Rubber Gloves - CGS-CIMB Research 2020-07-18: Expecting Higher ASPs Of Gloves In The US


Rubber Gloves - Expecting Higher ASPs Of Gloves In The US

  • US customs authorities (CBP) issued detention orders on two of Top Glove (SGX:BVA)’s units on allegations of forced labour practices.
  • Based on our assumption, we believe that the short-term financial impact on Top Glove is minimal, but there could be long-term impact on its reputation.
  • We expect Hartalega, Kossan Rubber and Supermax to benefit from CBP’s temporary ban on Top Glove’s gloves in the near term as the US glove demand remains strong.

US CBP bans import of gloves from TOPG subsidiaries

  • To recap, the United States Customs and Border Protection (CBP) placed a withhold release order (detention order) on disposable gloves produced by two of Top Glove’s subsidiaries, Top Glove Sdn Bhd and TG Medical Sdn Bhd, on 15 Jul. See Top Glove Announcements.
  • According to a US media report, CBP stated that it had gone through extensive inter-agency consultations and had found evidence of forced labour practices, including debt bondage, in Top Glove’s units.

Minimal impact to numbers, but reputation could take a hit

  • Under this order, products made by both companies are not allowed entry into the US. We estimate that sales to US by both subsidiaries make up 9-10% of Top Glove’s total 9MFY8/20 sales. Top Glove expects this issue to be resolved in 2-4 weeks.
  • We believe that the impact to Top Glove’s earnings will be minimal, assuming that it can resolve the detention order in the expected 2-4 week timeframe. We estimate that its FY8/20 EPS will be negatively impacted by 0.4% for every week the order is in effect.

Expect other glove companies to benefit from this detention order

  • In the same media report, CBP also mentioned that it is aware of the current critical need for disposable rubber gloves for domestic usage and would continue to allow entry of gloves produced by other manufacturers. It also expects no significant impact on total US imports of disposable rubber gloves. Based on our estimates, Top Glove’s rubber gloves make up c.13% of the US’s total rubber glove imports.
  • In our view, this will likely lead to a spike in demand for rubber gloves by other glove manufacturers as long as the detention order on both Top Glove’s subsidiaries is in effect. Hence, we believe glove makers under our coverage (ex-Top Glove) will benefit in terms of higher sales to the US, namely Hartalega, Kossan and Supermax.
  • However, we believe that other glove makers are unlikely to be able to fully fulfil the supply gap as glove makers globally are already running at high average uilitisation rates of > 95%. Hence, this could result in average selling prices (ASPs) of rubber gloves in the US being driven higher due to a potential supply squeeze. This is further aggravated by the surge in new Covid-19 cases in the US, which reached a new daily record high of 71.2k cases (17 Jul).

Reiterate our sector Overweight call

Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2020-07-18
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