Highlights

• We attended Top Glove?s 9M17 analysts briefing coupled with a short tour of their Jalan Meru Facility (F25). We walked away feeling neutral. Key highlights as below:
• To recap, 9MFY17 PATAMI of RM234m accounted for 68.1% and 66.9% of ours and consensus estimates. The sub-par results were attributed to time lag on cost pass through to customers as average latex and nitrile prices surged a further 24% and 19% qoq, whilst the US dollar had depreciated by 2% qoq.
• We understand that ASP has been revised lower in April (Nitrile: -7.8%, Latex:-15.6%) to reflect the normalization of raw material prices. The price of raw materials has eased significantly since their recent 5 year record highs (Nitrile: USD1.49/kg in March, Latex: RM8.16/kg in February) with Nitrile now trading below USD1/kg and Latex below RM5.50/kg.
• Yoy sales volume grew 3% in North America, 4% in Asia partially offset by a 5% decline in Europe. Management expects the Asian market to be the growth driver in future; with China spearheading the continents demand as their increased affluence and lifestyle changes (Healthcare, Food preparation etc.) increases the demand for gloves.
• On that note, YTD demand for Vinyl gloves from China has increased 11% yoy due to a government enforced closure of factories in China due to their suffocating pollution problems.
• Given the similarity in technology and higher margin business, management signalled their intentions of entering the condom business. The group targets to establish their factory within the Klang vicinity and reach markets within a years? time. We are of the opinion that, whilst the condom business would complement their existing business; in the near term, challenges facing the condom sector includes a consolidating global industry and consequently issues relating to demand.
• The second half of the briefing culminated in a tour of their F25 facility which houses the groups R&D centre. As part of its cost reduction effort, the group has intensified its research into formers. There are 19 dedicated R&D scientists and engineers tasked with of designing a lighter ceramic former. We estimate that in the long run, Top Glove could potentially save circa 10% on the cost of their formers . To note the group replaces approximately 2.4m formers per annum with a cost of RM10 per former.

Risks

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

Forecasts

• No change in forecasts.

Rating

HOLD ↔ , TP: RM5.20 ↔ .

• Whilst we like Top Glove for its exposure in the resilient export market and it being a benefactor of the strong USD, we are of the opinion that the stock is fairly priced at current levels.

Valuation

• Maintain HOLD with an unchanged TP of RM5.20 based on an unchanged P/E multiple of 18x CY18 EPS.

Source: Hong Leong Investment Bank Research - 21 Jun 2017