Highlights

Shared the observation of oversupply signs in the synthetic rubber (SR) glove market, spilling over from the natural rubber (NR) as price pressure mounts. This is mainly due to the rapid SR-focused capacity expansions in the industry which outpaced the expected demand growth of 8% - 10%.

Even for its upcoming addition of 22 lines, all are dedicated for the production of another 2.2bn pcs of SR per annum. This is expected to bring SR product mix from the current 24% to 30%.

1QFY14 results were dragged by China operation which incurred RM5.2m loss as government prohibited the usage of coal for boiler heating at Zhangjiagang (F8) as a measure to curb air pollution. Since then, F8 has ceased operations and Top Glove has decided to consolidate China footprint at Xing Hua (F15) and put F8 up for sale. Not expecting any provisions as the appreciation of land value would be able to offset the associated costs.

Both latex and nitrile prices remained favourable, ended in 1QFY14 at RM5.17/kg (-6.0% qoq and -11.3% yoy) and USD1.05/kg (-2.8% qoq and -24.5% yoy). It expects raw material prices to remain stable and hover at these levels.

The recent electricity tariff hike will not dampen earnings significantly as it only accounts for ~3% of overall costs (part of overhead and others). As a result, Top Glove has raised ASP by about 1% or USD0.20 per carton (1k pcs) beginning this year to pass on the cost increase to customers.

FY14 targets and guidance - to achieve >10% sales on the back of 10% - 15% increase in volume shipment. CAPEX is budgeted with RM180m.

Although GST will not impact Top Glove as it falls under the zero-rated category, suppliers may take this opportunity to increase prices, thus putting pressure on cost.

The privatisation of Mediflex from SGX has received nod from shareholders and will be delisted upon closure of the offer period on 20th Jan 2014.

Risks

• Spike in latex prices.
• Weaker USD against the MYR.
• Delays in capacity expansion plans, causing a hold back in capturing oncoming glove demand.

Forecasts

Unchanged.

Rating

HOLD, TP: RM6.09

Positives - Gradual shift to nitrile gloves and its upstream diversification (to meet ~40% latex requirements) delivering long term benefit, mitigate volatility of NR latex prices.

Negatives - Will experience lower net profit margins when compared to peers due to low exposure in nitrile latex gloves and PF NR gloves. About 54% of output in low margin powdered NR glove.

Valuation

Reiterate HOLD call on the back of unchanged TP of RM6.09 based on unchanged 16.0x CY14 EPS.

Source: Hong Leong Investment Bank Research - 8 Jan 2014