Top Glove - CGS-CIMB Research 2021-09-13: Positive News From CBP, But A Little Too Late


Top Glove - Positive News From CBP, But A Little Too Late

  • Effective 10 Sept 21, US CBP has determined that products from Top Glove’s Malaysian subsidiaries are no longer produced under forced labour. This is positive as it allows Top Glove to resume its glove exports to the US (estimated 15% of its total revenue prior to the CBP import ban in Jul 20).
  • Downgrade Top Glove to HOLD, due to declining ASPs and increase in global supply.

US CBP has lifted import ban on Top Glove’s Malaysia subsidiaries

  • In a Bursa announcement, Top Glove (SGX:BVA) stated that US Customs and Border Protection (CBP) has determined that products by its Malaysia operations are no longer made using convict, forced or indentured labour. As a result, Top Glove can export its glove products to the US effective 10 Sept 21.
  • To recap, Top Glove’s Malaysian subsidiaries were hit by an import ban by US CBP in Jul 20 due to findings of forced labour practices.

US sales from Malaysia operations made up 15% of total revenue

  • We view this positively as sales from its Malaysian operations to the US made up ~15% of total sales (FY20). Since the ban in Jul 20, Top Glove had to shift its glove exports for the US to other markets, which had weaker ASPs and lower glove consumption patterns, while its glove sector peers were able to capitalise on higher ASPs in the US market.

ASPs expected to continue on a downtrend

  • Still, Top Glove should continue to face weaker ASPs going forward despite the lifting of the CBP ban, due to incoming new global glove supply and slower customer buying patterns. According to Top Glove, its Sep 21 ASP (per 1k pieces) is at US$40-45 (3QFY21: US$89) for nitrile and US$35-40 for natural latex (3QFY21: US$56). This is lower than expected, leading to cuts in our FY21F/22F/23F ASP estimates for nitrile (US$69/US$35/US$29 per 1k pieces) and natural latex (US$41/US$29/US$26 per 1k pieces).

Weaker glove demand led to slowdown in capacity expansion plans

  • We gather that Top Glove has delayed some of its expansion plans, in view of the more challenging operating environment. Previously (in 3QFY8/21), Top Glove planned to grow its capacity from 100bn to 205bn pieces by end-CY24F (+105%). However, Top Glove has since reduced its capacity expansion plans to reach 174bn pieces (+74%) by end-CY24F. While this will slow down its near-term capacity growth, we believe Top Glove will benefit in the long term from more manageable global supply capacity in the glove sector.

Downgrade Top Glove to HOLD from Add; target price lowered to RM3.48

Walter AW CGS-CIMB Research | 2021-09-13
SGX Stock Analyst Report HOLD DOWNGRADE ADD 1.12 DOWN 2.560