• US Customs and Border Protection (CBP) have placed a detention order on disposal gloves produced by Top Glove (TOPG) subsidiaries, namely Top Glove SB and TG Medical SB (accounting c.12.5% of TOPG total sales) which is probably due to foreign labour related issues.
• TOPG is confident that they can resolve the matter within 2-4 weeks and have engaged the same consultant used by WRP Asia which was released from the detention list in March this year.

• We believe that the situation can be resolved smoothly, as shortage of gloves continue to be a grave problem in the US.

• Maintain our forecast and BUY call with TP of RM31.30. This is based on 23x PER pegged on FY21 EPS of 136 sen.

TOPG detention order by CBP likely due to labour issues

In a conference call yesterday, Top Glove (TOPG) confirmed the detention order by CBP on disposable gloves manufactured by its two subsidiaries, namely Top Glove SB and TG Medical SB effective on 15 July 2020. As yet to be clarified with CBP on the reasons for being listed in the detention list, management speculate that the issue is most likely to be related to foreign labour issues which have been highlighted since 2018. TOPG claimed that they have resolved all past allegations, save for one issue with regards to retrospective payment of their workers' recruitment fees to agents prior to Jan 2019. (Recall that the zero recruitment fees policy was established in Jan 2019 where the workers would no longer have to pay recruitment fees to agents). TOPG has set aside an amount of between RM20-50m for this purpose.

Situational scenario arising from detention order

Gloves from the affected subsidiaries account for 50% of US sales (total US sales c.25% of TOPG total sales) or 12.5% of TOPG total sales. As management expect speedy resolution to the issue within 2-4 weeks, gloves will continue to be shipped and parked at the US port warehouses/ free trade zone. Customers are expected to be willing to wait during this given period as it would cost them longer waiting time should they decide to cancel and reorder from new suppliers. Management is also not worried if there are cancellations and willing to refund the deposits as demand from other countries is high. In term of pricing, for ad-hoc/spot orders, the ASPs are about the same for the US and other markets but there is a slight different of c.5% higher for normal orders in the US.

Actions taken by TOPG

Measures taken by TOPG to address this issue are as follows: 1) TOPG have requested their US office to communicate with CBP to find out what are the real reasons for the detention of their gloves. Management is confident in its US representative as he has wide experience with government bodies such as the USFDA, other government agencies and customers. 2) TOPG have also obtained the services of a US consultant (which successfully handled the WRP case earlier) to represent the group in resolving current issue with CBP

Source: BIMB Securities Research - 17 Jul 2020