Lowering Top Glove's Target Price; Downgrade to HOLD

• Top Glove's earnings may peak in 3QFY21 and fall from 4QFY21 as ASPs decline. We maintain our FY21-23E net profit which has already assumed for lower ASPs ahead. However, our FY21-23E earnings per share forecast is reduced by 4%/14%/14% on a higher share base, as we assume that its proposed listing in Hong Kong will go through.
• Additionally, in view of the aggressive expansion by the China’s glove-makers, our DCF-based target price for Top Glove (WACC: 8.2%, LTG: 3.5%) is cut to RM4.85 (-44%) as we roll forward our valuation to FY24E (from FY21E) and lower our LTG to 3.5% (from 4.5%).
• Downgrade Top Glove to HOLD (from BUY).

Top Glove's 2QFY21 Within Our Expectation

• Top Glove's 2QFY21 (Dec 2020 to Feb 2021) core net profit of RM2.87b (+13% q-o-q, +25x y-o-y) brought 1HFY21 core net profit to RM5.41b (+24x y-o-y), making up 48%/54% of our and street’s full-year forecasts.
• A second interim dividend of RM0.252 per share was declared, implying 71% of profit payout.

Lower Volume, Higher ASP, Stable Margins

• Key takeaways on Top Glove's 2QFY21 results:
  • Revenue rose 13% q-o-q as the higher blended ASP of US$80/k pcs (+25% q-o-q) was partially offset by the lower sales volume (-8% q-o-q; production at Klang affected by COVID-19 outbreak) and a weaker US$ vs RM (-2% q-o-q);
  • EBITDA margin was stable at 71% (+0.5-ppt q-o-q) as the higher ASPs offset the cost inflation (NBR: +63% q-o-q, latex: +16% q-o-q) and lower operating leverage.

Top Glove's Earnings May Peak in 3QFY21

• Top Glove may reduce its nitrile glove ASP by 3-5% m-o-m in Apr-Jun 21, bringing its nitrile glove ASP to around US$100/k pieces by Jun 21 and converge with the ASPs of the price laggards.
• For 3QFY21 (Mar 2021 - May 2021), we estimate net profit of RM3.1b (+10% q-o-q) on higher sales volume (+12% q-o-q), slight ASP increase (+5% q-o-q) and higher production cost (+23% q-o-q).
• As for 4QFY21 (Jun 2021 - Aug 2021), we estimate net profit to drop to RM2.7b (-16% q-o-q) on higher sales volume (+11% q-o-q), lower ASP (-14% q-o-q) and higher production cost (+16% q-o-q).

China Expanding at Breakneck Speed

Intco: Aiming to be world’s largest player?

• Intco’s expansion pace is a lot faster than our earlier expectation. In the next 12- 15 months, Intco aims to reach Top Glove’s targeted capacity size is 205b pieces by end-2024.

Blue Sail: World’s third largest player?

• Blue Sail aims to increase its total capacity to approximately 76b pieces by end- 2022 (+3x from 28b pieces as at end-2020) and potentially becoming the world’s third largest player by capacity size.

China to Gain Market Share?

• As the China’s glove-makers expansion pace is a lot faster than the global demand growth and Malaysia’s glove-makers expansion, we think head-on. As such, we lower our terminal growth rate in our DCF to 3.5% (from 4.5%).

Demand-supply to Balance by 2023?

• We think the planned expansion for 2021-22 could face delays due to the constraint of supply chain (i.e. shortage of NBR raw material and formers). Hence, the planned supply may spill over to 2023 onwards, resulting in a more competitive environment.
• In our DCF, we have assumed for Top Glove’s FY24E EBITDA margin at 14.5%, similar to its FY19 level, when there was intense competition in the latex segment.

Top Glove's Dual Primary Listing in Hong Kong

Share base to increase 16.2-18.7%

• Top Glove proposed to issue based on the latest closing price of RM5.19, Top Glove could raise RM6.75b-7.76b cash.

EGM Potentially in Early-May 21

• The proposed dual primary listing is conditional upon the fulfilment of all required approvals from:
  1. Securities Commission of Malaysia;
  2. Bursa Malaysia Hong Kong (HKEX);
  3. Securities and Futures Commission of Hong Kong; and
  4. Other relevant authorities and/or parties, if required.
• At the upcoming EGM, Top Glove will need:
  • at least 50.1% of voting shares in favour of the dual primary listing; and
  • at least 75% of voting shares in favour of the amendments of its existing Constitution,
• in order to align the Constitution with the provisions of the relevant laws, listing rules and regulations in Hong Kong.
• Note that major shareholder, Tan Sri Dr Lim Wee Chai, who holds 35% equity stake, is allowed to vote.
• The proposed listing is expected to be completed by Jun 21.

Assumes the Listing to Go Through

• In our earnings model, we have assumed for Top Glove's dual primary listing to be successful. As such, we have incorporated for the following into our model:
  1. Total of 1.3b new shares to be issued (without over-allotment); and
  2. Cash raise of RM6.5b (assuming issue price of RM5.00).
• Top Glove has a capex plant with capex of RM600m). Top Glove is also considering business expansion and strategic opportunities in China or North Asia.

Source: Maybank Kim Eng Research - 10 Mar 2021