UG Healthcare - Phillip Securities 2021-05-14: Great Quarter Though ASPs Are Trending Down


UG Healthcare - Great Quarter Though ASPs Are Trending Down

  • UG Healthcare (SGX:8K7)'s 3Q21 PATMI beat estimates, up 56-fold y-o-y to S$34.3mn. 9M21 PATMI forms 83% of our FY21e forecast. Operating leverage and gross margins were better than modelled.
  • Glove prices likely peaked in the March quarter. Nitrile producers from China are disrupting the market with aggressive prices to penetrate the market.
  • We raise UG Healthcare's FY21e PATMI forecast by 7% to S$115.3mn for higher margins and lower operating expenses. FY22e PATMI forecast is cut by 17% to S$74mn as we lower gross margins by 5% points to 37% in view of ASP uncertainties. Prices have peaked and are trending down. UG Healthcare counters this by building up its core customer base and brand name to maintain price premiums. Supporting FY22e growth is a 58% surge in capacity to 4.6bn pieces.
  • Our target price for UG Healthcare is still pegged at a 30% discount to Big 4 glove makers.

The Positives

Stellar gross margins.

  • Gross margins more than tripled from a year ago to 62.7%. q-o-q, margins were moderately lower due to higher raw-material costs.

Huge operating leverage.

  • No details on operating expenses were provided. Our estimates are based on the difference between PBT and gross margins. Operating expenses - including associate income - were around 13% of 3Q21 revenue. This was above our modelled 14.7%. Higher prices have not lead to an equivalent rise in administration or marketing expenses. .

Cash build-up from record earnings.

  • Record earnings raised UG Healthcare's net cash to S$49.9mn from 2Q21’s S$32.5mn.

The Negative

Shipment delays persisted.

  • Container shortages are stretching out delivery times. Shipments that typically take one month have extended to three months. The worst hit are countries such as Brazil where freight rates are lower than in developed countries such as the U.S. and Europe. There wil delays in recognising revenue and more working capital has been tied up as inventory.


  • With glove prices trending down, buyers will not hold much stock. Some customers are already de-stocking from two months’ inventories to just a week. De-stocking plus aggressive pricing by manufacturers from China have created a peak in glove prices. China’s nitrile producers are new with less established distribution channels. They are offering lower prices to penetrate new markets and expanding aggressively. Manufacturers in Malaysia and Thailand are lowering prices to maintain their distributor customers.
  • UG Healthcare’s longer-term goal is to build up its customer base, pricing and brand name in its key markets. For instance, a 10-15% pricing premium will yield higher margins and could defend the company against competitors that either sell at or below to gain ground with customers.
  • UG Healthcare is also on track to expand capacity by 58% from 3Q21’s 2.9bn to 4.6bn in FY22. Net expansion is 1.7bn, with 500mn already commissioned in April and the remaining 1.2bn to begin from July 2021. Our FY22e revenue growth forecasts are premised on this surge in capacity. Plans for another factory after this phase will be announced when they are finalised.

Maintain BUY with lower target price of S$0.85, from S$1.03

Paul Chew Phillip Securities Research | https://www.stocksbnb.com/ 2021-05-14
SGX Stock Analyst Report BUY MAINTAIN BUY 0.85 DOWN 1.030