For the foreseeable future, we believe that glove demand and ASPs will be driven by testing frequency and vaccine roll out using gloves. For the remainder of CY21, we expect the vaccination demand for gloves to more than offset the decline from testing demand. Even with global supply expected to rise by ~20%, we expect there to be a supply shortage of circa 12.4bn pieces in CY21. Based on our new valuation methodology, our top pick Top Glove’s TP is lowered from RM10.54 to RM8.06. Maintain BUY.

Glove used for vaccinations. Examining countries with the highest population and other selected first world nations, we note that gloves are currently being used for most countries when administrating vaccines. As such, while vaccinations are expected to eventually prevent the spread of Covid-19 (and hence lower usage of gloves for testing), in the medium term, it would in fact increase demand for gloves.

Glove ASPs driven by testing and vaccine roll out. For the foreseeable future, we believe that glove demand and ASPs will be driven by testing frequency and vaccine roll out needing gloves. For the remainder of CY21, we expect the vaccination demand for gloves to more than offset the decline in demand used for testing. With global vaccine roll out only just beginning to take shape, we expect glove ASPs to remain elevated (at around USD115-140 per thousand pieces) for the time being, with a possible decline in 4QCY21 at the earliest. Even with global supply expected to rise by ~20% this year from existing players ramping up production capacities and newer players entering the market, we still expect there to be a supply shortage of c.12.4bn pieces in CY21.

Herd immunity. The US expects to reach herd immunity by 4Q21 and full vaccinations by 1Q22. However, with vaccinations happening more rapidly in affluent Western countries than the rest of the globe, current estimates indicate global herd immunity could take as long as 5 years (source). This would provide support for glove demand in the medium term.

Second strain and anti-vax wildcard could potentially wreak havoc. While it is still unknown how the second strain variants affect existing vaccines, there is a possibility that existing vaccines prove ineffective against newer variants. According to a recent study, the Oxford/AstraZeneca Covid-19 vaccine does not appear to offer protection against a mild viral variant first identified in South Africa. With regard to anti-vax movement, we note that from the latest reading, if all US citizens that say they would not take the vaccine (31%) do not get vaccinated, the US would not be able to achieve herd immunity. These two factors have the potential to prolong the Covid-19 pandemic.

Valuation methodology. We switch our valuation methodology from straight PE multiple to a modified DCF valuation. We value the glove companies using with their pre pandemic 5-year average PE multiple of (CY15-19) based on sustainable earnings in a post-super normal earnings environment summed with free cash flows (both discounted back to PV) generated during the boom period. This encompasses earnings in a post pandemic era as well as high profits generated during the pandemic.

Forecasts: We rejig our forecasts as shown in Figure #14 as we expect high ASPs to sustain until 4QCY21.

Maintain OVERWEIGHT. Despite share prices correcting downwards, we do not expect vaccine roll out to be as straight forward as the market suggests as logistical, procurement, anti-vax movement and second strain issues could derail efforts and thus provide support for glove demand. Based on our new valuation methodology, our top pick Top Glove’s TP is lowered from RM10.54 to RM8.06 (maintain BUY).

Source: Hong Leong Investment Bank Research - 16 Feb 2021