Highlights

• We left the fund managers, analysts and media briefing feeling neutral with positive bias from the current favourable conditions of raw material and USD.

• Raw material: The falling raw material prices of latex (-24.6% yoy, -12.2% qoq) and nitrile (- 1.0% yoy, -4.6% qoq) have been able to ease cost pressure.

• USD: Strengthening greenback against MYR (+2.2% yoy, +2.8% qoq) helps to sustain margin. Nevertheless, the company practices forward hedging consistently , in addition to the natural h edge of circa 20%. Hence, over the long-term scale, we believe that the impact would be neutral.

• Market share: Top Glove is currently accounting for 25% of the global glove demand, with an aim of 30% in 2020.

• Nitrile segment: Product mix is relatively cons tant with nitrile glove contributing 24% to total volume. Going forward, it is expecting a growth in this segment with additional nitrile lines from Factory 29, which is on track for completion by Jan 2015.

• Sales volume: Powder- free latex glove was the only glove segment which experienced contraction, due to substitution effect as customers switched to nitrile glove (s ee Figure #2). On the other hand, surgical glove increased by one- fold as tender was secured from Middle East, Latin America, etc.

• Flu: The latest epidemic in the U.S. is not showing any sign of demand spike yet. In order to have an impact, the increase has to be significant enough due to the large volume base.

• Capex guidance : Circa RM150m, to focus on the automation for packaging, which is labour -intensive. The ongoing investment in automation has borne fruit with a reduction of 1,000 headcounts so far.

• Strategies moving forward: (1) Investing in technology to improve quality and efficiency; (2) Computerisation of operation and manufacturing system; and (3) Recruitment of personnel with positive traits.

Risks

• Further reduction in ASP amid steep competition.
• Surge in nitrile and latex prices.
• Weaker USD against MYR.

Forecasts

• Unchanged.

Rating

HOLD , TP: RM4.62

Positives

• Gradual shift to nitrile gloves, China’s operationsturned around, cost reduction through product line automation and SAP ERP system.

Negatives

• Will experience lower net profit margins whencompared to p eers due to low exposure in nitrile latex gloves and PF NR gloves. About 48% of output in low margin powdered NR glove.

Valuation

• Maintain HOLD with a higher TP of RM4.62 (previously RM4.56) as we roll forward our valuation to CY16.
• Our valuation was pegged to an unchanged multiple of 13.5x CY16 EPS based on 1SD below 3-year historical average P/E

Source: Hong Leong Investment Bank Research - 9 Jan 2015