Highlights / Comments

• With 15 child deaths and 22 states reporting widespread of the virus in the U.S. , t he Centers for Disease Control and Prevention (CDC) has officially declared flu as an epidemic.

• In order to be declared an epidemic, the flu and pneumonia have to cause 6.8% of all deaths in a week. This was reached during the week ending 20 th December 2014.

• Despite that flu is always seen as epidemic, experts warned that situation could worsen this time as winter continues.

• Flu activity generally peaks between December and February in the U.S. with an average flu season length of 13 weeks. A worrying trend is noticed where the flu has been hitting earlier and earlier.

• CDC reported that about 90% of the flu cases are caused by H3N2 influenza virus.

• Not only leading to more hospitalisations and deaths, the mutating H3N2 is also causing vaccine to lose its efficacy.

• H3N2 is doubling the hospitalisation rate where 9.7 people per 100,000 has been hospitalised so far, compared to last year’s rate of 4.3. The proportion of people seeking healthcare services for flu has also increased to 5.5%, which is above their national baseline of 2%.

• As such, we view this unfortunate development to be positive to the sector as higher hospitalisation rate and higher demand for healthcare services will, in turn, increase demand for rubber gloves.

• Having said that, we will continue to monitor its development and observe whether it will be escalated to pandemic level. We are maintaining our neutral stance on the sector until we see further deterioration translating into glove demand.

Catalysts

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

Risks

• Mismatch between demand and supply in rubber gloves; potential increase in natural and/or synthetic latex prices ; depreciation of USD against MYR.

Forecasts

• Unchanged.

Rating

NEUTRAL

Positives

• Softening of natural and/or synthetic latex prices ,continuous improvement in cost efficiency.

Negatives

• Weakening of USD against MYR.

Valuation

Until we see further deterioration of the flu virus and turning into a pandemic , we are maintaining our NEUTRAL stance on the sector with the following ratings:

• Hartalega (HOLD, TP: RM7.43 , 16.2x CY16 EPS pegged to 1SD above 5-year historical average P/E).
• Kossan (HOLD, TP: RM4.49, 12.8x CY16 EPS pegged to 1SD above 5-year historical average P/E).
• Top Glove (HOLD, TP: RM4.56, 13.5x CY15 EPS pegged to 1SD below 3-year historical average P/E).
• Karex (BUY, TP: RM3.43, 19x CY15 EPS pegged to average P/E of international peers).

Source: Hong Leong Investment Bank Research - 5 Jan 2015