Macquarie Equities Research (MQ Research) expects glove demand to remain robust in 2021, due to the continued shortages next year, coupled with the rising  trend in COVID-19, the upcoming flu season in the US and swine flu in China. While MQ Research does not anticipate an immediate threat from Chinese players, it sees a potential glove oversupply risk in 2022.  Given the higher average selling price (ASP), MQ Research upgraded Hartalega to Outperform with an increased target price of RM17.00 while reiterating an Outperform rating on Top Glove with TP of RM30.40.

Impact

• Strong demand to continue in 2021. Common questions that MQ Research has received are “how strong is the current demand?” and “how long can this strong demand last?” Manufacturers are now pointing to lengthening lead times, robust order conversion and an increase in spot order enquiries. This indicates to MQ Research that the sector has not seen peak glove demand yet. In addition, MQ Research is keeping an eye on the swine flu in China and the upcoming flu season in the United States where peaks are usually between Dec and Feb. This should support overall glove demand until 1H21 and only gradually normalise in 2H21, having assumed a vaccine is available in mid-2021.

• Ambitious expansion plans from Chinese players does not change MQ Research’s investment thesis.  MQ Research factors in Blue Sail and Intco Medical expansion plans for the next three years in MQ Research’s demand-supply assumptions. MQ Research does not foresee an immediate threat from Chinese players as i) most capacities will only gradually commence in late-2Q21 and ii) new capacity will be rolled out on a staggered basis. MQ Research sees there is a potential oversupply risk in 2022 with 12bn pcs of surplus. Having said that MQ Research thinks this concern can be easily eased with the deferment of expansion plans (which MQ Research has seen in the past) or absorption from higher China domestic consumption.

• MQ Research views on the ASP trend. In MQ Research’s base case assumption, MQ Research expects manufacturers to continue to have pricing power to raise/maintain the high average selling price (ASP) until June-21, and thereafter MQ Research expects it will take six months to return to pre-COVID-19 levels. MQ Research projects global demand will normalise gradually when we have a vaccine. The vaccine is likely to take stages to commercialise globally.

• Key downside risks are demand growth and the ASP trend. Key to watch is vaccine progress. A virus shot from Pfizer and BioNtech showed promising results in early testing, and looks to be on track to have the first shot in early 2021. Dr Anthony Fauci is also hopeful for a COVID-19 vaccine by early-2021. MQ Research’s bear case valuations for Top Glove and Hartalega are RM11.80 and RM8.60.

Outlook

• Given that gloves are staples within the healthcare industry and MQ Research expects continued shortages in 2021, MQ Research projects strong earnings growth to continue in 2021E. In view of the recent, more aggressive ASP increases by manufacturers, MQ Research expects Top Glove’s FY21E to deliver about three times that of its FY20E. With strong earnings, MQ Research reiterates an Outperform rating on Top Glove with an increased target price (TP) of RM30.40. MQ Research also upgrades Hartalega from Neutral to OP with an increased TP of RM17.00 given the higher ASP increase than MQ Research expected. MQ Research’s FY21E forecasts for Top Glove and Hartalega are >100% and 78% above consensus.

12-month Target Price Methodology

• HART MK: RM17.00 based on a PER methodology
• TOPG MK: RM30.40 based on a  PER methodology

Source: Macquarie Research - 7 Jul 2020