We dialled into Kossan’s briefing last Fri. We expect to see ASPs increasing c.25%-45% QoQ. Utilisation rate is currently >90% vs. pre-Covid-19 c.80% and lead time has increase to 15 months vs. pre-Covid-19 of 45-60 days. We increase our FY20-22 earnings forecast by 30%/28%14% with more clarity on expected ASPs. We maintain BUY with higher TP of RM18.30 (from RM17.75). Our TP is based on FY21 earnings pegged to PE multiple 25x (+1SD above 5 year mean).

We Dialled Into Kossan’s Briefing Last Fri, With the Following Key Takeaways:

ASPs. While 2Q results showed good earnings trajectory (+190% QoQ, +164% YoY), we expect the momentum to pick up further in 2H20, in tandem with management’s guidance on the increasing trend of ASPs. We gather that preliminary prices indicate 3Q’s ASP would see an increase of c.+25% vs. 2Q. Following that, 4Q ASPs could be looking at an additional of c.+45% vs. 3Q. Additionally Kossan is optimistic that ASPs will continue its ascend up until 1Q21. We understand that spot order ASPs are now lingering between USD70-90 (2Q20: USD60-80) per 1,000 pieces.

Utilisation rate and lead time. Kossan reiterated that their factories are running at >90% capacity (vs. 1Q20: c.90,% vs. FY19: c.80%). Current lead time is c.15 months (vs. 1Q20: 12 months, vs. pre-Covid-19: 45-60 days). Also, Kossan mentioned that its major customers have locked in orders up till the end of 2021.

Expansion. Back in 2Q, Kossan’s Plant 19 has been fully commissioned with all 1 0- lines with 3bn pieces capacity. With that, Kossan’s current capacity stands at 32bn pieces (+10% YoY). Furthermore future expansion plans are currently on track, with staggered capacity increase. The new expansion on Plant 20 (land beside Plant 18 and Plant 19), will have an addition of 1.5bn pieces with 5 lines in 1H21 (expected to start in Apr). Moreover, the new land purchase in Meru, Klang is expected to start kicking in production as early as 2H21 with 6 lines that will produce 2bn pieces. This would bring Kossan’s FY21’s total capacity of 35.4bn pieces (+10.6% YoY). With the new capacity adding in, Kossan will be able to allocate c.20% of production for spot orders (currently c.15%, 2Q20:10%).

Demand outlook. From what Kossan shared, demand requests from customers have not been decreasing or slowing down despite the news on vaccines. However, the actual demand and supply for gloves would be depending on when the vaccine is ready for mass immunisation. In addition, rising public health awareness would increase the number of glove users (non-medical users, i.e. F&B, retailers), in addition to the healthcare sector. Overall, management remains upbeat on its earnings prospects at least until 1H21 with a possible softening in 2H21.

Forecast. With more clarity and guidance on expected ASPs, we increase our FY20- 22 earnings by c.30%/28%/14%.

Maintain BUY, TP: RM18.30. We maintain BUY with higher TP of RM18.30 (from RM17.75), post earnings adjustments. Our TP is based on FY21 EPS pegged to 25x PE (+1SD above 5-year mean).

Source: Hong Leong Investment Bank Research - 7 Sept 2020