Top Glove Corporation (Top Glove) reported a fourth consecutive quarterly net loss of RM130.6m in 3QFY23 (+20.7% QoQ) from a net loss of RM164.7m in the previous quarter. The loss narrowed mainly due to the increased in ASPs and cost optimisations following the decommissioning production lines and temporary shutdown of factories. After stripping out the non-operating items, 9MFY23 core net loss stood at RM420.4m (-262% YoY). The results were within our estimates at 71.3% but below market consensus at 91.3% of full year forecast. We maintain our forecast for FY23 but cut our FY24-25F earnings by an average of 12% to factor in lower sales volume. We reiterate our Underperform call on Top Glove, with a lower TP of RM0.59, based on 2- year average forward earnings, pegged to a 5-year average PER of 30x.

• 3QFY23 results highlight. Top Glove’s revenue declined 14.1% QoQ to RM530.6m. The principal region, Malaysia, reported a drop in revenue of 18.6% QoQ, while Thailand and China reported a growth of 72.8% and 6.6% QoQ respectively. At the pretax level, it remained a loss at RM138.5m (+5.1% QoQ). The oversupply situation continues to persist as customers still lack urgency in placing sizeable orders given the short delivery time, resulting in a low utilisation rate of ~30%. The tax credit recognized in the 3QFY23 was primarily resulted from unabsorbed tax losses, capital allowance, and reinvestment allowance, leading to a decrease in deferred tax liabilities.

• Push back from ASP hike. Top Glove has seen a drop in sales volume QoQ for all types of gloves in 3QFY23, including nitrile gloves (-15%), natural rubber gloves (-27%), surgical gloves (-15%) and vinyl gloves (- 48%). This was mainly due to the 6% QoQ upward revision in ASP.

• Decommissioning and ceasing production lines. In line with the prolonged gloves oversupply environment, Top Glove has taken steps to decommission 2 old production lines with 5bn pieces capacity annually, and temporarily shutting down 17 out of 49 factories which runs 35bn pieces capacity annually. This will shave off ~40% of the total capacity from 100bn to 60bn pieces per annum.

• Lower raw material prices and natural gas cost. The average nitrile price is expected to drop by 17% from March 2023 to ~USD0.79/kg in June 2023 while natural latex concentrate price is expected to decrease by 13% to USD1.08/kg amid ending of wintering season in May 2023. Meanwhile, natural gas tariff is expected to further declined by 11% from July 2023.

• Challenging near term outlook. The Group remains under pressure given the persistent demand-supply imbalance. While management believes that ASP has bottomed out and has implemented turnaround plan to raise ASP by about 3-5%, we reckon that its ability to do so will be limited by the intense pricing competition from China glove players

Source: PublicInvest Research - 19 Jun 2023