• Still NEUTRAL, new MYR1 TP from MYR0.88, 5% upside. Top Glove Corp’s most recent quarterly results briefing pointed towards a relatively cautious optimistic outlook for 2H23. Industry peers (including Chinese makers) have engaged in cost pass-through initiatives, coupled with better cost outlooks. Hence, we maintain our call for TOPG pending more consistent customer demand. Our TP incorporate a 0% ESG premium/discount, as its ESG score is in line with the country median.

• ASP. Industry-blended ASPs are said to be moderating slightly to USD20- 21/1,000 pieces from c.USD20-22 during the previous quarter. The pace of the ASP decline remained in low single-digits, which also suggests that ASPs may have bottomed already. According to our channel checks, Blue Sail Medical is said to have revised ASPs recently to USD15-20 from USD14-15. We also observed domestic glove makers engaging in cost pass-throughs, with Hartalega (HART MK, NEUTRAL, TP: MYR2.11) raising ASPs twice this year. TOPG raised its ASPs in Oct 2022.

• Demand. We noticed a one-off uptick in client orders in Dec 2022 in association with the National Health Service tender by the UK Government. Nevertheless, recent orders received were rather patchy, as customers are still reluctant to place bulky orders. That said, Malaysia’s rubber glove exports tumbled 14% MoM to 39,479.6 tonnes in Jan 2023 following an 11% spike in Dec 2022. Industry players are still unable to ascertain the timing of de-stocking activities from glove distributors. We gather that such distributors are expecting inventory levels to deplete over the next six months. We maintain our 2023 year-end demand target at 415bn pieces.

• Supply. Post Dec 2022’s results, we keep our 2022 industry supply assumptions unchanged, taking into consideration no new capacity added. We lower our 2023 industry supply assumptions to 397bn from 430bn, assuming glove makers will phase out their obsolete production lines. We believe this disciplined approach in commissioning new production lines could provide a temporary cushion to glove makers’ profitability, taking into account the current low industry utilisation rate of 30-40%.

• Earnings revision and valuation. We maintain our earnings estimates but lower our WACC assumption to 8.7% from 9.1% (trimming Beta to 1.0 from 1.1) in view of a more balanced risk-reward outlook. Despite the recent rally, TOPG still trade at -2SD P/BV, ie below its pre-COVID-19 historical mean.

• Key risks. Increase/decrease in gloves ASPs, slower-/faster-than- expected capacity expansions, higher-/lower-than-expected utilisation rates, and lower-/higher-than-expected raw material prices.

Source: RHB Research - 27 Mar 2023