• Top Glove's 1HFY21 (Sep 2020 to Feb 2021) core net profit of RM5.4bn (+2,283% y-o-y) was within expectations, at 52% of our and 54% of Bloomberg consensus full-year estimates.
• We are not overly concerned on potential decline in ASPs from 2HFY21F onwards, as we have accounted for this in our ASP estimates in FY21-23F.
• We reiterate our ADD call on Top Glove with an unchanged target price of RM7.80 (14x CY22 P/E).

Top Glove's 1HFY21 Core Net Profit Rose 2,283% Y-o-y; In-line With Estimates

• Top Glove's 2QFY21 (Dec 2020 to Feb 2021) core net profit came in at RM2.9bn (+2,380% y-o-y), bringing 1HFY8/21 core net profit to RM5.4bn (+2,283% y-o-y). This was in line at 52% of our FY21F estimate and 54% of Bloomberg consensus’s.
• Top Glove declared interim dividend of RM0.252 per share (70% payout), bringing 1HFY21 dividend to RM0.417 per share (8% dividend yield); within expectations.

2QFY21: Stronger Q-o-q Results Mainly Thanks to Higher ASPs

• Top Glove's 2QFY21 revenue rose 12.8% q-o-q as higher selling prices (ASPs, up 14% to +30% q-o-q) more than offset lower sales volume (-8% q-o-q). The latter was owing to temporary stoppages in certain Top Glove factories due to an outbreak of COVID-19 cases.
• Still, 2QFY21 core EBITDA margins rose 0.5%, as the quantum of ASP hikes fully mitigated higher raw material costs (latex: +16% q-o-q and nitrile butadiene: +63% q-o-q). This led 2QFY21 core net profit to rise 12.8% q-o-q to RM2.9bn.
• Top Glove's 1HFY21 revenue rose 315% and 1HFY21 core net profit jumped 2,283%. This was due to COVID-19 led demand for gloves, leading to higher sales volume (+25% y-o-y) and a spike in ASPs ( > 200% y-o-y) in the period.

We Reiterate Our Negative View on Top Glove’s HKEX Listing

• Top Glove recently proposed the issuance of 1.5bn new shares (18.7% of existing share base of 8.2bn shares) with a dual primary listing on HKEX. This is slated to happen in May-Jun 21, potentially raising RM7.7bn (assuming issue price of RM5.20/share). The rationale for this includes:
  1. targeting a wider investor base,
  2. fund-raising for capex plans, and
  3. a new platform for future fund-raising activities.
• Yet, we are negative on this as it is potentially EPS dilutive (reduces FY21-23F EPS by 11.2-15.1%).

Other Highlights of Top Glove's Briefing

• The 8% q-o-q decline in sales volume in 2QFY21 was attributed to the temporary stoppages in peak of its delivery lead time (250-620 days), as Top Glove has added new capacity while customers are rebalancing their glove inventory portfolio taking into consideration the availability and efficacy of COVID-19 vaccines.
• Nevertheless, Top Glove expects global glove demand to remain robust and higher than pre-COVID-19 levels, given increased consumption patterns and higher demand from emerging markets.
• While Top Glove is of the view that CBP matter, Top Glove highlighted that it has submitted all the necessary requested documents, while its independent consultant has also confirmed that there is no element of forced labour. It is now awaiting the audit of its foreign workers’ accommodations by its independent consultant.

Maintain ADD With a Target Price of RM7.80, Based on 14x CY22 P/E

• Despite its strong earnings prospects, we base our target price of RM7.80 on 14x CY22 P/E (-1 s.d. below its 5-year mean) given:
  1. ongoing ESG issues (treatment of foreign labour) and
  2. CBP ban on two Top Glove subsidiaries since Jul 20.
• If its HKEX listing is at RM6.80 (based on enlarged share base of 9.7bn).

Source: CGS-CIMB Research - 10 Mar 2021