• We hosted a conference call with management recently, and management guided that ASPs for August delivery have increase by 25% mom
• We believe that the recent resurgence of COVID-19 will drive ASPs higher in coming months, as the current shortage looks likely to worsen
• Our bull-case scenario indicates that TOPG’s fair value could be as high RM110.20, if selling prices do increase by 10% mom each month in FY21E

Selling Prices Continue to Surprise on the Upside

We hosted a conference call with management recently, which was well attended by >60 local and foreign investors. During the call, management raised their guidance on ASP growth for August to +25% mom from +15% mom. This came as a positive surprise to us, as we did not expect ASPs to increase by more than >15% mom for 3 consecutive months. We believe that ASPs can continue to increase by at least 5% mom each month moving into FY21E (as per management guidance) given the recent resurgence of COVID-19 in developed countries, which will drive demand and hence ASPs.

What If Selling Price Increase by More Than 5% Mom?

We believe there is a likelihood that ASPs could increase beyond the 5% mom increase given the current resurgence of COVID-19. Based on our estimates, if ASPs were to increase by 8-10% mom each month, our earnings estimates for FY21E will increase by a further 24%-42%. Based on a PE multiple of 30x, the fair value of TOPG shares would be around RM56.20-RM63.60. However, if we were to base it on 52x (similar to Hatalega’s [HART MK, MK17.46, Buy] valuation), the fair value of TOPG could surpass RM110, which implies an upside of more than 344% from the current level.

Reiterate BUY With a Higher TP of RM46.40

We are raising our earnings forecasts for FY20E-22E by 35%-310%, imputing a higher ASP assumption. We are also raising our TP to RM46.40, though based on a lower CY21E PER of 30x which is based on its 3-year historical mean, and we maintain our BUY call. We are not overly concerned by the detention order issued by the US Customs and Border Protection (CBP), and expect it to be resolved within the next 2-4 weeks. We estimate the impact on earnings for FY20E is around 5-6%. However, if the issue prolongs, TOPG will have to re-ship it goods to other countries, though it could benefit from higher spot prices. 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 - 21 Jul 2020