Demand remains robust at the moment
KRI’s management had guided that the overall ASP would increase by at least 50% in 4Q20 and further expects ASP to increase by 30-35% in 1Q21. We believe there is still room for future increases as KRI’s average ASP at US$50-60 currently is still around 20-30% below market price. Due to the strong demand, KRI has been able to lock in orders till end of 2021. Interestingly, unlike its peers, KRI is guiding for ASP to remain flattish or slightly lower in 2H21 than in 1H21, as they believe that some of their clients might be unwilling to pay higher prices due to the availability of the vaccines, which is similar to our view. We have forecast ASPs to decline by 1-3% mom moving into 2022.
Not perturbed by future competition
KRI’s management is not too concerned about the new supply coming on stream in 2H21 from the new entrants, as the supply constraint on raw materials (nitrile butadiene) will limit their ability to compete, as their cost base will be higher than for existing players. Management reckons that the recent spike in nitrile prices (spot) is largely due to new players paying a premium to secure future supplies. KRI is also expecting ASPs to fall gradually in 2022, unlike the previous pandemic when prices fell dramatically post the spike in demand. Management is expecting distributors to continue buying as current purchases are for genuine consumption, and inventory is still below the normal level.
Reiterate BUY with an unchanged TP of RM8.90
We are keeping our EPS forecasts, TP at RM8.90 (based on 23.8x 2022E PER) and BUY call unchanged, as we are not overly concerned about the potential oversupply occurring in 2022. We believe that existing players will have a cost advantage against new entrants due to their highly automated production lines. The current strong relationship with established distributors also allows them to sell at their products at a premium too. The downside risks to our call are: i) shortage of foreign labourers, and ii) shortage of raw materials
Source: Affin Hwang Research - 16 Dec 2020
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