UG Healthcare - CGS-CIMB Research 2020-09-25: Faster Pace Of ASP Hikes

UG HEALTHCARE CORPORATION LTD (SGX:41A)

UG Healthcare - Faster Pace Of ASP Hikes

We remain positive on UG Healthcare (SGX:41A) as the global shortage of gloves continues to drive an uptrend in average selling prices.
We expect UG Healthcare to record stronger earnings in quarters ahead. For 1QFY21F, we forecast a 50x y-o-y jump in net profit to S$15.7m.
Reiterate ADD with an unchanged target price. UG Healthcare remains our preferred pick among Singapore-listed glove companies.

We believe the global glove shortage will persist till at least end-CY21F, given the gravity of the COVID-19 outbreak and limited new supply in the coming months.
Our recent channel checks suggest that end demand remains strong as the pandemic appears to be accelerating worldwide, and European countries are preparing for a second wave of infections. Order lead times for glove manufacturers are further extending (currently till at least 1HCY21F), while inventory levels across supply chain (distributors, end-users) remain low.
We expect glove demand to remain high in the medium term even with the eventual discovery of a vaccine, given
1. current vaccine manufacturing and distribution constraints hampering mass availability,
2. structural increase in glove demand given increasing hygiene awareness, and
3. a need to restock inventory across supply chains.

UG Healthcare has recently seen an accelerated hike in selling prices. We estimate ASPs could rise by 10-15% monthly between Sep to Nov 2020, versus 10-12% monthly from May to Aug. We understand the recent hike in nitrile glove (c.40% of FY20 revenue contribution) prices was catalysed by raw material shortages.
Meanwhile, latex glove (c.50% revenue contribution) prices are also on the rise as more end-users from developed countries are increasingly open to switching from nitrile to latex gloves given the long order lead time for nitrile.
We forecast UG Healthcare to record ASP growth of +69% y-o-y in FY21F.

UG Healthcare is set to release its quarterly business update in early Nov; we estimate a net profit of S$15.7m for 1QFY21F (50x jump y-o-y).
We expect even stronger earnings in subsequent quarters, and forecast UG Healthcare to record S$70.5m net profit (+400% y-o-y) in FY21F, driven by:
1. further ASP increase,
2. higher sales volume (with +59% y-o-y production capacity expansion in FY21F), and
3. higher economies of scale.

We reiterate our ADD call with target price still pegged to 15.0x CY21F P/E.
See UG Healthcare Share Price; UG Healthcare Target Price; UG Healthcare Analyst Reports; UG Healthcare Dividend History; UG Healthcare Announcements; UG Healthcare Latest News.
UG Healthcare remains our preferred pick among Singapore-listed rubber glove companies, due to its undemanding valuation (a 52% discount to the Malaysia-listed glove sector average CY21F P/E of 16.7x) and OBM business model, which allows it to garner stronger ASP upside potential vs. its peers.
Potential re-rating catalysts include higher-than-expected increase in selling prices; downside risks include earlier-than-expected widespread availability of a vaccine for COVID-19.

ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-09-25

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