also assumed for zero ASP hikes and zero spot orders from 1Q21 onwards. Though some of the glove players have the policies of raising their ASPs by 5% every month into 1H21, we await for higher certainty before raising our ASPs further.
  • Prior to the ASP hikes in Mar 2020, we estimate that every 1% increase in medical glove ASP would result in 5%/6%/8% increase in net profits for Hartalega/Kossan/Top Glove. However, after our exam glove ASP revisions which resulted in higher ASP base, every 1% increase in blended ASPs would result in 2%/3%/4% increase in our FY21E net profit for Top Glove/Hartalega/Kossan.

Top Glove: Potentially doubling its ASPs by Feb 2021

  • Given the long sales lead time of 12 months (until Jun 2021) and tight supply outlook in 2021, Top Glove is confident that its ASP hikes could sustain into 1H21. Assuming the pace of ASP hike for the normal orders maintains at 5% m-o-m from Aug 2020, we estimate that the nitrile glove ASP would double to USD46/k pieces by Feb 2021 (from pre-COVID level in Feb 2020). At ASP of USD46/k pieces, it would still be 50-60% lower than the present spot price.

Earnings outlook and valuations

Record high EBITDA margins and ROE

  • Our higher ASP assumptions have resulted in record high EBITDA margins in CY20E for all the glove stocks in our universe (refer Figure 14 in PDF report attached below). We project Top Glove’s EBITDA margin to jump to 31-33% in CY20-21E (from 18% in CY19) and significantly narrowed the gap against Hartalega (CY20-21E: 35-36%).
  • We also project Top Glove’s CY20E ROE to be significantly higher at 43%. This is much higher than our projected CY20E ROE of 30% and 25% for Hartalega and Kossan respectively. Top Glove’s ROE could be higher than its peers because:
    1. the capex for its plants are lower (its factory sites do not require construction of basic infrastructure); and
    2. higher plant utilization rate of almost 100% (from 85% previously).

Our winner pick: Top Glove

  • In terms of earnings growth in the coming 3 quarters, we think Top Glove will outperform Hartalega and Kossan due to Top Glove’s steeper ASP hikes and faster capacity growth.
  • In addition to the construction of new plants, the upgrading works (increase the production speed) at its old plants have also boosted its capacity. Just last week, Top Glove reported a capacity growth of 7% to 78.7b pcs p.a. (from 73.8b pcs a month ago) due to the completion of the upgrading works. We understand that the upgrading works started in 2018-19 and have already fully completed in Jun 2020. Management guided that there would be no more upgrading works in the near-term, and hence, there should be no sudden capacity jump anytime soon.
  • We now estimate Top Glove’s effective capacity growth to be 17% and 27% in CY20E and CY21E respectively. Though this is around 10% higher than our assumed effective capacity for FY21E, we maintain our earnings forecasts for now as it is already significantly higher than that of consensus. Based on our sensitivity analysis, every 1% increase in sales volume, will raise our FY21E net profit by 1%.
  • In our earnings model, we have only assumed for ASP hikes and spot orders until 1QFY21 (Sep-Nov 2020). However, assuming the ASP hikes for normal orders sustain until Jun 2021 (+5% m-o-m) and there is no more spot orders, our blended ASP for FY21E would be USD39/k pieces. This would be 19% higher than our assumed blended ASP of USD33/k pieces in FY21E. Refer figure 17 in PDF report attached below for our scenario analysis under the different ASP hike scenarios.

Top Glove’s upcoming 3QFY20 results (to release on 11 Jun) will mark the beginning of the ASP up-cycle

  • Top Glove’s upcoming 3QFY20 results (to release on 11 Jun, see Top Glove Announcements) will mark the beginning of the ASP up-cycle and we expect the earnings to continue to explode in 4QFY20-1QFY21. With the earnings materialising, the market may continue to re-rate Top Glove. This will also be supported by its record high EBITDA margin (CY20-21E: just a tad lower than that of Hartalega) and superior ROE (higher than Hartalega and Kossan).
  • We value Top Glove on CY21E P/E of 23x (+0.5 SD to 5-year mean). Our target P/E is lower than its trading range of 27-30x in 2018 (+1SD to 5-year mean) because we take into consideration of the potential sharp correction of earnings from FY22E. Additionally, our CY21E EPS is also derived from 8 months of FY21E EPS (supernormal earnings) and 4 months of FY22E EPS (normalization of earnings).
  • Top Glove currently trades at CY21E P/E of 20x, in line with its 5-year mean, but still lower than its two big-cap peers. Hartalega trades at CY21E P/E of 39x (close to its +1SD to mean of 41x) while Kossan trades at CY21E P/E of 23x (slightly above its 5-year mean of 22x). Refer figure 23 for the sector’s valuation comparison.
  • See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.

Maintain HOLD on Hartalega, maintain BUY on Kossan.

  • Continue to read the PDF report attached below for details.

Read also recent SGX market update: Top Glove, Riverstone & UG Healthcare Report Quarterly Earnings

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-06-09
SGX Stock Analyst Report BUY MAINTAIN BUY 20.000 SAME 20.000