• Top Glove (TOPG) is proposing dual primary listing at Hong Kong Stock Exchange to raise HKD14.95bn (approx. RM7.77bn) through a global offering of up to 1,495 million new shares at a price which is to be determined at a later date.

• Proceeds from the proposed new shares issuance are targeted mainly for expansion of production capacity, developing a data driven manufacturing system as well as ESG practices and initiatives.

• The issuance of up to 1,495 million new shares will result in earnings dilution and impact our FD EPS forecast downward by c.13.8%.

• Maintain BUY with TP RM8.50 (TP ex-issuance new share: RM7.30), based on unchanged 23x PER over FY22 EPS.

Proposed dual primary listing.

TOPG proposed to raise HKD14.95bn (approx. RM7.77bn) through a global offering of up to 1,495 million new shares (inclusive of 195 million new shares under the Over-allotment Option) at a price which is to be determined at a later date. Our early estimation suggests the offer price to hover around RM5.20 per share based on proceeds of RM7.77bn over 1,495 million shares. The new shares are offered to members of the public in Hong Kong (Hong Kong Public Offering) and to institutional investors (International Offering). These shares are to be listed on the main board of The Stock Exchange of Hong Kong Limited (HKEX). Proceeds from the proposed new shares issuance are targeted mainly for expansion of production capacity, developing a data driven manufacturing system as well as ESG practices and initiatives. (refer table 2). Completion of the proposal is expected to be completed by 2Q2021.

Earnings dilution from issuance of new shares

The proceeds from the proposed issuance of new shares will be used to expand TOPG production capacity to support its long term earnings growth. However, the impact on earnings will only arrive beyond 2024. The issuance of up to 1,495 million new shares will result in earnings dilution and impact our FD EPS forecast downwards by c.13.8%. The theoretical TP upon completion of new shares issuance will be RM7.30 (from current TP of RM8.50).

Our view

We find the proposed dual listing is positive for TOPG long term prospect. Creation of an additional platform would provide the company avenue to broaden its investor reach and base especially those in Hong Kong and mainland China. It also can provide opportunity for future fund raising requirement should there be a need. We believe the dual listing will be well accepted by the business community in Hong Kong on the realization of greater healthcare awareness globally arising from Covid-19 pandemic and that glove is a crucial item in PPE. Successful listing also provide benefit to TOPG shareholders especially in the long run because of the size and financial advantages inherent to maintain its dominant position in the global rubber glove market.

Long term demand outlook remains promising

Top Glove expect to register FY21 supernormal earnings on the back of higher demand and ASPs. Moving forward, although ASP is unlikely to sustain at current levels in 2022 due to the roll-out of vaccines and rising competition, we still believe demand growth post-covid19 will remain promising at c.10-12% (vs c.8% historically) from step-up in structural change of gloves usage.

Maintain BUY with TP RM8.50

Maintain our forecast at this juncture, but there could be a potential upside to our forecast on the back of continuing higher ASP than expected. Our TP remain RM8.50 (TP ex-issuance new share: RM7.30), pending review, based on unchanged 23x PER over FY22 EPS. Despite weaker market sentiment due to vaccines development, we believe the stock remains attractive trading at PER of 5x FY21F and 14.2x FY22F. Maintain BUY.

Source: BIMB Securities Research - 1 Mar 2021