Maintain OVERWEIGHT. The latest reported results of TOPGLOV suggest that the ASP trend is expected to soften in subsequent quarters albeit at a slow pace on the back of still robust demand. However, we do not expect ASP to fall off a cliff despite average lead time being reduced from 300 days in early Jan 2021 to 200 days currently, compared to 20-30 days pre-COVID-19 supported by post-pandemic demand growth averaging 15%-20% per annum. Furthermore, we believe share price retracements of 50-60% over the past few months have priced-in weakness in ASP trend moving into 2H 2021. Glove stocks under our coverage are currently trading at unwarranted 6x-10xCY22 PERs and offering dividend yield of 6%-8%, Furthermore, we have conservatively assumed ASP of USD40-46/1,000 pieces for CY22. In our view, from the perspective of a long-term investor, there is still significant value to be derived from Malaysian glove players which command 65-68% of global market share and have consistently evolve and innovate in terms of products offerings, capacity expansion and plant modernization via automation. Our target price PER of glove stocks is conservatively at 30% discount to 5-year historical forward mean averaging between 15x to 28x with earnings expected to start normalize moving into 2022. Top Pick for the sector is HARTA (OP; TP: RM17.00) with the stock trading at 9x CY22E EPS offering 9% dividend yield.

Lead times reduced but still elevated. The recently announced results of TOPGLOV suggest that the ASP trend is expected to soften in subsequent quarters albeit at a slow pace on the back of still robust demand. The group highlighted that its nitrile gloves’ ASP would be lower in coming months by 3-5% m-o-m but cushioned by a similar increase in latex gloves. All-in, we do not expect ASP to fall off a cliff in year 2021 despite average lead time being reduced from 300 days in early Jan 2021 to the still elevated 170 days currently, compared to 20-30 days pre-COVID-19. The lower lead time could be attributed to a gradual supply ramp-up in the market place following a gradual expansion in 2H 2020 (recall the oversupply situation in 2019 discouraged players from expanding aggressively). We believe the players’ share price retracements of 50-60% over the past few months have priced-in ahead of gradual price retracement in ASP trend moving into 2H 2021, presenting a buying opportunity. Gloves stocks under our coverage are currently trading at 6x-9x FY22E PER offering dividend yield of 6-8% of which our CY22E ASP assumption is between USD40-46/1,000 pieces. In our view, from the perspective of a long-term investor, we still see significant value being derived from Malaysian glove players which commands 68% global market share and have consistently evolve and innovate in terms of capacity, products and plant modernization via automation.

Global demand growth at 15-20% per annum post-COVID-19. According to the Malaysian Rubber Glove Manufacturers Association, the global shortage of rubber gloves will sustain beyond 1Q 2022 with growth rate averaging between 15% and 20% per annum going forward compared to pre-COVID-19 of 8%-10%, with still high lead time averaging six to eight months (although lower compared to 12-15 months at the start of the pandemic). We have done an analysis on the supply-demand dynamics which in conclusion quashed concerns of oversupply. We highlight that even assuming a 15% demand growth in 2022, supply barely matches demand (see table overleaf). Interestingly, players are getting orders for new users that include airlines, restaurants, retail apparel chains and hotel operators. If we look at the capacity expansion numbers in isolation, it looks overwhelming. Juxtaposed against the annual demand growth and new pandemic-led demand, the additional capacity is not a concern. In fact, the estimated new yearly capacity may not actually materialise as scheduled and hence unbale to meet the post pandemic demand growth of 15% per annum moving into 2022. Typically, to cater for normal demand, glove makers essentially need to build just one plant per year. However, from channel checks, to cater for this current pandemic-driven demand, two to three plants are required for each glove maker (on average) annually in order to meet the super-normal demand, which take between 12 to 24 months to complete. Hence, we conclude that ASP is unlikely to fall off a cliff moving into 2H 2021. Although sentiment on the sector is diminishing, lead times suggest that CY22 demand will remain strong, from increased demand brought by heightened hygiene awareness extending beyond the healthcare sector. Incremental volume growth is expected from new users of examination rubber gloves including nitrile and latex-based ones. Latest news reports that resurgence of COVID cases have led to lockdowns in Europe as the third wave of COIVD has swept across Europe. Several European countries in certain parts are extending or reintroducing lockdown measures including Spain, Germany, France and Italy as a third wave of the pandemic sweeps the continent.

TOP Pick is HARTA (OP; TP: RM17.00). We like HARTA for: (i) its solid management, (ii) constantly evolving via innovative products development, and (iii) trading at 9x CY22E EPS based on ASP assumption averaging USD46/1,000 pieces. At current price, the stock offers 9% dividend yield based on our FY22E forecast.

Key risks to our calls are: (i) faster-than-expected effectiveness in vaccine inoculation and (ii) lower-than-expected ASP in 2H 2021 and hence moving into 2022.

Source: Kenanga Research - 2 Apr 2021