• Top Glove is proposing to issue up to 1.5bn new shares (raising RM7.7bn, including over-allotment of RM200m shares) with a dual primary listing on HKEX.
• We are negative on this news given the dilutive impact of the exercise. We estimate our FY21-23 earnings per share could be diluted by 11.2-15.1%.
• Our target price is reduced to RM7.80 (14x CY22 P/E. -1 standard deviation of its 5-year mean).

To Issue 1.5bn New Shares From Primary Dual Listing on HKEX

• Top Glove on Friday announced plans for a dual primary listing in which it will issue 1.5bn new shares (includes an over-allotment option to issue another 200m shares) via a global offering on the Main Board of The Stock Exchange of Hong Kong Limited (HKEX).
• The new shares would make up 16.2% of Top Glove's existing share base of 8.2bn (18.7% if over-allotment is exercised in full). The listing is slated to take place in May 21.

Could Raise Net Proceeds Up to RM7.7bn

• Assuming an issue price of RM5.20/share (to be determined later), Top Glove would be able to raise net proceeds of RM7.7bn (including over-allotment shares and net of listing expenses).
• We understand the proceeds will be mainly used to fund its existing capex plans (80%), potential merger and acquisitions plans (10%), environmental, social and governance initiatives (5%), as well as working capital purposes (5%).

Rationale for This Proposed Exercise

• According to Top Glove, the rationale for this dual-listing is:
  • better reach to a wider investor base (especially in Hong Kong, North Asia),
  • raise funds for capex plans (RM10bn in next five years),
  • new platform for potential future fund raising, and
  • better brand awareness.
• Once completed, Top Glove’s shares would then be listed and traded on Bursa, SGX-ST, and HKEX (with shares transferable among the three stock exchanges).

We Are Negative on This News at This Juncture

• Despite rationales of this exercise, we are negative on this exercise as it is dilutive to earnings per share. Assuming that the over-allotment option is exercised, this exercise will reduce our FY21- 23F earnings per share by 11.2-15.1%.
• In our view, this fund-raising exercise is avoidable as earnings per share’s expected stellar FY21-22F results should be able to support its capex plans, while it has zero gearing currently.
• Bear in mind that Top Glove recently announced a 20% special dividend for the remaining three quarters in FY21 on top of an existing dividend policy of 50%.
• Also, Top Glove spent RM1.4bn to conduct share buybacks of 200m shares in the past one year.

Maintain ADD With a Lower Target Price of RM7.80

• No changes to our FY21-23F earnings per share forecast pending further updates on the matter. Still, we lower our Top Glove's target price to RM7.80, based on a lower P/E multiple of 14x CY22 P/E (-1 s.d below its 5-year mean) from 16x previously, due to concerns i.e.:
  1. ongoing ESG issues (treatment of foreign labor) and
  2. CBP ban on two of Top Glove’s subsidiaries remain unresolved since Jul 20.
• Assuming that this exercise is completed, our theoretical target price would be at RM6.80 rged share base of 9.7bn).
• We still retain our ADD call for Top Glove.

Source: CGS-CIMB Research - 28 Feb 2021