While Top Glove is expecting to raise ASPs gradually going forward, we are not particularly enthusiastic about it as this is done in anticipation of rising raw material costs. Demand has remained relatively weak and utilisation rate is still low at c.30% currently. We expect the higher electricity and fuel costs to continue weigh down on Top Glove’s profitability. Maintain SELL on Top Glove, as we believe it will take time for the market to absorb the additional supply before the Group can regain profitability. TP unchanged at RM0.53, representing at a P/B multiple of 0.8x (at close to -2SD to its 5-year pre-pandemic average), on its FY23f BVPS of RM0.66.

We Came Away From Our Recent Company Meeting With the Following Key Takeaways:

ASP revision. In anticipation of the higher raw material costs, Top Glove will be looking to gradually raise its ASP in the coming months to pass on some of the cost increases to buyers. Latex prices are expected to rise due to wintering season, whereas higher butadiene prices will drive NBR prices higher. Nitrile gloves are currently priced at c.USD18 per thousand pcs, and Top Glove aims to raise c.USD1 in each revision, with more aggressive revision of c.USD3 expected from April onwards. Other Malaysian, Chinese and Thai glove manufacturers will likely follow suit, since rising raw material prices will impact all producers. While we anticipate the price adjustment to alleviate some of the margin pressure, we are not optimistic that this will bring Top Glove back to profitability

Demand still relatively weak. Top Glove has yet to see any major uptick in terms of glove demand, except for the one-off order supplying to the UK government in Dec 2022. Tender orders are typically lumpy in nature, and is not expected to be repeated in the near-term. Not to mention that such orders are usually sold at competitive pricing. Utilisation rate is also still low at this point, running at c.30% presently. Management expects demand to start gradually picking up soonest in 2HCY23, while utilisation rate is not expected to recover back to 70%-level any time before 2H/4QCY24.

Cost inflation continues. Based on the existing cost structure and utilisation rate of 30% on 85bn pcs capacity, nitrile gloves would have to be priced at c.USD22 in order to breakeven at EBITDA level. The recent natural gas and electricity tariff revision is also expected to put downward pressures on margins, as it is expected to increase by 15% and 42% respectively. Fuel costs currently accounts for 15% of Top Glove’s production costs, vs 8-10% prior to the rise in fuel prices. Given the high natural gas cost, we think that the local glove makers do not have much competitive edge in terms of costing against the Chinese and Thai players, as the Chinese players uses coal, which is expected to be USD1-2 cheaper, whereas the Thai players uses biomass and is estimated to be c.USD1 cheaper than natural gas. With that being said, management do expect natural gas costs to ease in April. Management is also working to manage the cost pressures by running the newer, more efficient lines. We highlight that most of the major glove making processes have also been automated, with the exception of packaging.

Forecasts. Remain Unchanged.

Maintain SELL, TP: RM0.53. We maintain our SELL call on Top Glove, as we believe it will take time for the market to absorb the additional supply before the Group can regain profitability. TP unchanged at RM0.53, representing at a P/B multiple of 0.8x (at close to -2SD to its 5-year pre-pandemic average), on its FY23f BVPS of RM0.66.

Source: Hong Leong Investment Bank Research - 9 Mar 2023