Top Glove Corporation (Top Glove) reported a narrower net loss of RM57.7m (+65.7% YoY) in 1QFY24 versus a net loss of RM168.2m in 1QFY23, mainly due to a higher sales volume. After stripping out the non-operating items, 1QFY24 core net loss stood at RM61.5m (+54.2% YoY). The results came in below both our and market expectations. The discrepancy in our earnings forecast was due to a lower-than-expected ASPs. We cut our FY24F earnings to a net loss of RM90.7m and slashed FY25F earnings by 36.4% to factor in lower ASPs on pricing pressure from Chinese players. All told, we retain our Underperform call on Top Glove, with a lower TP of RM0.59 based on 1x (- 1SD 5-year historical PB multiple mean) on its CY24F BVPS.

• Sales volume improved at the expense of ASPs. Top Glove’s revenue increased by 4% QoQ to RM493.5m. All three regions reported a higher revenue of RM437.2m (+4.3% QoQ) in Malaysia, RM29.3m (+13.6% QoQ) in Thailand and RM2.6m (+14.5% QoQ) in China. The rise in revenue was mainly due to a 9% QoQ increased in sales volume. However, ASPs recorded a drop of 8% QoQ in 1QFY24 to USD20/1k pcs, indicating that customers are still not willing to absorb higher selling prices given stiff competition from China which currently selling at c.2USD/1k pcs lower than Malaysian gloves players.

• Net loss narrowed. Top Glove reported a net loss of RM57.7m in 1QFY24 (+87.5% QoQ). After stripping off the non-operating items, core net loss narrowed by 6.5% QoQ to RM61.5m in 1QFY24, mainly due to on-going efforts in cost optimisation and higher utilisation rate of 40% (4QFY23:30%) based on 60bn pcs per annum capacity. Raw material costs increased in 1QFY24 with natural rubber latex up 11% QoQ while nitrile butadiene was up 4% QoQ. Meanwhile, natural gas tariff was down 8% QoQ in 1QFY24. Looking ahead, we anticipate raw material prices to remain stable, while natural gas cost is expected to climb higher in 1QCY24, attributed to a time lag effect, but should normalize in 2HCY24.

• Outlook. Moving into FY24, we remain cautious on Top Glove’s operational landscape, primarily attributed to the competitive edge of Chinese glove makers. The on-going risk includes further decline in global market share for Malaysian glove manufacturers, with customers favouring the Chinese players. As such, we expect Top Glove to remain loss making and profitability is unlikely to revert to pre-Covid levels anytime soon.

Source: PublicInvest Research - 21 Dec 2023