Investment Highlights

• We maintain our BUY call on Top Glove Corporation (Top Glove) with an unchanged FV of RM5.47/share based on a P/E of 27.7x on FY21F EPS. Our PE multiple is based on the 1-year industry average forward PE.

• We continue to like Top Glove for its: (1) expansionary plans; (2) focus and continual efforts in improving quality and operational efficiencies; and (3) position as the largest rubber glove manufacturer.

• The key takeaways from the 4QFY19 analyst briefing are as follows;
• 1. Increased competition coming from all sides i.e. latex, nitrile and vinyl segments. On a positive note, the group has managed to gain market share in the nitrile space.
• 2. Aspion’s performance improved in FY19.
• 3. New technology is expected to improve efficiencies when it is implemented in CY20F and CY21F. 4. Expansion plans remain on track with an additional 18.2bil pieces of gloves in CY20F.

• Competition has heightened due to the increased capacity in the rubber glove industry. Top Glove was affected by increased competition from latex, nitrile and vinyl segments in FY19.

• Top Glove’s nitrile segment performed encouragingly as sales volume increased 12% QoQ and ASP increased 1% QoQ in 4QFY19. The group was able to gain market share despite the intense competition. As rubber gloves producers ramp up their capacity expansions, we foresee pressure on margins although the group expects an improved performance in the nitrile segment.

• Top Glove’s latex segment took a hit in FY19. Sales volume of latex powdered glove dropped 23% QoQ and latex powder free dropped 12% QoQ in 4QFY19 although natural rubber ASP increased 8% QoQ. We anticipate challenges in the latex space to continue as industry production capacity from Thailand increases. However, the lower latex concentrate price (-6.8% since 4QFY19) should slightly offset the pressure on margins.

• Vinyl sales volume fell 10% QoQ while ASPs dropped 12% QoQ in 4QFY19. Recall that in 2017, there was a ban on vinyl glove factories in China due to the high levels of air pollution. This had resulted in a supply disruption of vinyl gloves and higher ASP in 2017. However, supply is back as reflected in the weak performance of Top Glove’s China unit. We anticipate the group’s operations in China to continue bleeding due to the stiff competition and higher cost of production.

• Top Glove is planning to increase its vinyl gloves capacity by 4.0 bil pieces with a new plant in Vietnam, which is expected to be completed by 2QCY20. The new plant is anticipated to be more cost effective in producing vinyl gloves.

• Aspion’s performance improved in FY19 although its utilization rate is still below 60%. The improved performance was attributed to the group’s efforts in modifying the production lines and processes and improvements in customer relationships. Top Glove is expecting a higher contribution in FY20F underpinned by improvements in production efficiencies and quality and higher selling prices.

• The group is continuously investing in automation and has reduced number of workers per million pieces of gloves from 3.54 in FY13 to 1.84 in its latest factory (2.51 in FY19). Top Glove has implemented new technologies in its existing and new lines which is expected to improve operational efficiencies. The group plans to use its artificial intelligence (AI) vision camera for online detection and removal of defective gloves. This would save 10% of manpower costs and would be fully implemented in CY20F. However, we believe cost savings will be offset by the downward pressure on margins by heightened competition in CY20F.

• Top Glove plans to increase its current capacity to 65.9bil pieces from 63.9bil pieces by end of 2019. In CY20F, the group plans to add 18.2bil pieces (14.2bil of nitrile) in production capacity to a total of 84.1bil pieces of gloves by end-CY20.

• Top Glove will continue to face margin pressures due to the influx of nitrile and latex glove supply in CY19E and CY20F. Supply of gloves is expected to increase by 15.0% in FY19E and 22.3% in CY20F on the back of capacity expansions by the top rubber producers in Malaysia and Thailand. In Thailand, Sri Trang plans to increase latex glove supply to 30bil pieces (from 21bil currently) by 2020F.

Source: AmInvest Research - 7 Oct 2019