Top Glove - Maybank Kim Eng 2020-07-22: Follow The ASP Momentum; New Target Price Of MYR28.60


Top Glove - Follow The ASP Momentum

A 6-month trade; maintain BUY on Top Glove

  • We raise our Top Glove (SGX:BVA)'s FY8/20-22 EPS by 13%/103%/44% on higher ASP assumptions. Our new Target Price is MYR28.60 (+31%), based on a lower P/E target of 16x (from 23x; a tad lower than its 5-year mean of 17.5x) on the supernormal CY21E EPS.
  • Maintain BUY as Top Glove Share Price could still be supported by the ASP hikes in the next 6 months.
  • In our view, this is only a trade as Top Glove’s high ASP premium against its peers will likely dissipate from 2QCY21, in anticipation of more new supply.

Small impact from the US detention order

  • Due to the US detention order on 2 of its subsidiaries (12.5% of total sales volume), Top Glove has engaged independent consultants to verify all aspects of the foreign workers’ welfares (i.e. overtime, passport safekeeping, accommodations, recruitment fees). Top Glove is hopeful for the issue to be resolved by mid-Aug. In the event that this drags on, it will re-route the detained shipments to other markets at a lower ASP (i.e. 5% lower than to US).
  • Assuming it takes 1 month to re-route the shipments, we estimate that it would reduce our FY20E net profit by 2%.

Wide ASP gap against peers

  • In Aug, Top Glove raised its glove ASPs by 25-30% m-o-m. It plans to raise its ASP in Sep by another c.20% m-o-m and the ASP hikes will sustain into Dec 2020 due to the glove shortage. Meanwhile, its peers are likely to raise their ASPs by 10-15% m-o-m until Dec 2020. Presently, Top Glove’s nitrile glove ASP premium is 25-50% higher than its peers and the gap may stay as the ASP hikes from its peers continue to lag that of Top Glove.

Top Glove's earnings to peak in 2QFY21E?

  • In our view, Top Glove’s high ASP premium may stay in the next 6 months given the supply shortage. However, as new supply from all key glove producing countries (i.e. Malaysia, China, Thailand, Indonesia) come online from 2QCY21, Top Glove will need to drop its ASPs to match that of its peers. Hence, we think Top Glove’s ASPs may peak in 1QCY21 and fall from 2QCY21. It takes 1-1.5 years for the new capacity to be built and COVID-19 turned pandemic in Jan 2020 in China. Hence, more new capacity (especially from China), could commence in 2QCY21 and alleviate the glove shortage.
  • As we expect Top Glove’s ASP to peak in 1QCY21, we project Top Glove’s quarterly net profit to peak in 2QFY21 (Dec-Feb) at MYR2.65b on high EBITDA margin of 58%.

ASP hikes turn even more aggressive

  • In Aug, Top Glove raised its latex glove ASP by 25% m-o-m while the nitrile glove ASP is raised by 30-40% m-o-m. This is a lot more aggressive than its hikes in the prior months (+5-15% m-o-m in Mar-Jul). For Sep, Top Glove plans to raise its ASP by another c.20% m-o-m. YTD, we estimate that Top Glove’s latex glove ASP has jumped 85% while its nitrile glove ASP has jumped 117%.
  • In our ASP assumptions, we have assumed for Top Glove to raise its glove ASP by 20% m-o-m in Sep and 10% m-o-m in Oct-Dec 2020. Based on our estimates, Top Glove’s ASP hikes by Dec 2020 would be 140-190% YTD for latex gloves and 245% YTD for nitrile gloves.

Spot ASPs could be raised too

  • Presently, spot order accounts for a higher portion of its total sales volume, i.e. 25-30% of its total volume (from 20% previously). Meanwhile, the nitrile glove and latex glove ASPs for spot remain at USD100-130/k pieces and USD50-60/k pieces.
  • The spot ASPs could be raised in the coming months as Top Glove’s ASPs for the normal orders would continue to be raised aggressively, leading to a narrower gap against the spot. That said, we believe the spot ASPs may also fall from 2QCY21 in line with our expectation of a lower ASPs for the normal orders.

Risk of order deferment/cancellation if ASP premium stays beyond 2QCY21

  • For the nitrile gloves, Top Glove has secured sales for the next 560 days (until Jul 2022). As for its latex gloves, it has secured sales for the next 460 days (until Nov 2021).
  • Though Top Glove has already collected deposits from its customers (big customers: 3-month rolling forward deposits, small customers: 20% of sales), we think Top Glove will still need to lower its ASPs when more new supply comes into the market from 2QCY21.
  • If ASP gap against its peers is not narrowed and there is new capacity from other players, the customers may opt to defer some of its orders with Top Glove until Top Glove drop its ASPs. Meanwhile, some of its small customers (paid 20% deposit) may also opt to cancel its orders if the ASP gap against its peers remains wide (i.e. 25-50% premium).
  • As Top Glove continues to raise its ASPs aggressively until Dec 2020, the deposits it collected from its small customers in the recent 3 months would become just c.10% of the future invoice.

Our earnings assumptions for Top Glove

  • We raise our FY20-22E EPS by 13%/103%/52% as we:
    • Raise our blended ASP assumptions by 6%/69%/15% for FY20-22E. This assumes for ASP hikes of 10-20% m-o-m in Sep-Dec 2020, which would be reflected in their 1Q-2QFY21 results. We also assume for its ASP to drop 10-20% q-o-q in 3Q-4QFY21 as we impute for the higher supply ahead. Our FY21E ASP growth is 110% and we assume for its FY22E ASP to fall 53% (c.10% higher than pre-COVID 19 level);
    • Lower our USD vs. MYR assumptions slightly to 4.20/4.15/4.15 for FY20-22E. YTD FY20, the USD vs. MYR averaged 4.22 and is on a downward trend. Based on our sensitivity analysis, every 1% decrease in the USD vs. MYR, would result in 1.5% decrease in our FY21E net profit.
    • Raise our NBR cost by 39% and latex cost by 13% in FY20E. Presently, there is already a shortage of NBR and we think NBR cost could trend higher as it takes time for supply to catch up with demand (requires construction of new NBR plant). As for the latex, there would be spillover effect from NBR as more glove producers switch to producing latex gloves due to the shortage of NBR.
  • See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.

Lee Yen Ling Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2020-07-22
SGX Stock Analyst Report BUY MAINTAIN BUY 28.60 UP 21.900