We met with Kossan’s management recently for an update on the company. Maintain NEUTRAL, with a higher TP of MYR7.08 (from MYR6.35, 5.0% upside). The company shared its long-term plans to build five plants that would more than double total glove production capacity to 50bn pieces pa by FY21, from 22bn pieces currently.

Capacity expansion. Kossan Rubber Industries (Kossan) shared its plans to build five plants on the 57 acres of land in Batang Berjuntai that was purchased back in Feb 2013. Construction could start as early as 2H16, with capacity gradually coming online throughout FY18-21. After that, its total glove capacity will more than double to 50bn pieces pa from the 22bn pieces currently.

Earnings visibility. Management expects a stronger earnings profile in the 2H15 on the back of stronger contributions from Plant 2 & 3, a higher degree of automation and more effective cost control. While it initially did not anticipate any glove capacity expansion in 2016, it now expects up to an additional capacity of 1bn pieces as a result of revamping of old manufacturing lines during the year. We believe that marginimprovements going forward would be sustainable on the back of improving operating efficiencies as well as higher mix of nitrile gloves.

Cost pressures. Kossan also shared that the impact from the recent increase in natural gas tariffs to MYR21.8 per million British thermal units (MMBtu) from MYR19.77/MMBtu would be manageable as the cost would be passed through to its clients within 1-3 months. Natural gas accounts for 6% of the company’s total costs.

Earnings forecast & risk. After adjusting our assumptions, we upgrade our FY15-24 earnings forecasts by 3%-16%. The key downside risk to our forecasts remains the heightened completion within the industry that could lead to lower ASPs and margins, while upside risks include afurther weakening of the MYR.

Maintain NEUTRAL. While Kossan’s growth prospects are intact with a 19% EPS CAGR for FY15-17, we believe that this has been priced in atcurrent levels where the stock has returned an impressive +50% YTD. Kossan currently trades at 19.2x FY16F P/E, slightly below its historical 2SD trading band of 20.4x P/E. We reiterate our NEUTRAL recommendation with a revised DCF-based TP of MYR7.08 (COE: 9%, TG: 2%), which also implies a FY16F P/E of 20.3x