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


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.

Global shortage of gloves to persist

  • 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.

Faster pace of ASP hikes

  • 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's 1QFY21 preview: 50x jump in net profit

  • 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.

Maintain ADD on UG Healthcare

ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-09-25
SGX Stock Analyst Report ADD MAINTAIN ADD 4.800 SAME 4.800