• The US Customs and Borders Protection (CBP) have placed a detention order (withhold release order) on disposable gloves produced by Top Glove Sdn Bhd and TG Medical Sdn Bhd (subsidiaries of Top Glove)
• TOPG’s gloves are now being detained at the ports of entry in the US, similarly for any incoming shipments too starting 15 July 2020
• Management has guided that they will be working with relevant authorities to resolve the matter within the next 2 weeks

Foreign Labour Issue Haunts TOPG Again

Although the CBP did not provide additional details about the detention orders, TOPG’s management believe that it could be related to its past foreign labour issues, in regards to the retrospective payment of recruitment fees by their workers to agents prior to January 2019, which TOPG is already is the midst of resolving the issue. Management also reiterated that their current labour policies have already complied with international standards, and have passed the audits by external parties. TOPG has engaged an external consultant, and we are confident that TOPG can resolve the problem in the coming weeks easily, as the issue is mainly related to past practices.

There Is Still Strong Demand From Other Regions Too

Although the US market contributes around 25% of sales in FY19, we are not revising our numbers as we believe TOPG can resolve the problem in a timely manner. As there is shortage of gloves globally, we believe that TOPG can sell its gloves to other countries if needed, if the suspension is prolonged during the COVID-19 crisis. There is a high likelihood that the problem will be resolved quickly, given the worsening outbreak of COVID-19 in the US, as CBP has recently lifted the suspension of another glove manufacturer due to the shortage in the US. ASP in the US is marginally higher than other regions by about 5%.

Reiterate BUY With An Unchanged TP of RM22.40

We believe that the sales to the US will only be temporarily disrupted by the current detention orders, hence we are keeping our earnings forecasts unchanged. As the current demand growth continues to outstrip supply, TOPG will continue to benefit from the rising ASP, in our view. As such, we are keeping our BUY call and TP at RM22.40 unchanged, based on unchanged 52x CY21E PER. Key risks to our call include: 1) intensifying competition from other countries; 2) higher volatility in rawmaterial prices; and 3) worsening labor issues.

Source: Affin Hwang Research - 17 Jul 2020