Highlights

• We attended TopGlove 1QFY17 analyst briefing and walked away feeling neutral.
• Result recap: 1QFY17 revenue increased by 9% QoQ while PATAMI improved by 12% due to higher sales volume (+5%) and stronger USD (+4%).
• 1QFY17 sales volume grew by 7% YoY mainly driven by latex powder free (+9%) and nitrile (+16%) but partly offset by latex powdered (-15%). Nitrile as percentage of total product mix has increased from 32% to 35% surpassing latex powder glove (32%) to become the largest segment.
• ASP had started recovering with 2-3% QoQ increase for nitrile and latex gloves. We understand that the company had revised ASP upward by circa 3% in late Oct/Nov period to factor in the increase in latex prices. We will see the full impact of this ASP revision to reflect in upcoming quarterly result.
• Latex price had surged by 80% YoY to RM6.4/kg recently mainly lifted by strong auto sales in China (10MCY16 sales +13% YoY). The strong sales were attributed by advance purchase of vehicle after tax was halved to 5% from 10% in Oct15 for smaller car. With the China authority extending its tax break into 2017 but at a higher rate of 7.5%, we expect China auto sales growth to slow down, curbing the rising of latex price.
• Under the new Employer Mandatory Commitment (EMC), employers will pay the levy on foreign workers and are no longer allowed to deduct from workers’ salaries, effective 1 Jan 2017. This is expected to increase TopGlove’s labour cost by 3.5% and a minimal increase of 0.5% in total cost. We believe the stronger USD and continuous effort in implementing automation will help to mitigate the impact.

Risks

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

Forecasts

• After factoring in higher USD/MYR assumption from RM4.00/US$ to RM4.30/US$, higher latex and nitrile price, our earnings forecasts for FY18 and FY19 are raised by 7.7% and 8.6% respectively.

Rating

HOLD ↔, TP: RM5.49 ↑

• We still like TopGlove for its exposure in the resilient export market (in view of rising protectionism in global trade) and potentially benefiting from strong USD on higher likelihood of aggressive Fed rate hike.

Valuation

• Maintain HOLD with TP raised from RM4.91 to RM5.49 after factoring in the earnings increase and roll over our valuation to CY18 based on an unchanged P/E multiple of 18x (+0.5 std deviation above mean).

Source: Hong Leong Investment Bank Research - 06 Jan 2017