Top Glove - CGS-CIMB Research 2021-09-17: Concerns Over Lower ASPs Largely Priced In

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TOP GLOVE CORPORATION BHD (SGX:BVA)

Top Glove - Concerns Over Lower ASPs Largely Priced In

• Top Glove's FY21 final core net profit of RM7.8bn was 3% below our forecast, due to weaker-than-expected sales volume, owing to lower production during the MCOs.
• We expect Top Glove to continue recording weaker q-o-q results ahead, due to lower ASPs, increase in global glove supply and weaker demand from clients.
• Reiterate HOLD rating on Top Glove with a lower target price of RM3.00 (17x CY23F P/E).

Top Glove's FY21 net profit rose 322% y-o-y; still missed expectations

• Top Glove (SGX:BVA)’s 4QFY21 (Jun 2021 to Aug 2021) net profit came in at RM608m (-52.9% y-o-y), bringing FY21 net profit to RM7.8bn (+322% y-o-y). See Top Glove's announcements. This was below, at 97% of our and 91% of Bloomberg consensus’ FY21F estimates, due to lower-than-expected sales volume, owing to lower production output during the enhanced and full movement control order (MCOs).
• Top Glove declared a final dividend of RM0.054 per share, bringing FY21 cumulative dividend to RM0.651 per share; within expectations (FY21 dividend payout: 66%). See Top Glove's dividend history.

Top Glove's 4QFY21 Net profit declined 70% q-o-q from lower production volume

• Top Glove's 4QFY21 revenue and net profit dipped q-o-q by 49.2% (to RM2.1bn) and 70% (to RM608m), respectively, due to:
  1. weaker sales volume (-20% q-o-q), mainly from impact of the MCOs,
  2. lower selling prices (ASPs: -32% q-o-q), and
  3. lower economies of scale.
• Accordingly, 4QFY21 EBITDA margins waned 30.2% points q-o-q to 33.8%.
• Cumulatively, Top Glove's FY21 revenue rose 127% y-o-y to RM16.4bn, while net profit grew 322% y-o-y to RM7.9bn; this was due to COVID-19-led impact resulting in a steep y-o-y rise in ASPs (+146% y-o-y).

Expecting further weakness in quarters ahead

• Going forward, we expect Top Glove to continue posting weaker q-o-q results, due to weaker ASPs from incoming new global glove supply and slower customer buying patterns. According to Top Glove, its Sep 21 ASP (per 1k pieces) is US$40-45 for nitrile (4QFY21: US$58) and US$35-40 for natural latex (4QFY21: US$42). It expects ASPs to continue to decline by 8-10% monthly up until Jan 22.

Positive on uplift of CBP ban on Top Glove’s Malaysia operations

• Effective 10 Sep 21, US Custom and Border Protection (CBP) has lifted the import ban on goods made by Top Glove’s Malaysia operations as it concluded that these products were no longer made using forced labour. We view this positively, as Top Glove’s sales from its Malaysian operations to the US made up ~15% of total sales (FY20). See report: Top Glove - CGS-CIMB Research 2021-09-13: Positive News From CBP, But A Little Too Late.
• Top Glove plans to ramp up its US sales from end-Sep 21 onwards, which should fully normalise by Dec 21.

Reiterate HOLD on Top Glove, with a lower target price of RM3.00

• We cut our FY22F/FY23F/FY24F EPS forecast for Top Glove due to a further drop in ASPs (to US$32/US$29/ US$28 per 1k pieces, from US$35/US$29/US$28 previously). Thus, our target price for Top Glove is lowered to RM3.00 (17x CY23F P/E, 5-year mean P/E), while we keep our HOLD call.
• See
  • Top Glove's Share Price,
  • Top Glove's Target Price,
  • Top Glove's Analyst Reports,
  • Top Glove's Dividend History,
  • Top Glove's Announcements,
  • Top Glove's Latest News.
• Despite weaker earnings prospects, we opine that Top Glove’s current valuations will be supported by:
  1. inelastic global glove demand,
  2. its position as the largest global glove maker, and
  3. its strong fundamentals (total cash and investment securities of RM2bn at end-4QFY21).
• See the peer comparison table of Top Glove with Malaysia listed glove makers Hartalega, Kossan Rubber Industries, Supermax, and Singapore listed glove makers Riverstone (SGX:AP4), UG Healthcare (SGX:8K7) in report attached below.

