Investment Highlights

• We are downgrading our call on glove sector to NEUTRAL from OVERWEIGHT. We believe that at current share price levels, the valuations for glove companies under coverage (Top Glove, Kossan and Hartalega) have fully priced in the companies’ earnings outlook. We think that the average selling prices (ASP) will begin to taper off in 1Q2021 after the expected increase in ASP until end-2020, which have been priced in. Share prices of all of the glove companies in our coverage have exceeded their target prices.

• PE valuations are demanding. Top Glove is currently trading at CY21F PE of 43.3x, which is 2SD higher than its 3-year average forward PE of 28.9x while Kossan Rubber’s CY21F PE of 26.0x is almost 1SD higher than its 3-year average forward PE of 23.7x. Hartalega is presently trading at a CY21F PE of 40.9x, which is slightly higher than its 3-year average PE of 39.5x.

• Increase in industry capacity would exert downward pressure on selling prices. The big glove producers (Top Glove, Kossan, Hartalega, Supermax and Sri Trang) have plans to increase capacity by 21% in 2020E, 23% in 2021F and 27% in 2022F (as shown in Exhibit 1). We believe that higher supply of gloves from the expanded capacity will more than offset the increase in demand. Moreover, we think that recent strides in vaccines formation (as shown in Exhibit 2) will affect the ASP of gloves as the urgency of glove orders would be lessen. We are not making any changes to our earnings forecasts as we have already assumed that a Covid-19 vaccine would be available by 2H2021.

• The glove companies’ capacity expansion plans will add 126bil pieces (54%) of capacity in 2 years 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 a short-term supply glut will come back into play in 2022F.

• On a positive note, we expect sales volume to continue growing in 2021F as we anticipate a structural change in the way gloves are used. There will be a new normal where glove usage per capita will increase as hygiene measures become stricter. 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.

• We take this opportunity to downgrade our call on Top Glove and Kossan to HOLD while we maintain our HOLD call on Hartalega.

• We now have a HOLD call on Top Glove with unchanged FV of RM25.70. Our valuation is based on 33x CY21F EPS. We assume ASP of US$35 in FY21F and US$25 in FY22F.

• We reiterate our HOLD call on Hartalega with unchanged FV of RM18.74. Our valuation is based on 45x CY21F EPS. We assume ASP of US$30 in FY22F and US$27 in FY23F.

Source: AmInvest Research - 25 Aug 2020