Although Yew Lee has a material exposure to the glove sector (c.80% to FY21 revenue), we believe short term headwinds plaguing the industry has contained repercussion to Yew Lee’s bottomline, as expectations of inventory draw down activities being at the tail-end should incentivize glove buyers to restock by 2H22. We are projecting FY21-23 core net profit CAGR of 8.6%, underpinned by higher margin customisable industrial brush sales to existing and potential new customers (Malaysia and overseas) from the semiconductor, glass making and agricultural sectors. We value Yew Lee at RM0.35/share (25% upside from IPO price), based on a P/E multiplier of 15.6x against FY23 EPS of 2.24sen.

An industrial brush specialist. Yew Lee is principally involved in manufacturing of industrial brushes and trading of industrial hardware and machinery parts. In FY21, the manufacturing segment contributed 70% to the group’s revenue while the rest was derived from the trading segment. In addition, we gathered that c.80% of Yew Lee’s manufacturing sales came from the rubber glove sector while the remaining c.20% was from the glass manufacturing, E&E, agriculture, and food processing industries.

Enlarged glove production capacity to sustain Yew Lee profitability. Despite the profit downturn in glove players which have led to a perception of a significant slowdown in Yew Lee’s brush sales volume, we reckon the sales order will stay resilient as brushes are deemed to be “wear and tear parts” (replaceable every 1-2 weeks in general, depending on the utilization rate). Based on our channel checks, gloves players are currently running at c.65% utilization rate, still below the pre pandemic level of above 80%. However, we note that the tail-end of inventory drawdown activities by buyers coupled with the uptick bias in glove’s ASPs (amid rising input cost) will incentivize buyer to restock again, and accelerate utilization rate by 2H22. According to the Disposable Medical Gloves Market report, the global Disposable Medical Gloves market will grow with a CAGR of 9% from 2021 to 2027. On top of that, the outbreak of Covid-19 that led to glove players expanding their production aggressively over the last two years has enlarged the overall glove supply, translating to a bigger market pie for Yew Lee’s brush business.

Making further inroads into Thailand and Indonesia markets. By leveraging its expertise in the custom-made industrial brushes for Malaysia glove manufacturers, Yew Lee will be tapping further into Thailand (i.e. 2nd largest glove producing country in the world) and Indonesian markets. To achieve its goals, Yew Lee is in discussion with several distributors with experience and networks in Thailand and Indonesia for potential non-exclusive distributorship arrangements, to further capitalize on the enlarged glove production capacity by leveraging on its solid track record in supplying industrial brushes to world well-known glove manufacturers, namely Top Glove, Hartalega group and Riverstone Holdings.

Diversifying into more lucrative businesses. To mitigate the concentration risk in gloves, Yew Lee will further diversify its industrial brushes to more customized and higher margin demand from semiconductor, glass manufacturing and agriculture segments. We expect more meaningful contributions from these segments when the construction of its new warehouse (well equipped with modern machineries and equipment) is completed by 2H23 to improve its manufacturing capabilities and efficiency.

Fair value of RM0.35. We value Yew Lee at TP RM0.35, based on a target PE of 15.6x FY23 EPS, benchmarking its major customers in the glove industry, but lower than Bursa Industrial index 5-year mean of 17.3x. Besides, we opine that the assigned PE is well-supported by Yew Lee strong core net profit margin and ROE.

Source: Hong Leong Investment Bank Research - 24 May 2022