Highlights

WSJ reported that Saudi Arabia’s announcements in the past 5 days of 7 new deaths from a SARS-like virus have heightened the Mideast outbreak which is entering into a more-aggressive phase.

It was reported that the coronavirus appear to be deadlier as it is believed to be transmitting human-to-human.

The latest reported by the kingdom bring the number of confirmed deaths from the novel coronavirus, which typically causes acute respiratory distress, to 18 and overall cases to 30, including 23 in Saudi Arabia (see Figure #1). The other confirmed cases occurred in Qatar, Jordan, the UAE and UK.

Comment

We view this coronavirus outbreak as deadlier and more severe compared to avian flu (H7N9) in China as it is highly contagious (human-to-human).

With 18 death cases, the fatality rate of coronavirus topped 60.0%, a very alerting level compared to H7N9’s 23.8%, at the same time, there were several recovery H7N9 cases, easing the tension in China.

The brief announcement by Saudi health officials triggered renewed international complaints that the kingdom has been slow in reporting details of the outbreak. This signifies the nation’s incompetency in handling a crisis, causing great potential that this outbreak will go pandemic.

Rubber glove players’ exposure to Middle East remains low, implying a potential surge in demand should the outbreak deteriorates.

Percentage of Sales to Middle East (%)

• Hartalega >0.2
• Top Glove 6.0
• Kossan 2.0

Catalysts

Surge in demand in the event of a disease outbreak; appreciation of the USD against the MYR; more stringent requirements and increased spending in the healthcare sector; and lower rubber prices to boost profitability and increase demand for gloves.

Risks

Uptick in natural and/or synthetic latex prices will inevitably erode profitability, depreciation of USD against MYR, natural gas price hike and price undercutting.

Forecasts

Unchanged.

Rating

Overweight

• Positives: Latex prices have fallen significantly, production efficiency to continue improving and production shift to nitrile gloves from NR gloves will lead to better cost management.
• Negatives: Weakening of USD against MYR.

Valuation

Upgrade the sector rating from NEUTRAL to OVERWEIGHT as this pandemic is inevitably viewed as a catalyst, providing potential upside to rubber glove stocks.

The PE multiples of all rubber glove stocks under our universe are upgraded by 2x (see Figure #3) and our TPs are derived based on CY14 EPS.

• Hartalega (BUY, TP: RM6.37);
• Top Glove (TRADING BUY, TP: RM6.91); and
• Kossan (BUY, TP: RM4.75).

Source: Hong Leong Investment Bank Research - 08 May 2013