Investment Highlights

• We maintain HOLD on Top Glove Corporation (Top Glove) with an unchanged fair value (FV) of RM0.86/share, based on CY24F P/BV of 1.5x (0.75 standard deviation (SD) below its 10-year average of 3x). There is no ESG-related FV adjustment based on our neutral 3-star rating.

• After our recent follow-up with management, we maintain our FY24F-26F core earnings. Regarding the recent Red Sea crisis, Top Glove guided that the impact would be minimal and expects a 15%-20% QoQ sales volume growth in 2QFY24F, which is consistent with our forecast.

• Nevertheless, this differs from Hartalega Holdings’ recent result underperformance due to Red Sea-related shipment delays. We attribute the deviation to Top Glove’s 1QFY24 revenue exposure to less impacted regions such as Asia (32%), Latin America (12%) and Eastern Europe (12%).

• The group observed sustained medical rubber glove demand recovery since Dec 2023, with nitrile medical gloves (nitrile gloves) improving significantly more than that of latex medical rubber gloves (latex gloves).

• This could be attributed to following factors: (a) rubber glove users switching from powder-free latex gloves to nitrile gloves, which is cheaper by US$2/1K, and absence of latex allergy issues, and (b) majority of Chinese competitors (nitrile-focused) have been running at full capacity, whereas Thailand-based Sri Trang Gloves (latex-focused) still has excess capacity with a 3QCY23 plant utilisation rate of 59%.

• In view of a recent demand pick-up, Top Glove is gradually ramping up manpower and capacities that were previously idle. We gathered that the process could take 3 months, during which foreign labour will be recruited and production lines (primarily cleaning procedures) will be initiated.

• In terms of pricing, management guided that Top Glove has been increasing average selling prices (ASP) for nitrile gloves since Oct 2023 to pass on higher raw material prices.

• Despite input material price reductions since Dec 2023, ASP for nitrile gloves remain unchanged to facilitate margin expansion. We view this pricing strategy to be more aggressive than some cost-competitive local peers, as they lowered ASP in 4QCY23 by passing through the lower costs. In 3QCY23, Top Glove has the highest cost structure among Big 4 .

• Despite recent latex price increases of +15% over the past month, the group refrained from increasing the ASP for latex gloves due to sluggish demand and ongoing competition from Sri Trang Gloves. The group intends to offset this with greater economies of scale from nitrile gloves.

• The stock currently trades at a fairly-valued CY25F PE of 23x, which is 15% higher than the 10-year average of 20x.

Source: AmInvest Research - 15 Feb 2024