Top Glove Corporation Berhad - NR and Vinyl Glove Segment Remains Challenging

Date: 07/10/2019

Source  :  TA
Stock  :  TOPGLOV       Price Target  :  4.25      |      Price Call  :  SELL
        Last Price  :  6.99      |      Upside/Downside  :  -2.74 (39.20%)

Key takeaways from Top Glove’s FY19 results briefing include: i) natural rubber and vinyl gloves segment remains tough, ii) nitrile gloves segment is the main earnings driver for FY20, and iii) Aspion needs more time. Management believes that demand for gloves will continue to grow at 10%. Thus, expansion plans remain on track and set to grow by 31.6% to 84.1bn gloves by end-2020. We cut our earnings estimates by 3.9%/3.5%/2.7% for FY20/FY21/FY22 after decreasing our latex and vinyl glove ASP by circa- 3%. TP is lowered to RM4.25/share (previously RM4.41). Maintain sell.

Natural Rubber and Vinyl Gloves Segment Remains Tough

To recap, Top Glove’s FY19 sales of natural rubber gloves grew by only 0.2% (versus 23% in FY18) amid cut-throat competition from Sri Trang, Thailand which reduced product prices to gain market share. This has caused Top Glove’s PBT margin contracted by 3.3p.p to 9% in FY19. To fend off competition going forward, Top Glove would price its natural rubber glove prices to match with the competitor’s average selling prices (currently at USD19/1000 pieces). By doing so, management expects its market share to recover in FY20-21.

In our previous note, we highlighted our concern over the additional supply from Sri Trang, which would likely dent Top Glove’s margins. In our previous forecast, we have assumed some pricing weakness underpinned by addition supply of natural rubber glove from Sri Trang, which target to increase supply to 30bn gloves by 2020 from 17bn pieces in 2018. We now expect the GP margin of natural rubber glove to decline further to circa-15.5% in FY20 (versus 21% and 16% in FY18 and FY19 respectively) amid price competition. A saving grace is that natural rubber latex is also on the downtrend (-7% QoQ). For vinyl gloves, FY19 sale volume contracted by 29% (versus 15% growth in FY18). The contraction, coupled with the rise in production cost, had contributed to EBIT losses of RM4.1mn for FY19 (versus profit of RM27.9mn in FY18). Going forward, the group will expand PVC gloves capacity in Vietnam (4.0bn total gloves capacity, which is set to commence operations in 2Q20) as the cost of production in Vietnam is much lower than in China. However, there are no plans to shut down Top Glove’s manufacturing plant in China as management opines that the decline in profit is cyclical. All in, we do not expect the vinyl glove segment to turnaround in FY20 as vinyl glove ASP is expected to remain low at circaUSD11.5/1000 pieces (versus USD14.5/1000 pieces in FY18).

Expansion Plans and Prospects of Nitrile Gloves

Overall, management remains bullish on the global demand for gloves which is set to grow by 10% in 2020. As such, Top Glove will continue with its expansion plans, ie: to increase capacity by 31.6% to 84.1bn gloves/annum by end-2020 (see table 1). Out of the 20.2bn new gloves capacity, 73% are nitrile gloves while the remaining are vinyl and latex gloves. Note that nitrile gloves accounted for 46% and 42% of Top Glove’s FY19 revenue and volumes respectively (nitrile sales volumes surge by 30% YoY).

Moving forward, we expect most of the additional nitrile expansion to go to the US and Japan markets. Having said that, we do not think that Top Glove would be able to gain additional market share especially in the developed markets (unless they throw price). On a side note, there is some demand coming from developing countries where Top Glove has an entrenched position. Top Glove is expected to gain some market share from struggling competitors like WRP Asia Pacific Sdn Bhd (circa-11bn gloves capacity) and Latex Partners (circa-13bn gloves capacity) in these countries.

In terms of trade diversion from US-China trade war, management expects minimal benefits as China exports only about 3-5% of rubber gloves demand. While we expect Malaysian rubber gloves manufactures to gain market share in the US market (China exports circa-12bn rubber gloves to the US), China manufacturers will likely dump prices in the EU market.

Source: TA Research - 7 Oct 2019

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