• Keep NEUTRAL, new MYR0.88 TP from MYR0.95, 6% upside. Top Glove’s share price has tumbled 24% following weaker-than-expected volumes sold during its recent quarterly results period – potentially implying that customers are still price-sensitive. Nonetheless, we believe that gradual improvements in market dynamics should offer a respite for local glove manufacturers like TOPG. Our TP incorporate 2% ESG discount based on our in-house proprietary ESG methodology.

• ASP. Industry-blended ASPs stabilised at USD20-21 per 1,000 pieces, as ASPs have begun to show signs of improvements in 1Q23. On a positive note, local and regional glove makers remain keen to pass on the increased costs to customers to ensure long-term sustainability in the gloves industry. We gather that the price gap between Chinese and local glove makers has narrowed to USD3 from USD5 previously.

• Demand. Malaysia’s glove exports volumes contracted 35% MoM during April following a 10% and 8% MoM growth in February and March. A similar trend was observed in China as its exports volumes dropped 17% MoM. We believe this could potentially be due to seasonality given that there were three occasions of MoM declines in glove exports (out of five observed years) within 2015-2019. That said, we still expect gloves demand to pick up gradually by 2H23 as client inventory levels continue to deplete. This is coupled with glove inventory stocks – built up since 2020 – running towards their expiry dates (typical shelf life: 3-5 years). Given the lack of demand clarity in 2023, we now expect a 5% YoY contraction for 2023 global glove demand from 2022’s-19% with a 2023 demand target of 379bn.

• Supply. We see a negative 2023 industry supply growth of c.53bn in view of 40bn and 13bn cuts from TOPG and Hartalega (HART MK, NEUTRAL, TP: MYR2) as glove makers are said to be phasing out obsolete production lines to curtail cost pressures. Our industry annual supply assumption is now 370bn. We expect the capacity rationing exercises (given industry-low utilisation rates of 30%-40%) could lead to better operating efficiencies as the obsolete plants are less energy and manpower efficient.

• Earnings adjustments. Our earnings estimates are largely unchanged.

• Maintain NEUTRAL. We raised our required return assumptions for TOPG under our DCF valuation methodology to reflect greater risks in associates with the glove sector. We derive a lower TP of MYR0.88 for the group, which implies 2.3SD below its pre-COVID-19 5-year historical mean of 3x.

• Key upside/downside risks: Increase/decrease in gloves ASPs, slower- /faster-than-expected capacity expansion, higher-/lower-than-expected utilisation rate, and lower-/higher-than-expected raw material price.

Source: RHB Research - 28 Jun 2023