Investment Highlights

• We maintain our SELL call on Top Glove Corporation (Top Glove) with an unchanged fair value (FV) of RM0.60/share. This is pegged to a target FY24F PE of 20x, at parity to its 10-year average. There is no ESG-related FV adjustment based on our unchanged 3-star rating.

• Top Glove’s 1HFY23 core net losses of RM304mil came in below expectations, accounting for 87% of our estimated losses and 100% of street’s projected losses. The shortfall was mainly attributed to a weaker than expected average selling prices (ASP) and elevated operating costs.

• We expect Top Glove to continue to incur losses. Nevertheless, the losses are expected to narrow to RM100mil in 3QFY23F and RM11mil in 4QFY23F.

• Our estimated lower losses in 2HFY23F is premised on higher ASP and plant utilisation rate (PU) assumptions compared to 1HFY23, given that Top Glove has increased its ASP in 3QFY23F and the expectation of customers replenishing their stocks in the 4QFY23F.

• Hence, we raise our estimate for FY23F losses by 19% after factoring in a lower ASP assumption of US$23/1K pcs (from US$23.5/1K pcs previously). However, our FY24-25F earnings forecasts are maintained for now as we are still monitoring closely the oversupply situation as well as inventory restocking activities by buyers.

• No interim dividend has been declared in this quarter, and this is in line with our assumption. Top Glove has halted dividend payments in the short-term to preserve its cash reserves.

• On a QoQ basis, Top Glove registered a larger 2QFY23 core net loss of RM170mil (-26%) mainly due to: (1) 2% decline in revenue primarily stemmed from a 4% decline in ASP, despite sales orders rose by 6%. Hence, we believe that the higher sales orders have came in at the expense of lower ASP. (2) Rising costs of natural gas (+17%) and electricity tariff (+42%).

• The blended ASP was US$20.5-21.5/1K pcs in 2QFY23, 4%- 5% lower than 1QFY23 (Exhibit 2). This was mainly due to the aggressive pricing from local and regional competitors amidst a weak demand with customers still holding off restocking activities.

• Notably, Top Glove has raised its ASP in 3QFY23F to partially pass on the higher operating expenses. Based on our channel checks, other key Malaysian glove makers have increased their ASP by <5%.

• All Chinese players and glove makers under our coverage have posted losses. We believe that ASP has reached near the bottom due to the recent scale back of capacity expansion by key glove makers in Malaysia, China and Thailand.

• Yesterday, Top Glove’s share price has spiked by 19% despite financial performance has remained weak. We continue to advocate a sell call and advise investors to take profit.

• The stock currently trades at a high FY24F PE of 27x, which is 35% above its 10-year average.

Source: AmInvest Research - 17 Mar 2023