- We reaffirm our BUY rating on Top Glove Corp with an unchanged fair value of RM7.08/share.

- At its company briefing yesterday, management reiterated its 8% to 10% annual growth forecast for global rubber glove demand.

- The group said that consumption at its traditional markets (e.g. US, Europe) remains intact, driven by demand for nitrile gloves (1QFY14 volume: +37% YoY, -1% QoQ) while emerging markets (e.g. Turkey, Brazil) continue to support its bread and butter natural rubber glove division (1QFY14 volume: +10% YoY, +6% QoQ). Overall, sales volume grew by 3% QoQ and 10% YoY.

- The group’s 1QFY14 latex:nitrile:vinyl product split stands at 69:24:7. In 1QFY13, it was 77:16:7. The greater proportion of higher-margin products resulted in an EBITDA margin expansion of 1.7ppts to 14.4%.

- Management had also shed further light on the widening losses at its China outfit. Besides strong competition in the vinyl glove segment, we understand that the consolidation of Factory 8 (Zhangjiagang City) into Factory 15 (Xinghua City) following a change in energy regulation at the former played a role. Costs had crept up as production volumes were tapered.

- We believe that the consolidation exercise will be completed in 2Q or 3Q of FY14F. Management expects to break even for this exercise as any expenses incurred would be offset by gains from its land value.

- Top Glove remains committed to its strategy of continued capacity expansion to support its guided sales volume and earnings growth of 10% for FY14F. The group plans to add 2.2bil nitrile pcs by end-FY14 to its current capacity of 43.9bil pcs while remaining cognizant of potential overcapacity in the nitrile segment.

- Having achieved a comfortable capacity base, management stated that it will now concentrate on expanding its profit margins by emphasising on efficiency of its operations and investments in R&D and IT. Within the past year, close to 98% of its plants have been automated.

- With reference to the 16.85% electricity tariff hike effective 1 Jan 2014, management revealed that they have raised ASP by 1% in tandem with the anticipated 1% hike in overall production costs. Electricity costs make up 3% of the latter.

- On its upstream venture, management said that land clearing at its 30,772ha Indonesia plot has been completed and the plantation of young rubber trees has commenced. We have not included any earnings contribution from this undertaking in 

Source: AmeSecurities