Highlights

• Recapping 2017… After a lacklustre performance in 2016 with an average return of -21%, rubber product companies outperformed the FBM KLCI in 2017 with an average return of 29% (47.5% ex Karex) versus FBM KLCI at 9%.

• Appreciating RM. As exports account for more than 90% of revenues which are denominated in USD while a substantial portion of the cost base denominated in RM, a stronger RM will affect revenue upon translation into the home currency. Top Glove has the highest sensitivity towards USD depreciation.

• We believe that rubber product companies will be able to pass through the MYR appreciation to customers via an increase in ASP relatively easily on the back of the shortage of gloves from China’s new environmental stance.

• Raw material price. Latex and nitrile accounts for about 35-40% of total cost. Both raw materials experienced a sharp increase earlier during 2017 due to (1) torrential rains and flooding affecting harvest for natural rubber (NR) (2) shut down of several butadiene plants in Asia causing a shortage in a key ingredient for nitrile (NBR) production.

• In 2018 we expect the prices of both NR and NBR to be range bound, with both NR and NBR to fluctuate within RM5-6/kg mark barring any further unforeseen circumstances such as flooding in rubber producing regions and or Butadiene plant shut downs.

• Supply increase. In CY18 we expect the four rubber glove manufacturers to add an estimated 18.75bn pieces in capacity (+14.8%).

Rating

Neutral ( ↔ )

• We are maintaining our Neutral stance on the sector for 2018 due to the historical high sector valuation (2SD above historical average) against the backdrop of a strengthening RM.

Top Picks

• Top Glove ( BUY; TP: RM9.95 ). We see upside potential upon the completion of the Aspion acquisition which would transform Top Glove into the world’s largest surgical glove player by capacity.

Source: Hong Leong Investment Bank Research - 23 Jan 2018