Investment Highlights

• We are keeping our OVERWEIGHT call on the glove sector. We believe that selling prices will continue to soar in the next 6 months as lead time stretches up to 12 months. The glove companies’ earnings will be further boosted by expanded margins as raw material prices remain low, selling prices continue to grow, USD continues to strengthen over the MYR and expansion plans remain intact for the glove producers.

• In terms of demand, we expect sales volume and average selling price (ASP) to grow exponentially in 2H2020 in light of the Covid-19 pandemic. The higher demand has resulted in a shortage of supply, pushing up average selling prices for these medical gloves. ASPs are trending upwards and glovemakers now guide for around 5–15% QoQ gradual increases while spot selling prices for gloves skyrocketed 100–400% in the past few months as panic buying of gloves ensues.

• Total rubber glove export value from Malaysia grew 21.4% YoY to RM6,868bil in Jan–April 2020. We think that the trend will continue well into 2021 until a Covid-19 vaccine is available to the masses. In the meantime, usage of rubber gloves will remain a priority not only in the medical sector but across various industries.

• Beyond the Covid-19 pandemic, we anticipate a structural change in the way gloves are used, forming a new normal where glove usage per capita will increase as hygiene measures become stricter. This is expected to apply not only in the healthcare sector but also across different industries like F&B. The glove consumption per capita in emerging markets such as India and China is low at around 2–6 gloves as opposed to circa 100–280 gloves for developed countries

• Having said that, we think that rubber glove’s ASP will face a downward pressure in year 2022F (assuming full containment of Covid-19) due to lower urgency of orders with higher supply of gloves from expanded capacity. As shown in Exhibit 1, the big glove producers (Top Glove, Kossan, Hartalega, Supermax and Sri Trang) have plans to increase capacity by 16% in 2020E, 11% in 2021F and 10% in 2022F. This will add 74.6bil pieces (+40%) of capacity by end-2022. Although this bodes well in terms of ability to cater to higher volume of orders for the next 1–1.5 years we think that short-term supply glut will come back into play in 2022F.

• Our house projection for the USD/MYR rate is an average of RM4.29 in 2020 and RM4.25 in 2021. We think that a stronger USD will even help further expand net margins for glove companies because unlike pre-Covid-19 times, cost savings are not passed through to customers due to supply constraints.

• We are raising our ASP assumptions for Top Glove, Kossan and Hartalega in light of the recent spike in Covid-19 cases across the globe. We think that glove ASP will continue to grow in 2H2020 and be sustained even in 1H2021 as lead time continues to hover at 12 months. The changes to earnings forecasts are shown in Exhibits 7–9.

• We maintain our BUY call on Top Glove with a higher FV of RM26.00/share. Our valuation is based on 33x CY21F EPS. We assume an FY21F ASP of US$35 (previously US$29) as we believe the higher selling prices will sustain for another year before falling post-Covid-19 pandemic. We also raise our ASP assumption to US$25 (previously US$24) for FY22F as we expect that a drop in demand growth will be minimized by the structural change in glove usage.

• We maintain our HOLD call on Hartalega with a higher FV of RM16.94/share. Our valuation is based on 38x CY21F EPS. We assume higher a FY21F ASP of US$32 (previously US$28) as we believe the higher selling price will be sustained for another year before falling post-Covid-19 pandemic. We also increase our ASP assumption to US$30 (previously US$26) for FY22F.

• We retain our BUY call on Kossan with a higher FV of RM12.51/share. Our valuation is based on 27x FY21F EPS. We assume a higher FY20F ASP of US$28 (previously US$26) as we believe the higher selling price will be sustained for another year before falling post-Covid-19 pandemic. We also increase our ASP assumption to US$28 (previously US$26) for FY21F.

Source: AmInvest Research - 7 Jul 2020