• Management is currently guiding that the ASP for August delivery is expected to increase by at least 40% compared to 2Q20’s ASP.
• The increase is significantly higher than for its peers, as the ASP for most of KRI’s 1H20 deliveries were locked in before the outbreak of COVID-19
• Reiterate BUY, with a higher TP at RM22.80, as we believe there could be more upside to the ASP while earnings are unlikely to peak in 2020.

ASP guidance for post-Sep’20 is similar to peers’

Management has provided guidance for the ASPs for Jul’20 (+15% vs 2Q20) and Aug’20 (+40% vs 2Q20), which we believe are higher than its peers’, due to the repricing of its products to match current market prices and the higher demand for rubber gloves. KRI wasn’t able to benefit much in 1H20 as the selling prices had been locked in before the spread of COVID-19; hence it is playing catch-up (in terms of selling prices) in 2H20. Nevertheless, the guidance for post-Sep’20 deliveries is similar to its peers’ at around +5% mom, which we believe is reasonable given the increase in the number of COVID-19 cases. Kossan’s order book is currently for more than 12 months.

The new Plant #20 will plug the expansion gap

During the recent results briefing, management disclosed that the company will build a new Plant #20 (1.4bn/pcs/year), adjacent to its Meru factories which it had acquired for RM40m recently. The plant is expected to start contributing by 2H21. We believe that the new Plant #20 will help address previous concerns over the lack of new capacity in 2021, as Plant #19 will be fully operational by the end of the year, and the new manufacturing complex at Bidor, Perak will only start operations in 2022. With Plant #20, the average annual capacity growth for Kossan for 2019- 22 stands at 14%, higher than the 10-year average demand growth for medical rubber gloves of 8-10%.

Reiterate BUY with higher TP at RM22.80

We have raised our EPS forecasts for 2020-22 by 70%-140% to factor in our new ASP assumptions, as the recent spike in ASPs have continued to surprise us on the upside, and lifted our 12-month TP to RM22.80 based on a 28x 2021E PER. We maintain our BUY call on the stock. We believe that industry ASPs could continue to surprise on the upside. Risks to our call include the availability of vaccines for the public before 1H21, and spikes in forex volatility and prices of its raw materials.

Source: Affin Hwang Research - 4 Aug 2020