Investment Highlights

• We reiterate our NEUTRAL stance on the glove sector. 3Q2021 earnings generally met expectations with one miss and two met expectations. Top Glove earnings missed due to faster than expected ASP decline. However, Hartalega and Kossan earnings met expectations. Overall, we maintain our NEUTRAL stance. The upside is capped as ASP downtrend is still continuing but we expect nitrile gloves ASP to bottom in the next 3-6 months at between USD25-USD30 per box of 1,000 pieces. Share price has also returned to pre-pandemic level for Hartalega and Kossan while their balance sheet has strengthened significantly.

• Earnings generally met expectation. Out of the three glove companies that we cover, one missed expectation while the other two met expectation. Top Glove result missed expectation as its FY21 earnings of RM7.87bil made up 92% of our estimate. It also accounted for 91% of the consensus forecast. We gather that the earnings miss was caused by faster than-expected drop in gloves' ASP. Hartalega and Kossan earnings met expectations.

• Hartalega 1HFY22 earnings were within expectations. 1HFY22 earnings of RM3.17bn makes up 71% of ours and 82% of consensus FY22 forecast. We deem the earnings as within expectation as we expect a weaker 2HFY22. The downtrend of ASP is ongoing and should affect 2HFY22 earnings. Kossan 9MFY21 net profit of RM2.63b were in line with expectations. Although it makes up 84%/81% of consensus/our FY21 earnings estimates, we expect a weaker 4QFY21 due to declining ASP trend.

• Nitrile gloves ASP should bottom in the next 3-6 months at between USD25-USD30 level. We believe that ASP should bottom soon. Firstly, major glove producers have slowed down their expansion in the past 3 months. Secondly, there is sign that inefficient players have started to make loss. For example, Blue Sail Medical have registered net loss of RMB22.9m in 3Q2021 which we believe is due to the decline in ASP for gloves. Note that Blue Sail Medical is a major China gloves producer with estimated 5% market share of global medical gloves supply. Coupled with the scarcity of power supply in China as winter approach, we expect less competition from China at current low level of ASP at below USD35 per 1,000 pieces of nitrile gloves.

• Newsflow on ESG: Positive news in September but negative in October and November. In September, Top Glove has managed to improve its Social aspect among ESG factors. This has caused US Customs and Border Protection (USCBP) to modify its forced labour finding on the Company. As a result, Top Glove Malaysia is allowed to export its disposable gloves to United States after being banned for almost 14 months from 15-Jul-2020 to 10-Sep-2021.

• In October, USCBP has banned Supermax products. According to USCBP website, USCBP will detain disposable gloves produced by Supermax. We gather that USCBP has identified 10 out of 11 forced labor indicators while it was investigating the company. As a result, USCBP concluded that it has ample evidence to believe that Supermax Corporation Bhd. and its subsidiaries produce gloves in violation of U.S. trade law.

• Recently on 4-Nov, USCBP has announced that “officers at all U.S. ports of entry will detain disposable gloves produced in Malaysia by a group of companies collectively known as Smart Glove”. Based on USCBP investigation, it has identified seven forced labor indicators.

• Balance sheet is now much stronger than pre-pandemic time. As shown in Exhibit-2 for the glove players under our coverage, balance sheet are now all in net cash with the range between RM2.05 billion to RM4.71 billion. This is a significant improvement as compared to the pre-pandemic net debt of RM48 million to RM2.22 billion.

• Share price has returned to pre-pandemic level for Hartalega and Kossan. We use 31-Jan-2020 as the baseline for pre-pandemic time. At that time, gloves ASP has not started to increase. COVID-19 has not spread to Malaysia and global daily cases were still low at less 2,000 cases. Hartalega share price back then was RM5.92 while Kossan was RM2.45.

Source: AmInvest Research - 9 Nov 2021