• Top Glove released their latest guidance recently, highlighting that the lead time for nitrile glove has reduced to 300 days from 510 days previously
   
• The reduction in lead time is due to the company actively managing its current long lead time to match current industry levels which is around 300-360 days, which is still above the [30] days a year ago
   
• As such we reckon that demand for gloves remain healthy, and maintain our EPS forecast and BUY call

Reduction in Lead Time Is Not a Decline in Overall Demand

Top Glove (TOPG) has revealed that the current lead time for their nitrile gloves has been reduced to 300 days from 510 days since end of Nov 2020. However, we are not concerned about the changes, as the decline can also be partly attributed to the 20% increase in nitrile capacity since. Apart from that, TOPG also mentioned that they are actively managing the lead time and require more customers to put deposits for their orders, which resulted in some cancellations. We also believe that some of the cancellation is due to the current US CBP ban, which limits TOPG’s ability to ship gloves into the US.

Vaccine Hope Help Ease Rising ASP Momentarily

TOPG mentioned that they have not raised ASPs for Nitrile gloves for Feb delivery, due to the recent order cancellation, after a 10% mom increase for both Dec and Jan. We believe that with the recent introduction of the Covid19 vaccine, some of TOPG’s customer are likely to adopt a wait-and-see approach in hope for prices to drop, as TOPG’s gloves are selling at a premium relative to its peers. However, this is very unlikely, as other manufacturers have indicated that they aim to raise prices to match the current price leaders. Given that global Covid19 cases are still on the rise, driving demand higher, we expect TOPG to raise prices again in Mar.

Reiterate BUY, With An Unchanged TP of RM10.10

As we believe that the current demand supply gap is likely to continue, we are not expecting ASPs to fall dramatically in 2H21, after a few countries achieve herd immunity. We are maintaining our BUY call, with an unchanged TP of RM10.10 (based on 22.7x CY22E earnings). There is a high likelihood that there is upside risk to our forecasts if the current Covid-19 situation worsens, as the current shortage will continue to drive ASPs higher. Downside risks include shortage of raw material and labour.

Decline in Lead Time Is Not An Industry Wide Issue

Although TOPG reported a sharp decline in the overall lead time for its nitrile gloves from 510 days to 300 days in less than 2 months’, we believe that the reduction is not a good indicator of overall industry demand, as our channel checks suggest that only TOPG is facing such an issue. We reckon that the reduction is due to a few reasons, i) an increase in nitrile production capacity by 20%, ii) order cancellations due to new deposit requirements and iii) order cancellations due to ongoing social compliance issues. Nevertheless, the current lead time is still significantly higher than pre Covid19 levels, and is inline with its peers.

Increase in Capacity Reduced Lead Time by 85 Days

Interestingly TOPG’s management has also indicated recently that they have manage to secure more nitrile (raw material), allowing them to increase their nitrile capacity by 20% since end of Nov 2020. Although nitrile gloves are able to command better absolute margins, the shortage of raw material has limited manufacturers ability to direct more capacity for such production. We estimate that the 20% increase in capacity has helped to cut the overall lead time by 85 days or 17%.

Higher Deposit Requirement Led to Order Cancellations

To reduce the long lead time and to have similar practices with industry players, TOPG has also started to require most of its customers to put up deposits for their orders to reduce speculative buying. As such, we believe some customers have decided to adopt a wait-and-see approach instead, as they believe prices could soften in the near term due to the recent distribution of Covid19 vaccines around the world. However, our channel checks suggest that its peers are not facing similar problems. We believe it could be due to TOPG having one of the highest ASPs among its peers.

Social Compliance Issue Takes a Bite Out of the Order Book

Apart from that, we believe that the recent allegation of non-compliance of social issues with regards to the treatment of TOPG’s workers may have also led to some order cancellation. Although there is still acute shortage of gloves, we believe that some countries/customers are forced to cancel their orders due to pressure from their stakeholders. We are not surprised if TOPG’s US customers are cancelling their orders, given TOPG’s limited ability to ship gloves into the US due to the current ban imposed by the US Customs and Border Protection (CBP) since July 2020.

Current Shortage Will Help to Ease Problems

Despite being faced with several issues, we believe that the impact to TOPG’s earnings is still limited due to the current high ASPs. As the current shortage for gloves continues due to the high number of Covid19 cases around the globe, we believe other manufacturers will continue to raise their selling prices to match the price leaders. Given the current tight supply and limited alternatives, there is a high likelihood that customers would return to TOPG sooner or later. Top Glove is the market leader and commands around 25-30% of the world production capacity.

Source: Affin Hwang Research - 8 Feb 2021