Top Glove Corporation (Top Glove) reported a fifth consecutive quarterly net loss of RM463.1m (-635.2% YoY) in 4QFY23 from a net loss of RM63m in 4QFY22. The loss has widened, mainly due to a decline in ASPs and weaker sales volume. After stripping out the non-operating items, FY23 core net loss stood at RM486.1m (-173.1% YoY). The results came in within market expectations at 95% but above our estimates at 84%. The discrepancy in our earnings forecast was due to lower-than-expected operating cost i.e natural gas cost. We maintain our earnings forecast for FY24-25F, as we are still wary of pricing pressure from Chinese players, which may lead to further setbacks in ASPs. All told, we retain our Underperform call on Top Glove, with an unchanged TP of RM0.63 based on 1x (-1SD 5-year historical PB multiple mean) on its CY24F BVPS.

• Revenue declined due to lower ASPs and sales volume. Top Glove’s revenue declined by 10.3% QoQ to RM475.9m. Both Malaysia and Thailand region reported a drop in revenue to RM419.3m (-8.9% QoQ) and RM25.8m (-42.8% QoQ), while China reported a revenue growth of 43% QoQ to RM2.3m. The drop in revenue was mainly due to a 5% QoQ decline in ASPs, while overall sales volume was down 9% QoQ in 4QFY23. Utilisation rate remained low at c.30%. We gather that major customers are still not placing large orders as they are able to receive orders in a short lead time due to low utilisation rate in the industry.

• Net loss due to impairment and write off of assets. Top Glove reported a net loss of RM463.1m in 4QFY23 (-254.7% QoQ). Core net loss narrowed by 43.8% QoQ to RM65.8m in 4QFY23 (after stripping off the non-operating items and one-off impairment of goodwill and PPE amounting to RM389m). The narrowed core net loss was mainly due to a 13% QoQ decline in natural gas costs. Raw material cost which accounted for 36% of total production cost, has also eased with the average nitrile price declining 22% QoQ and natural latex concentrate price dropping 8% QoQ.

• Outlook. Moving into FY24, we remain cautious on Top Glove’s operating landscape, mainly due to the formidable competitive presence of Chinese players. Based on our channel checks, Chinese players are currently selling at c.USD14-15/1k pc, with improved margins due to lower coal prices. Malaysian glove players could face further erosion in global market share as customers may continue to divert their orders to Chinese players, lured by the comparatively lower pricing. As such, we expect Top Glove to remain loss making and is unlikely to revert back to its pre-Covid profit levels anytime soon.

Source: PublicInvest Research - 9 Oct 2023