Key highlights from Top Glove's briefing:

• Top Glove recorded a 20% q-o-q decline in 4QFY21 sales volume. This was mainly due to:
  1. the full impact from the temporary stoppage of sales to the US from Malaysia (compared with 2-month impact in 3QFY21),
  2. production disruptions due to the implementation of the enhanced MCO (factories in Selangor closed for 10 days), which affected its operations in Selangor,
  3. lower demand from customers due to the higher COVID-19 vaccination rate, and
  4. customers keeping lower inventories due to the adoption of a ‘wait and see’ approach.
• While ASPs declined 32% q-o-q in 4QFY21, Top Glove expects ASPs to continue declining by 8% to 10% monthly up until Jan 22F. In Sep 21, we gather that Top Glove’s glove ASPs (per 1k pieces) was around US$40-45 (4QFY21: US$58) for nitrile and US$35-40 for natural latex (3QFY21: US$42). As of FY21, the largest percentage of sales by product mix (in terms of sales volume) was nitrile gloves (42%), natural latex powder-free gloves (24%), natural latex powdered gloves (23%), vinyl/CPE/TPE 99%) and surgical gloves (2%).
• Top Glove expects raw material prices to continue on a declining trend going forward. This is on the back of an increase in the supply of raw materials, in tandem with an increase in the supply of raw materials. However, Top Glove is not of the view that the quantum of decline in raw material prices will be more than the expected decline in ASPs going forward.
• With the lifting of the US CBP ban on Top Glove’s Malaysia operations effective 10 Sep 21, Top Glove expects its Malaysian subsidiaries to begin exporting their products to the US from end-Sep 21F. It expects normalising of orders to the US (similar quantum before the US CBP ban) by Dec 21 (2QFY22F).
• Top Glove expects to spend a total capex of RM1bn in FY22F. This will mainly consist of
  1. capacity expansion plans (RM530m),
  2. building new hostels for workers (RM100m),
  3. building a new nitrile butadiene and gamma sterilisation plant (RM250m), and
  4. ancillary capex (RM120m, mainly for IT and ESG purposes).
• Top Glove stated that it is embracing Industry Revolution 4.0 in its manufacturing process. It plans to build a smart production facility with a total annual production capacity of 20bn pieces. This plant will have these features:
  1. a visual inspection system to ensure quality of gloves,
  2. fully automated glove packaging machines,
  3. a smart energy management system to reduce energy usage during its manufacturing process, and
  4. usage of solar energy to reduce energy wastages.
• We understand that this plant will only require worker usage of 1.5 workers per million pieces produced (compared to an average of 2.1m pieces per worker in FY20). Phase 1 of this plant should commence operations by 2QCY22 (3QFY22F) and be fully completed by 2QCY25F (3QFY25F).
• Top Glove will continue to invest in ESG. It has set ESG targets for FY25.
• As of 16 Sep 21, Top Glove stated that 90% of its workers in Malaysia have been fully vaccinated. On the other hand, 87% of all its workers worldwide are fully vaccinated. Hence, Top Glove is allowed to operate at a 100% workforce, following guidelines set by the Malaysian government
• In the long term, Top Glove expects global glove demand to grow by 10% to 15% annually. This is driven by various factors, including increase in glove usage in non-medical sectors and better healthcare awareness in emerging countries.

Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2021-09-17

SGX Stock Analyst Report HOLD MAINTAIN HOLD 0.97 DOWN 1.120