We met management to discuss (i) the convertible bond (ii) capacity expansion and market dynamics and (iii) Aspion. Upon full conversion of the convertible bonds to shares, no dilution will occur as the additional new shares (c. 4.9% of existing share base) will be offset with the interest saving of RM32m. Aspion is expected to have a stronger 2H19. We are adjusting our FY19,FY20,FY21 forecast downward by -6.3%,-5.3%,-4.6% as we calibrate our finance cost assumptions as we had earlier assumed a higher level of interest savings (RM24m/annum vs. RM2m/annum). Post forecast realignment our TP decreases to RM5.93. The recent sell down in the stock is due to hedge funds short selling the stock in view of the convertible bond issuance and is not fundamentally driven. Maintain BUY.

We met with members of management to discuss latest developments at Top Glove. Our discussions mainly focused on (i) the convertible bond (ii) capacity expansion and market dynamics and (iii) Aspion.

2Q19 outlook. We can expect a muted quarter on given seasonality in 2Q and timing differences between ASP revision and costs on the back of the strengthening RM, higher minimum wage beginning January and as well as c.4%-6% higher cost of natural rubber QoQ. In terms of EBITDA margins we can expect a slight contraction of c.1ppts to 15% from 16% QoQ. Nonetheless we can still expect earnings growth on a YoY basis.

Supply demand dynamics. Overall management are still positive on the global demand growth for rubber gloves in FY19, thus the growth story remains intact. We understand that lead times are at c.30 days (normal level: 30-45 days). In terms of volume growth we can expect Top Glove to see c. +15% YoY which is in line with the global demand growth (5 year CAGR:+15.1% by Frost and Sullivan). Due to delays in construction, F33 (1.2bn pieces) and F32 1st phase (2.2bn pieces) will be delayed to mid 2Q19 from the original target of 1Q19. Whilst Factory 41 (Vietnam- 2.0bn pieces) will be pushed beyond the scheduled 1Q20 due to a delay in getting the appropriate government approvals for the investment. We view this in a positive light as these slight delays may ease the pressure on ASP in 2019.

Convertible bonds. Top Glove has issued USD200m in convertible bonds (CB) as part of their debt restructuring and should result in cash savings of c.RM16m per annum, whilst the PNL impact is more muted as the YTM of 3.75% is amortized as part of the finance cost on the PNL. The PNL impact is expected to be c.RM2m/annum savings. The debt restructuring will enable Top Glove to tap on a lower fixed yield for the duration of the bond vis a vis the syndicated loan which is based on the position of Libor (c. 4% subject to Libor fluctuations). Upon full conversion to shares, Top Glove is expected to save c.RM32m a year - no dilution will occur as the additional new shares of around 4.9% of existing share base will be offset with the interest saving of RM32m.

Aspion. We understand that Aspion is expected to turn profitable in 2Q19 (from loss of RM4m in 1Q19). Management remains confident that there will be no impairments in the near term as they expect 2H19 to be better and will form the basis of their impairment test calculations. We understand that the Kulim plant is running well but much work needs to be done at the Kota Baru and Kluang plants. In terms of capacity utilization, Aspion is hovering at c.50%-60% and product mix is 70:30 of examination to surgical.

Source: Hong Leong Investment Bank Research - 8 Mar 2019