What’s New?

• Development of the vaccine for COVID-19 has accelerated significantly. We are of the view that development of vaccine for COVID-19 is moving faster-than-expected in which we have seen two vaccines are being approved and used for early or limited usage, expecting to be distributed globally in Q1/Q2 CY2021.

Comment

• Non-western countries are leading in vaccine development. Based on The New York Times, vaccines developed by a Chinese company named CanSino Biologics and The Gamaleya Research Institute from Russia have been approved for early and limited usage recently, indicating positive developments for running a Phase 3 and Phase 1 trial in Saudi Arabia and Russia respectively. Moreover, there are 8 vaccines which are running for the last phase of the clinical trial whereby scientists gave the vaccines to thousands of people and are monitoring the infection rate closely, compared with volunteers who received a placebo. Notably, the vaccine would consider effective if it could protect at least 50% of vaccinated people according to the Food and Drug Administration (F.D.A).

• Deceleration of COVID-19 cases. Countries which have the most COVID-19 cases such as the US and Brazil are being alleviated in which the 5-day moving average number of new cases have gone down significantly from July’s peak (see figure 1). Besides, around 57% of people across parts of India's financial hub of Mumbai have coronavirus antibodies from a study found in July which is very close to “herd immunity” 67%-70% of the population according to an expert from University of Chicago despite Indian COVID-19 new cases are growing at the fastest rate in the world. Subsequently, some parts of New York City have reached a similar level of antibodies which have seen in Mumbai.

• PPE price rally tapering off. Globally, Personal Protective Equipment (PPE) prices have been increasing over the past few months. However, we have seen the price rally taking a breather as the latest rate of change on M-o-M for PPE prices are flattening in the US and Canada (see figure 2). We believe the PPE price rally has reached its end-phase on the back of alleviating COVID-19 cases, faster-than-expected vaccine development, and supply catching up with demand amid prevailing strong awareness of personal or hygienic protection.

• Hospitals are using fewer gloves. Declining US hospitalized patients (see figure 3) pursuant to infection of COVID-19 would reduce usage of gloves. Hence, this would heavily impact the demand and pricing of gloves as the US recorded the highest number of glove import in 2019. Furthermore, the nation was willing to pay a premium for PPE products due to its severity of COVID-19 cases. Thus far, we do not foresee any other countries that are willing or able to afford to pay such a high premium aside from the US and Europe.

• Less human interaction and social activities resulting in lower usage of gloves. We notice that people are going out lesser nowadays despite the easing of COVID-19 cases. Google mobility report shows that the US, Brazil, and India mobility trends in public transits and workplace have reduced dramatically since COVID-19 breakout (see figure 4). In fact, people prefer to stay in their own compounds during this period whereby these countries recorded robust growth in residential activities. As a result, fewer physical interactions led to slowdown in the spread of COVID-19, as evidenced by the Rt (a key measure of how fast the virus is growing) in the US which came down radically in recent days (figure 5). Note: If Rt is above 1.0, the virus will spread quickly.

Valuation & Recommendation:

• Downgrade the sector to Neutral from Overweight on the back of: 1) deceleration of COVID- 19 new infections, 2) faster-than-expected development of vaccine, 3) momentum of rising ASP for gloves might not be as strong as initially thought as more companies joining the bandwagon of manufacturing medical glove, and 4) demand for glove is tapering as a result of less social activities. Thus, we reduce our Target Price (TP) for Hartalega to RM16.02, HOLD (from RM21.62, BUY) while maintaining TP for Top Glove at RM25.40 as we believe Top Glove has higher spare capacity to cater to the huge demand of gloves globally as compared to Hartalega. Both TPs for Hartalega and Topglove are in line with their 5-year mean PE of 40x (54x which is at its +1SD previously) and unchanged PE of 30x respectively. Profit wise, no change to our future earnings forecasts for both stocks.

Source: JF Apex Securities Research - 27 Aug 2020