• Still NEUTRAL, new MYR0.98 TP from MYR1, 8% downside. We expect gradual improvement in the market dynamics should offer favourable tailwinds for the local glove manufacturers amid continuing challenges in raising ASPs. With client inventory depletion expected to come towards the tail-end of 1H23, we expect better orders consistency moving into 2H23. Our call and TP on Top Glove Corp incorporates 2% ESG discount from 0% previously after we updated our ESG scoring framework.

• ASP. Industry-blended ASP is said to have stabilised at USD20/1,000 pieces – in line with our expectation that ASPs may have bottomed already. Positively, the local and regional glove makers have collectively increased ASPs since the start of 2023 – the price gap between Chinese and local glove makers have narrowed to USD3 from USD5 previously.

• Demand. Malaysia’s glove exports rebounded 8% and 10% MoM during February and March. This is the second consecutive MoM increase following a 14% MoM decline in January, which suggests gloves demand is gradually gaining traction. Nevertheless, we understand that customers are still reluctant to place bulky orders. Advance orders have also been shortened to one month from pre-COVID-19’s three months. Industry players are expecting client inventory rationalisation to happen by 2H23, underpinned by glove inventory levels that have built up since 2020, which are running towards their expiry dates (typical shelf life: 3-5 years). As such, we retain our 2023 year-end demand target at 415bn pieces, representing 4% YoY growth from 2022’s numbers.

• Supply. We expect muted-to-negative industry supply growth for 2023, in view that glove makers are contemplating phasing out obsolete production lines. We expect capacity rationing exercises (given the low industry utilisation rate of 30%-40%) that could lead to better operating efficiencies, as the obsolete plants are less energy and manpower efficient.

• Earnings revision and valuation. We maintain our earnings estimates for TOPG unchanged. Following our ESG framework update, its ESG score is lowered to 2.92 from 3.0, which resulted in a 2% ESG discount from 0% previously as TOPG’s ESG score is now below the country median.

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

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for more details.

Source: RHB Research - 15 May 2023