.. But May Still Succumb to ASP Pressure

• Top Glove's Slightly weaker 2QFY8/19 earnings were within our expectation but below that of street.
• Local players’ plant utilizations are at a high of 80- 90% but there is some ASP pressure due to the influx of new capacity. Additionally, weaker USD may also lead to lower margins in the near-term.
• We lower our FY19-21F EPS by 3-4% as we impute for a higher tax rate. Consequently, our target price is reduced to MYR4.45 (-3%), based on an unchanged 24x CY20 PER (10% below our target PER for Hartalega).

2QFY19: Within Ours But Below Street’s

• Top Glove’s 2QFY19 net profit of MYR106m (-4% q-o-q, -3% y-o-y) brought 6MFY19 net profit to MYR216m (+1% y-o-y), making up 48% and 44% of our and street’s full-year estimates.
• There was weakness in Group’s earnings due to ASP pressure but the weakness was also cushioned by the higher earnings from Aspion, which registered a net profit of MYR12m (11% of total Group net profit in 2QFY19; net loss of MYR3-4m in 1QFY19).

Flattish Sales Volume, Higher Earnings From Aspion

• Key takeaways from Top Glove’s 2QFY19 results:
  1. Sales volume grew marginally (+1% q-o-q), but revenue fell (-8% q-o-q) on the lower ASPs (-8% q-o-q) as Top Glove passed on the lower rubber costs and also partially because of the competition-led ASP pressure;
  2. EBITDA margin was stable at 16.4% (+0.2-ppt q-o-q) due to the lower revenue denominator;
  3. Aspion had a minor earnings improvement with PBT of MYR3m (1QFY19: breakeven) but net profit was higher at MYR12m due to tax credit. Aspion’s plant utilization rate only improved slightly to >50%;
  4. Vinyl glove operation in China reported minor EBIT loss of MYR0.4m (1QFY19: MYR2m) on weaker vinyl glove ASP, a result of higher supply in China.

Lowering Earnings Forecasts on Higher Tax Rate

• In 1HFY19, Top Glove’s effective tax rate averaged 18% (+5.9-ppt y-o-y) and management expects its tax rate to be higher at 20% in FY19 (FY18: 16%) due to the expiry of the special reinvestment allowance.
• We lower our FY19-21 EPS by 4%/3%/3% as we raise our tax rate assumption to 20% p.a. (from 17% p.a.).

Source: Maybank Research - 22 Mar 2019