• Our recent engagement with Top Glove’s representative prompted revision to our key assumptions and further solidify our view for explosive earnings expansion over the next 12-15 months.
• Glove demand likely to sustain in 2021 backed by unabated Covid-19 and fears of second wave, supporting higher ASP until 1H2021.

• Top Glove order lead time lengthening further to c.16 months and ASP for Aug rose 30% mom (previous guidance 10%).

• We revised our FY20/FY21 earnings by +49%/+158% and maintain BUY with higher TP of RM31.30. This is based on 23x PER pegged on FY21 EPS of 136 sen.

Demand visibility to be sustained in 2021.

Gloves demand is anticipated to be sustained in 2021 due to unabated worldwide spread of Covid-19 with some countries yet to reach peak infections (eg: US, Brazil, India) and risks of second wave (e.g: China, South Korea, UK, Australia), on the assumption that mass vaccine production will not be available at least until mid-2021. We gather that Top Glove’s average order lead time has increased further to c.16 months (from previous month guidance of c.12 months) with Nitrile gloves have the longest order lead time (chart 2). Top Glove has the greatest extra capacity compared to its peers to take advantage of robust demand. Management targets capacity of 86.1bn pcs by end 2020 (+c.21% yoy) and 100.4bn pcs by end 2021 (+16% yoy) (refer table 2). We are assuming utilisation rate of more than 95%/90% for FY20/21.

ASP continues to trend upwards.

Management guided that ASP for June and July had increased by 15% mom with Aug ASP increasing further to 30% (previous guidance c.10%) on the back of booming demand. Additionally, there is an increase of ad hoc/spot orders especially from North America, West Europe and Asia due to the ongoing spike in cases and second wave of Covid-19. Ad-hoc order price is about 3-4x higher than normal prices (ad-hoc price c.USD90- 120/1000 pcs) which currently accounts for 20% of total capacity allocation (previously c.10%). We believe Top Glove has a better pricing power compared to its peers due to their diverse customer base. Moreover, it is the biggest OEM player in the sector c.26% global market share and hence, could be a sector leader in ASP hikes. Overall, we now forecast that higher ASPs could be sustained until 1H2021 before gradually decreasing in 2H2021 and gravitate to normal level in 2022.

Long term prospect still promising.

Long term demand post Covid-19 remains positive (>+ 10% p.a) on greater hygiene awareness, as well as greater structural global change in gloves usage for non-medical sector such as services industries. In catering for growing global demand, Top Glove continues to expand through organic growth by building about 2 factories every year and seeking for viable M&A opportunities. Additionally, ongoing efforts of embarking on digitalisation and automation will help reduce a reliance on foreign labour and improve the efficiency of its manufacturing process in the long term

Source: BIMB Securities Research - 14 Jul 2020