HLBank Research Highlights

Author: HLInvest   |   Latest post: Tue, 14 Jul 2020, 9:56 AM


Rubber Products-Reflecting greater optimism

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The onslaught of Covid-19 has led to a global surge in demand for gloves. This has in turn increased ASP alongside higher utilisation rates. We raise the earnings forecast of our coverage to reflect this and also apply higher valuation PE multiples (from +1.5SD to +2SD). Our top pick remains the market leader Top Glove, Hartalega is upgraded from Hold to BUY, Kossan remains a HOLD while Karex is upgraded from Sell to HOLD. As the outlook for rubber glove producers looks promising given stronger demand driven by Covid-19, we upgrade our sector rating to OVERWEIGHT (from Neutral).

Covid-19. Since WHO declared Covid-19 a pandemic (11 Mar), the virus’ spread has been exponential especially in the US and Europe; naturally, expect glove producers will benefit from higher demand for its products. Furthermore, there are chances of 2nd

wave to re-emerge alongside no vaccine within the near horizon (health experts say 12- 18 months). Alongside, better hygiene/preventative measures and the resulting sustained higher demand for gloves, share prices have re-rated of late.

Key drivers. Our channel checks reveal that all glove companies under our coverage have seen a surge in demand for gloves. We also understand that these increased orders are on a higher ASP since the Covid-19 outbreak (c.6% blended). Apart from that, with the additional lead time (c.5 months blended vs. pre Covid-19 of 1-2 months), we reckon utilisation rates have surged to above 95% (from c.80-85% pre Covid-19) and we expect it to maintain this way for the rest of 2020.

Top Glove. Being the world’s largest glove manufacturer, Top Glove has received surge in orders in tandem with the current strong global glove demand. Lead time of 1- 1.5 month pre Covid-19 outbreak, has rose to c.11 months. Utilisation rate pre Covid- 19 stood at 85%, but has now increased to c. 97%. An increase of ASP by c.9% was achieved since Feb to date, and we expect it to sustain until year end. Top Glove also is exploring to diversify their product range to face masks, which they intend to start production in 2H20. We increase FY20-22 earnings by 60%/72%/37% to reflect higher ASP and utilisation. Furthermore, we take this opportunity to adjust our valuation PE target from 35x to 41x (+2SD above 5-year mean) which increases our TP to RM13.50 (from RM7.40). Our TP is based on mid FY21 pegged against PE multiple of 41.05x. Maintain our BUY call and our top pick for the sector.

Hartalega. We adjusted earnings post FY20 results (published today). We gather that ASP has increased c.4% since Covid-19 while utilisation rate remains above 90%. Further increases for both are likely going forward, mirroring peers (ASP: c.7%). Hence, we increase FY21-22 earnings by 43%/38%. We also take the opportunity to roll forward our valuation to FY21, and apply a PE of 46.5x (+2SD from 5-year mean) from 42x. This raises our TP to RM10.08 (from RM5.99), upgrade to BUY (from HOLD).

Kossan. We comprehend that since Covid-19, Kossan’s ASP has increased by c.4% while utilisation has increased to c.90% (from 80%). We opine both its ASP and utilisation will continue to increase closer to peers (c.7%). With that, we raise FY20-21 earnings forecast by 31%/17% and roll forward our valuation to FY21, tagged to a higher PE of 31.4x (+2SD) from 27x. This increases our TP to RM8.11 (from RM5.00). Maintain HOLD. Results are expected to be released on 21st May.

Karex. We understand a global shortage of condoms is looming, as lockdowns globally have disrupted production and somewhat increased demand. With Karex being the largest condom maker globally, we feel it may benefit via higher ASPs. The MCO (started 18 Mar) stopped Karex’s production for the first 10 days’ but fortunately, it was subsequently granted permission to restart but with only 50% of its workforce. As we understand, since Covid-19, Karex’s ASP has been on an upward trend, possibly due to other smaller domestic manufacturers that were not able to operate during MCO and/or faced hiccups in obtaining raw materials. Nonetheless, the positives of higher ASPs will only be felt in a more profound manner from FY21 onwards as the near-term impact could be partially offset by lower utilisation from the MCO (i.e. 10 days of production loss followed by 50% operative scale up until 29 Apr). We revise FY20-22 earnings upwards by 15%/33%/6% and increased our valuation to PB multiple of 1.2x (-1SD below mean) from 0.75x. Thus, our TP increases to RM0.59 (RM0.36); in view of the less murky outlook we upgrade our call to HOLD (from Sell).

Upgrade to OVERWEIGHT. As the outlook for rubber glove producers looks promising given stronger demand driven by Covid-19, we take the opportunity to upgrade our sector rating to OVERWEIGHT (from Neutral). Our top sector pick remains the market leader, Top Glove



Source: Hong Leong Investment Bank Research - 19 May 2020

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