Raise Top Glove to BUY

• We think the ongoing coronavirus could develop into a global pandemic outbreak. Top Glove (SGX:BVA) is the biggest beneficiary given its fastest capacity growth and relatively lower plant utilisation rate. No change to our earnings forecasts for now.
• We made the following changes:
  • Top Glove - raise to BUY (from HOLD) with a higher Target Price of MYR5.65 (+19%);
  • Kossan – maintain at BUY with a higher Target Price of MYR5.30 (+9%).
  • Maintain Hartalega at HOLD with an unchanged Target Price of MYR5.75.

Possible Sustained Human-to-human Transmission

• The coronavirus has infected a total of 5 countries (China, Thailand, Japan, Korea, and US) and there is also a suspected case in Philippines. A total of 300 cases and 6 fatalities were reported. According to World Health Organisation (WHO), the new Coronavirus may have sustained human-to-human transmissibility. Yesterday, it was reported that 15 medical workers at Wuhan have been diagnosed with coronavirsus.

May Develop Into a Pandemic Outbreak

• Though the major airports have already tightened their screening measures, we note that the screening may not be able to pick up all the infected patients as the incubation period of the virus (between contracting of the virus and the onset of symptoms) is 6-10 days. Hence, we see high possibility of the coronavirus developing into a global pandemic outbreak.

Top Pick: Top Glove

• We believe the potential pandemic outbreak may spur global demand for gloves. During SARS (2002- 03) and H1N1 (2009-10), the global demand jumped by an average growth rate of 13%. In our stock universe, we think Top Glove would be the biggest beneficiary given its fastest capacity growth of 18% in CY20 (Kossan: 11%, Hartleaga: 9%) and relatively lower plant utilization rate of 85% (Kossan: 85%, Hartalega: > 90%).
• We raise Top Glove to BUY (from HOLD) with a higher Target Price of MYR5.65 (+19%) as we raise our P/E target to 31x (from 26x; being its +1SD to 5- year mean) and also roll forward valuation to CY21E.
• We keep Kossan at a BUY with a higher Target Price of MYR5.30 (+9%) as we roll forward our valuation year to CY21E (still based on unchanged 24x P/E target, +0.5SD to 5-year mean).
• Hartalega remains a HOLD with unchanged Target Price of MYR5.75 as it is already based on CY21E P/E target of 37x (+0.5SD to 5-year mean).

Source: Maybank Kim Eng Research - 22 Jan 2020