UG HEALTHCARE CORPORATIONLTD (SGX:8K7)
RIVERSTONE HOLDINGS LIMITED (SGX:AP4)
Gloves Sector Outlook - NEUTRAL; All Eyes On ASP
- Recent vaccine newsflow has been a dampener to glove makers’ share price, as concerns arise that ASP could see an earlier/steeper decline with the stronger-than-expected effectiveness of COVID-19 vaccines (Pfizer: 95%; Moderna: 95%).
- However, we remain positive on the fundamentals and expect FY21F to be another year of record profits for glove makers. We also expect ASPs to remain on an uptrend in coming months and stay high in CY21F even with the widespread availability of COVID-19 vaccines.
Glove Sector - All eyes on ASP
- With the recent positive newsflow on vaccine development, all eyes are on how long the elevated glove ASPs can sustain and how ASPs will stabilise post-COVID-19. We expect ASPs to remain on a firm uptrend in 1Q21F, with the recent resurgence in COVID-19 cases boosting glove demand, while supply remains weak given the disruption from Top Glove (SGX:BVA)’s production halt. We understand that end-users remain insensitive to pricing and are in fact willing to pay a premium to secure stable supply. MARGMA notes that the glove industry’s current contractual glove ASPs are about US$70-80 per thousand pcs, some 200% higher than pre-COVID-19 levels (~US$25).
- Without demand or supply shock in sight, we expect ASPs to stabilise on a gradual basis, in tandem with better demand-supply dynamics starting 2H20F. MARGMA estimates that ASPs could still remain at c.50-60% above pre-COVID-19 levels by 2023 (c.US$35 per thousand pcs). We have already factored in more conservative assumptions in our model — we estimate ASP to decline 3% monthly beginning Apr 2021, which brings our ASP assumptions to c.US$35 by end-2022F, about 1 year earlier than MARGMA’s expectations.
- With this, we see fundamentals remaining strong in CY21F, with glove makers on track to another year of record profit. We forecast UG Healthcare to see net profit growth of 7.7x to S$103m in FY21F, while Riverstone can also see net profit growth of 88% y-o-y to RM1.1bn in FY21F.
Positioning for a post-COVID era
- COVID-19 has brought bumper profits to glove makers, helping to strengthen balance sheets and prepare them for stronger growth ahead.
- UG Healthcare has leveraged on its strong profitability in CY20, as well as additional cash inflow from its completed share placement, to accelerate its upstream manufacturing capabilities. We expect its total capacity should reach 4.6bn (+59% y-o-y) by end-FY21 and believe that the company’s vision of eventually hitting production capacity of 10bn per annum could be realised sooner given its strengthened balance sheet — these could help UG Healthcare achieve higher profits even as ASPs normalise post-COVID-19. We remain confident that the additional capacity can be taken up, as UG Healthcare has always sold more gloves than it produces. We estimate that UG Healthcare outsources c.500m-700m gloves from other manufacturers for sale through its distribution network annually.
- Meanwhile, Riverstone has focused more on grabbing market share in the cleanroom segment this year, as competitors in this space shifted focus towards healthcare gloves. We are positive on this move, as Riverstone deals directly with end-users (OBM model) in this segment, vs. distributors (OEM model) for its healthcare segment. This will allow Riverstone to widen its customer base in the cleanroom segment, which tends to be a more sticky relationship as products are tailored to individual customer needs. Also, the cleanroom segment contributes higher ASPs and gross margins; hence a higher sales volume mix from the cleanroom segment will also translate into higher normalised profits post- COVID-19.
Valuation
- Currently, UG Healthcare and Riverstone are trading at 4.7x and 9.4x CY22F P/E, respectively, which we think more than priced in earnings normalisation post-COVID-19. There remain regulatory, manufacturing and logistic hurdles to the widespread availability of COVID-19 vaccines.
- UG Healthcare (SGX:8K7) (ADD, Target price:S$1.70) is our preferred pick in the sector given its relatively cheaper valuation and our expectations of higher normalised profits, backed by a 59% y-o-y manufacturing capacity expansion in CY21F. We also like it for its undemanding valuation (a 65% discount to the Malaysia-listed glove sector average CY22F P/E of 13.5x) and OBM business model, which allows it to garner stronger ASP upside potential vs. its peers. Our target price is based on 13.2x CY22F P/E.
- We also like Riverstone (SGX:AP4) (ADD, Target price: S$2.50) as it reaps benefits from both the COVID-19 pandemic as well as the recent tech sector boom, allowing both its healthcare glove and cleanroom segment to see strong volume growth. We are positive on its move to prioritise growth in the cleanroom glove segment, as it contributes higher ASP and GPM, which will allow Riverstone to see stronger normalised profits.
What could go wrong:
- We would turn more cautious should the ASP hike be unable to offset higher raw material prices or should there be supply disruptions, e.g. production halts due to COVID-19 outbreak in factories (medium risk).
Read also:
ONG Khang Chuen CFA
CGS-CIMB Research
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https://www.cgs-cimb.com
2020-12-09
SGX Stock
Analyst Report
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2.500
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