Heightened Competition for Latex and Vinyl

We are maintaining our SELL call and TP of RM4.10 on Top Glove (TOPG), post the analyst briefing hosted by the management recently. Although we are expecting strong growth within the nitrile segment to continue, supported by 12% capacity growth, we see downside risk to our latex segment forecasts. As the recovery for latex glove margin is also dependent on latex prices remaining stable throughout FY20, any irrational competition is likely to hamper the recovery.

Irrational Competition From Abroad for the Latex Segment

Sales volume for the latex glove segment only grew by 0.2% yoy for FY19, which is significantly lower than the 23% yoy growth delivered in FY18, as sales volume contracted by 12-23% qoq in 4QFY19. Although the overall capacity for latex glove has been relatively stagnant for the past 5-years, management believes the decline in its market share in recent quarter was due to irrational competition from overseas. We believe management was referring to Sri Trang (STA TB, Not Covered), a rubber plantation company that has aggressively expanded its glove production capacity recently, as it is working towards the listing (IPO) of its rubber glove division soon.

Shifting to Vietnam to Seek Competitive Edge

Despite hitting record profits in FY18 for its vinyl glove segment, profit for the segment was reduced from RM27.9m in FY18 to -RM4.1m in FY19, due to the increase in vinyl glove supply as the government relaxed some environment policy which was supposed to curb overall production capacity in China. Given that Top Glove is not competitive (cost) in China, operating only 1 manufacturing plant, it is now moving forward with its expansion into Vietnam, with production (4.0bn pcs) expected to start in 2Q20. We believe that Top Glove is likely to keep its China plant, to maintain exposure to the fastest growing developing market.

Maintain SELL With An Unchanged TP of RM4.10

We are maintaining our SELL call with an unchanged TP of RM4.10 (24x CY20E PER), as we believe that there could be more downside risk to our earnings forecasts moving forward due to irrational competition in the latex and vinyl segment. Upside risks to our call, would be weakening of MYR against USD, significant drop in latex prices, and China government reintroducing new environment policy to cap capacity.

Source: Affin Hwang Research - 7 Oct 2019