Macquarie Equities Research (MQ Research) summarised a presentation held by the Top Glove’s Executive Director in the ASEAN Conference. Strong glove demand is reaffirmed as enquiries for spot orders continue to rise with Top Glove’s observation of a shortage in the market currently. Top Glove shared its plan to increase the average selling price (ASP) and spot prices in September and October while sharing its view of that an oversupply may not be likely to happen in 2021 despite having a lot of new entrants into the sector. MQ Research maintains Top Glove’s target price at RM30.40. Read on for more.

Event

• Top Glove’s Executive Director, Mr Lim Cheong Guan, presented on Day 2 of the ASEAN Conference.

Impact

• Strong glove demand reaffirmed. Mgmt. indicated that enquiries for spot orders continue to rise. As such, the group allocates 30% of total capacity for spot orders (vs. last month’s guidance of 20-25%). In addition, normal order lead time is lengthening -- nitrile gloves 590 days, natural rubber 460 days, vinyl 150 days and surgical 125 days. Top Glove also observed the inventory levels at distributors or hospitals are as low as 2-3 weeks vs. normal 2-3 months, suggesting market is facing a shortage.

• ASP rise higher than expected. The group now plans to increase the ASP for September and October order deliveries by 30% MoM and 15-20% MoM, respectively, which is higher than the initial guidance of 5% MoM. Spot prices also increased in tandem with normal prices, from US$80-130 per 1,000 pcs to US$100-150. Assuming projected ASP increases and strong demand hold, management is optimistic that the nitrile glove ASP is likely to reach US$100 by end-2020, which is the peak during the HIV epidemic in 1991.

• Views on post-Covid-19 ASP. Mgmt. views the overall ASP will normalise post the pandemic; however, it is likely to be higher than pre-Covid-19 due to higher glove consumption. Historically, with higher glove demand, manufacturers have enjoyed better negotiating power with customers.

• No oversupply concerns in 2021. In spite of having a lot of new entrants e.g. Karex, Blue Sail and Intco, into the sector, mgmt. does not foresee oversupply in 2021, given i) the construction of a factory takes at least 1-2 years to complete, ii) difficulty for small players to source nitrile raw material due to shortage, and, iii) new capacity addition can be absorbed by higher global demand growth. Global glove demand is expected to grow +20%/+25%/+15% for CY20-22E due to higher healthcare awareness.

• Updates on CBP issue. The independent consultant appointed for the purpose has interviewed about 1,000 workers and intends to resolve the issue by end-Aug 2020. The estimated total remediation payment is RM53m, subject to finalisation with the CBP. Top Glove has started the first remediation payment of RM4.4m on 10 Aug. Mgmt. expects no earnings impact from the issue as these orders are diverted to other countries.

Action and Recommendation

• MQ Research has an Outperform rating on TOPG with a target price of RM30.40 based on 23x CY21E price-to-earnings ratio.  

12-month Target Price Methodology

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

Source: Macquarie Research - 26 Aug 2020