• Maintain HOLD (TP: RM0.86). Top Glove registered a core LATAMI of RM101.4mn during 1HFY24, which substantially below our in-house and market expectation. The lower-than-expected earnings were due to lower ASPs despite improvements in sales volume. Revenue showed double-digit growth at 11.5% QoQ amidst an improved LBT margin which inched up 2.9ppts QoQ. This encouraging performance was buoyed by improving sales volume (+18% QoQ), which offset the increase in raw material prices. We foresee that the industry is on the path to recovery, with the supply expected to normalize after the decommissioning of the production facility. Demand wise, we anticipate customers will continue to place consistent albeit modest orders due to product expiry concerns. Maintain a HOLD call on Top Glove, with lower TP of RM0.86 (RM0.90 previously). Our valuation is based on BV/share of RM0.58 and FY25F P/BV of 1.48).

• Key Highlight. Higher production volume as well as utilisation rate has resulted in an increase in production and cost efficiency, and thus mitigated the mismatch of ASPs and costs. ASPs have declined by 5% QoQ during 2QFY23 despite increases in nitrile and latex prices, 15% QoQ and 3% QoQ respectively. Additionally, management shared that ASPs have increased by over 10% since March '24, due to higher order volume in tandem with pricing from rubber players in China and Thailand.

• Forecast. In view of lower-than-expected earnings, we cut FY24-25F by 59- 17.5% to RM18.2-87.3mn respectively to account for lower margin assumption.

• Outlook. We are positive about the recent gradual recovery in demand which will improve the operating efficiency of the group and could potentially turn around the company's financial performance. Overall, we foresee that the industry is on the path to recovery as the supply is expected to normalize after the decommissioning of production facilities. In terms of demand, we foresee customers continuing to place consistent albeit modest orders due to product expiry concerns. We maintain a positive outlook on this trend and anticipate market consolidation in the near term. Nonetheless, despite reduced capacity in the Malaysian market, we remain cautious on the potential for prolonged oversupply due to capacity issues in China.

Source: BIMB Securities Research - 21 Mar 2024