Following our recent meeting with the management of Top Glove Corporation (Top Glove), we continue to be cautious of the group’s overall outlook in 2023. Although the group has raised ASP in March, it is still insufficient to cover total cost to enable it to achieve breakeven level in the coming quarters. Note that Top Glove is now operating at a low utilization rate of 30%. In order to breakeven, it would need to raise ASP further by about 10%, in addition to running at a utilisation rate of at least 60%. We cut our FY23F earnings to net loss of RM559.6m to reflect a lower sales volume assumption. We believe the group will remain loss-making until 1HFY24, given the intense competition from Chinese glove makers. Following the recent rally, Top Glove is now trading at an expensive multiple of over 40x PER. We maintain our Underperform call on Top Glove with an unchanged TP of RM0.62, based on 2-year average forward earnings, pegged to a 5-year average multiple PE of 28x.

• Attempts to raise ASP but cost-pass through remains tough. Top Glove has attempted to raise ASP for a total of 3 times in Aug 2022, Nov 2022 and March 2023. The first ASP hike was on natural rubber (NR) gloves following a 19% jump in latex price, while the second attempt of c.5% hike was for both NR and nitrile gloves. The first two attempts were not successful due to customers’ excess inventory levels. We are not optimistic that its sales order remains unaffected following the recent ASP hike in March (blended ASP USD20/1k pieces) as the Chinese glove makers are still pricing their products competitively at USD14-16/1k pieces due to low cost advantage. We believe competitors in China would continue to secure more market share at Malaysia’s expense. Although China may already be operating at high utilisation rate of c.80%, we think that there should not be any major hindrance for these efficient producers to add new capacity when demand returns.

• Raw material prices trending down in 2HFY23. The natural latex prices are expected to stay flat from May 2023 due to the end of wintering season. We also note that natural gas prices have been trending down from USD4.48/MMBtu in Dec 2022 to USD2.22/MMBtu in March 2023, which will be translating into a lower gas tariff in the 2HFY23 (refer Table 2 and Table 3). However, management expect another round hike in electricity tariff in 2HFY23, but we expect the impact to be minimal as electricity contributes only ~4% of the total costs. All in all, given the view that cost is not likely to surge or remain elevated, we think it will be more challenging for Top Glove to justify further ASP hike. Without the economies of scale as it only operates at 30% utilisation rate, we believe the group would continue to be loss-making for the remainder of 2023.

• Challenging near term outlook. The Group remains under pressure given the persistent demand-supply imbalance. While Malaysia glove players have started to raise ASPs from February 2023, we believe that the ability to pass on cost to customers might still be limited as the Chinese players are still selling at discount to their Malaysian peers. Among the glove makers in our universe of coverage, Top Glove has the lowest net cash, hence making it more challenging for it to endure a prolonged period of overcapacity condition in the market. Hence, we maintain our Underperform rating on Top Glove.

Source: PublicInvest Research - 20 Apr 2023