What’s New?

• Rally of the sector is sustainable as underpinned by resilient US demand in relation to ‘Obamacare’. We envisage prolonged upcycle of the rubber glove sector as empirical evidence suggests that glove manufactures are set to benefit from healthcare spending expansion by the U.S pursuant to comeback of Patient Protection and Affordable Care Act (PPACA) or “Obamacare” in colloquial term on the back of high chances of winning by Democratic Party’ s Joe Biden.

Comment

• Joe Biden is expected to clinch landslide victory in upcoming US presidential election. Joe Biden is likely to outrun Donald Trump in the U.S presidential election to be held in November 2020 according to The Economist forecasting model (Figure 1). The model indicates Joe Biden has 89% chance of winning the Electoral College, 98% chance of winning the most votes, and 241 predicted range of Electoral College votes (270 to win). Battered economic condition, record cases of COVID- 19, and “Black lives matter” protest heavily dampen Trump’s approval rating in the nascent months. Also, there are small odds of vaccine discovery and strong economy recovery in the U.S before November poll.

• What is Joe Biden thinking? He is planning to build on the Affordable Care Act by giving Americans more choices, reducing health care costs, and making the health care system less complex to navigate. We have captured few salient points of Joe Biden’s visions on healthcare such as “Giving Americans a new choice, a public health insurance option like Medicare”, “Increasing the value of tax credits to lower premiums and extend coverage to more working Americans”, and “Expanding coverage to low-income Americans”. Hence, we expect an upscale of healthcare plan and budget on the way after he becomes the U.S president.

• Democrat tends to work on healthcare structural reform. History tells us that Democratic Party has always been mover of the country’s healthcare reform where we have seen a slew of healthcare acts have been launched such as Medicare Bill, Children’s Health Insurance Program (CHIP), and PPACA. Healthcare benefits of the U.S citizen has always been assured by Democratic Party in the U.S history.

• Expansion of insurance coverage. The healthcare sector underwent a structural reform upon former president Barack Obama launched PPACA in 2010. The motive of PPACA is to create fairer health coverage and less complicated, along with subsidies to make it more affordable and expand to the Medicaid program to cover more people with low incomes. As a result, in 2016, the number of Americans not covered by health insurance fell from 44 million to 27 million – an almost 40% drop. Moreover, public and private health insurance accounted for 41% and 34% respectively in total national healthcare expenditures in 2018 rather than 22% and 21% in 1970 (Figure 2).

• Surge in the U.S’ total national healthcare expenditures (TNH) with the enforcement of PPACA. PPACA came into force in 2014 after signing in 2010. TNH grew consecutively in 2014, 2015, and 2016 (+5.2%, +5.8%, and 4.6% YoY respectively) (Figure 3) as more people were protected by the insurance scheme. In addition, “other non-durable medical products expenditures” growth had been trending upwards since 2010 but the growth slumped to 2.2% in 2017 (Figure 4) after Trump repealed PPACA. The changes made by Trump including reduction in the penalty for not having insurance to zero amount, federal government was no longer reimbursing subsidiaries to low-income group for applying insurance, and significantly cutting federal funding for these programs.

• The U.S was the highest gloves importer. The U.S imported USD2.3b value of gloves which was 2.2x of the world’s second largest importer, European Union which amounted to USD1.06b in 2019 (Figure 5). The U.S healthcare spending was top in 2018 globally where the healthcare expenditure counted 16.9% of GDP, far outpacing 2nd position of 11.2% of GDP (Figure 6). Meanwhile, the U.S also ranked 2nd in gloves per capita consumption (pieces) in 2018. We think the U.S will keep its leading position in the coming years which is in tandem with the country’s budget expansion in healthcare as more people will get covered by insurance.
• Malaysia glove manufactures leading in global market. Malaysia glove manufactures commanded 63.5% market share of global gloves in 2019, following by Thailand (15.5%) and Indonesia (4.3%) (Figure 9). Leading manufactures with high exposures to North America markets such as Hartalega (55.0%), Topglove (27% est.), Supermax (50%) and Comfort glove (52%) are going to benefit from ramp up of healthcare spending by the U.S. Moreover, we deem Malaysia will continue to dominate in global glove market as Joe Biden has no intention to compromise with China in trade related and HK’s national security law issues any time soon, besides Malaysia enjoying relatively low tariffs as compared to China as well as long-renowned superior quality of rubber gloves. This will only strengthen local glove makers’ footprints in the U.S.
• Strong correlation between the U.S healthcare expansion and Malaysia glove sales. ‘Other non-durable medical products’ expenditures had strong positive relationship with Malaysia’s gloves export to the U.S from 2010 to 2018 with R2=0.883 (Figure 10), showing a strong correlation between the 2 factors. Notably, aggregate revenue of Hartalega, Topglove, Supermax, and Comfort glove to North America recorded a double-digit growth from 2015 to 2018 (Figure 11) as well as CAGR of 18.14% during the period rather than uneven growths the years before 2015, which is in line with the aforementioned PPACA came into force in 2014.

Valuation & Recommendation:

• Maintain overweight as we expect another strong growth cycle is brewing underpinned by the resumption of Obamacare besides the coronavirus pandemic effect. Thus, we maintain our existing BUY call on Topglove with a higher target price of RM25.40 (Previous TP: RM22.41) and upgrade Hartalega to BUY with a revised target price of RM18.80 (which is pegged at 51x which +1 S.D of 5-year mean; Previous TP: RM9.10).

• We upgrade our earnings forecasts for FY21 and FY22 on Hartalega by 117% and 121.4% to RM1248m (+187% YoY) and RM1158.6m (-7.2% YoY) respectively in view of better ASP and utilization rate. Also, we introduce our FY23 net earnings forecast of RM993m.

• Likewise, we also upgrade our FY20, FY21, and FY22 net earnings forecasts for Topglove by 31.6%, 20.9%, and 61.1% to RM1305.7m, RM2717.5m, and RM1457.4m respectively in respect of better ASP and utilization rate pursuant to acceleration of COVID-19 cases globally.

Source: JF Apex Securities Research - 9 Jul 2020