On Friday (26 February), Top Glove made the long-awaited announcement of its listing on the Hong Kong Stock Exchange (HKEX). You can read the official announcement here. Together with the announcement, Top Glove submitted a required Application Proof to HKEX. It is a 750 pages document and it gives arguably the most detailed description of the business of Top Glove one could ask for. You can find the full document here.

There are still a number of material unknowns surrounding the listing, so discussing the details at this point would be premature. However, the Application Proof contains a lot of important details about the company and the glove industry. As had done Intco Medical, when they submitted their Application Proof last month (you can find it here), Top Glove has commissioned Frost & Sullivan to conduct a market research on the industry and on the company. The details of this research are provided on pages 84-108 (industry) and pages 109-132 (Top Glove's business) in the Application Proof, and due to lack of space, for now we will comment only on the interesting parts of the industry section.

**Average Selling Prices**

This is the buzz word nowadays, and while it depends on a large number of other variables (i.e. it's not necessarily an exact figure), let's focus on the corresponding data provided with Frost & Sullivan's report. The report has segmented glove prices based on material they are made of (nitrile, latex, vynil) and based on application (medical and non-medical). Below is the graph with projections up to CY2025:

From Top Glove's previous announcements (for instance see their latest investor presentation from Friday here), we know that the company will have the following production capacity by type of gloves and by year:

Capacity |
Current |
End 2021 |
End 2022 |
End 2023 |
End 2024 |
End 2025 |

Nitrile | 45 | 60.3 | 81.8 | 96.9 | 112.1 | 127.2 |

Latex | 41 | 41.3 | 41.3 | 42.6 | 44 | 45.3 |

Vinyl | 7 | 10.4 | 12.9 | 15.5 | 17.9 | 20.5 |

TOTAL | 93 | 112 | 136 | 155 | 174 | 193 |

For simplicity, as detailed data is not available for the exact plans for 2023 and 2024, and because only the total capacity is known for 2025, I have made the following assumptions for these years:

- From 2022 to 2025, the total capacity is expected to increase by 70% (known)

- The total increase in capacity from 2020 to 2022 is planned to be 68%, of which 55% for nitrile gloves, 7% for latex gloves, and 55% for vinyl gloves.

- Thus, it would be a fair assumption that the increase in capacity will be similar for each segment. My exact assumption is that the nitrile capacity will increase by 60% to 127.2 billion pieces, the vinyl capacity will increase by 60% to 20.5 billion pieces, and the latex capacity will increase by 10% to 45.3 billion pieces.

- Even distribution of increase in capacity year-on-year is assumed.

Based on the aforementioned ASP projections, and based on average utilization rate of 86%, we get the following sales revenue projections for each calendar year (+ in RM, assuming USD1 = RM4):

CY2021 = $6.251 billion (RM25.007 billion)

CY2022 = $4.870 billion (RM19.480 billion)

CY2023 = $3,871 billion (RM15.484 billion)

CY2024 = $3.866 billion (RM15.462 billion)

CY2025 = $3.929 billion (RM15.715 billion)

**TOTAL (5 years) = $22.788 billion (RM91.150 billion)**

Note that these are calendar year projections and not financial year projections. The financial year for Top Glove starts in September, so one quarter of the financial year is always within the previous calendar year.

**Enterprise Value**

Based on financial analysts' projections, the net profit of Top Glove will be approximately 50% in 2021, 30% in 2022, and 20% in 2023. Let's assume it will go down to 15% in 2024, and 10% in 2025. In this case the net profit for each calendar year should be:

CY2021 = RM12.503 billion

CY2022 = RM5.844 billion

CY2023 = RM3.097 billion

CY2024 = RM2.319 billion

CY2025 = RM1.572 billion

The company also has RM1.21 billion cash as of the latest financial results from end of November 2020.

Let's very conservatively assume that the earnings growth is going to be 5% per year after 2025. Assuming weighted average cost of capital of 7% for Top Glove (see here), we get the following enterprise present value based on discounted cash flow model: **RM82.44 billion**.

There are a few important notes that must be taken into account:

- I use net profit to derive the final figure. This is not the right way to use the DCF model (in a nutshell it is not a DCF per se). You have to figure out the free cash flow for each year. However, deriving an accurate figure for free cash flow is even harder, and requires a lot more assumptions. Additionally, different versions of the DCF use variations of what they consider "free cash flow". Thus, I have most certainly taken the easy way and I accept any criticism in advance. In this sense, the figure might be on the optimistic side, even though some of my assumptions are conservative. Bear in mind that Top Glove has a small amount of outstanding debt, for instance.

- As you can see, in order to arrive at this final figure, a number of assumptions need to be made anyhow. Most of the assumptions made are based on other people's assumptions or data (for instance, assumptions based on financial analysts' consensus). Thus, different assumptions might result in (very) different final valuations.

- The discounted cash flow model has the disadvantage of requiring precise figures. This is the reason why we have used as few extra assumptions as possible, and whenever possible we have been relying on publicly available data.

*Important disclaimer: Any views expressed are for informational and discussion purposes only. None of this information is intended as, and must not be understood as, a source of advice. It is imperative that you always do your own research and that you make any decisions based on your personal situation and your own personal understanding.*