• Targeting 30% of global market share by 2020

• Capturing demand from China

• Venturing into contraceptive manufacturing

• Automation remains the way forward

• Maintain NEUTRAL with a revised TP of RM5.15 per share

Targeting 30% of global market share by 2020. Top Glove in its 3QFY17 analyst briefing yesterday stated that it is targeting to achieve 30% of the global rubber gloves market share by 2020. It is expected that the increase in market share will be driven by both organic and inorganic growth via its capacity expansion as well as mergers and acquisitions to boost its gloves supply. In addition, it will also continue to expand its market outreach to countries that has low glove penetration rates such as the African countries. Top Glove expects to have 59.7b pieces of gloves production capacity by end-2018.

Capturing demand from China. In the recent earnings announcement, we note that vinyl gloves as well as PVC gloves for food and beverages have seen an increase in demand. Vinyl gloves registered an increase of +17%qoq and +28%yoy in sales volume respectively. Meanwhile, production of PVC gloves surged by +38%qoq and +171%yoy respectively. We understand that this is due to the closure of several vinyl gloves plants in China which had to comply with the Paris Climate Agreement. In view of the increasing demand for gloves from China, Top Glove has already designated the two newly acquired plants in Nilai and Muar to cater for the demand coming from China. The two plants will be producing natural rubber gloves.

Venturing into contraceptive manufacturing. Management revealed during the briefing that it will be venturing into contraceptive manufacturing where it aims to start producing condoms going forward. Although the venture is still in its infancy, management shared that it will be making an initial investment of RM20m which will allow Top Glove to produce 20 condom production lines. It is targeting to commence the production within a 1-year period from now. We understand that the location of the plant will be on Top Glove’s existing 100-200acres of vacant land space in Klang and it will be producing both OEM as well as its own brand of condoms. However, despite the high margins coming from the condom business, we think it will make up less than 10% of Top Glove’s revenue going forward.

Automation the way forward. Management reiterated its commitment towards investing in automation. For the past three years, it has invested close to RM100m annually in automation. As a result of this, it has enabled the company to reduce the number of headcount for general workers by 1,000. Management shared that it will continue to invest in automation to increase its production efficiency going forward, In addition, its recent joint-venture (JV) with a Japanese partner to produce its own chemical filler will result in a 15% cost savings on its chemical cost going forward. The new chemical filler will be in production in six months period from now. At present, Top Glove’s chemical costs stands at 11% of its total costs and this will be reduced to 9.3% post the production of the new chemical filler.

Earnings forecasts. We make no changes to our FY17F earnings forecast. However, we are lifting our FY18F earnings estimates by +3.1% as we lower our cost assumption in view of the upcoming 15% cost saving on its chemical cost as a result of its JV on chemical filler with a Japanese partner. In addition, we have also revised our utilisation rate assumption in FY18 to 80% from 75% previously as we anticipate demand to recover from 4QFY17 onwards as the raw material prices continues to trend lower. Key risks to our earnings would be: (i) higher than expected increase in production costs i.e: raw material prices, labour costs etc and; (ii) further delays in plant expansions.

Maintain NEUTRAL with a revised Target Price (TP) of RM5.15. All things considered, we reiterate our NEUTRAL call on Top Glove with a revised TP of RM5.15. Our valuation is premised on FY18 EPS of 28.6sen pegged to an unchanged PER of 18x which is the company’s 5-year historical average PER. We think this is fair as we believe all the positives have been priced in and the stock is now fully-valued. Additionally, we opine that despite the improvement in raw materials price, the cost savings might be offset by: (i) lower ASPs - as a result of the low raw materials price and; (ii) the strengthening of Ringgit, which could limit its earnings potential going forward. We think that re-rating catalyst will be in the form of: (i) significant increase in volume sold; (ii) improvement in ASP and; (iii) launching a new innovative glove product.

Source: MIDF Research - 21 Jun 2017