• Keep NEUTRAL, new MYR0.84 TP from MYR0.88, 5% upside. We expect Top Glove Corp to record a narrower core loss of MYR83m in 4QFY23 (Aug) from improved operating efficiencies following its capacity rationing exercise. We now expect client inventory depletion by 2H24, leading to better order consistency. Our TP includes a 2% ESG premium (previously a 2% discount) after we raised the score for the Environment pillar due to TOPG’s inclusion in the Dow Jones Sustainability Indices (DJSI) for five consecutive years.

• ASPs. Industry blended ASPs stabilised at USD20-21 per 1,000 pieces – largely unchanged from 1Q23. Attempts to raise prices were faced with obstacles from easing raw material prices. Based on our channel checks, Chinese glove-makers’ ASPs were unchanged from 1Q23 at USD15-17. Nevertheless, we think the stable ASP trend will bode well for glove-makers in the near term, as aggressive price hikes could compromise volumes sold, given that the customers remain price-sensitive.

• Demand. Malaysia’s glove export volumes contracted 1% MoM in July following a 7% MoM decline in June. This is the first two consecutive months of declines in glove exports this year. In 2Q23, glove exports tumbled 17% QoQ following a 0.3% QoQ growth recorded in 1Q23. Meanwhile, China glove exports fell 1% MoM in July from an 11% growth in June. Its 2Q23 export growth was up 2% from -1% in 1Q23. As demand continues to be choppy in the near term, we now expect a meaningful recovery only by 1H24, with the pace of inventory destocking coming in slower than expected. We reduce our 2023 global glove demand assumption to -7% from -5% YoY, with a demand target of 371bn. This should be followed by a 4% growth in 2024.

• Supply. We expect industry supply to contract by 50.7bn YoY in 2023 (40bn cut from TOPG, 13bn cut from Hartalega (HART MK, NEUTRAL, TP: MYR1.94), 3bn cut from Kossan Rubber (KRI MK, NEUTRAL, TP: MYR1.27), and 5bn cut from Supermax Corp (SUCB MK, NEUTRAL, TP: MYR0.80)), offset by 3bn of newly added capacity from Chinese glove maker Intco Medical and 7.3bn planned capacity expansion from Thailand. Our 2023 industry annual supply assumption is now 372bn, and we expect the capacity rationing exercise (given Malaysia’s low plant utilisation rate of 30-40%) to result in better operating efficiency, as the obsolete plants are less energy- and manpower-efficient.

• Earnings, valuation. We maintain FY24 earnings estimates, but reduce FY25 estimates by 68% after incorporating the absence of new capacity expansion until further notice. We raise TOPG’s score for the Environment pillar based on its inclusion in the DJSI for five consecutive years and its enhanced FTSE Russell ESG Ratings score. Risks: Increase/decrease in glove ASPs, slower/faster-than-expected capacity expansion, higher/lowerthan-expected utilisation rate, lower/higher-than-expected raw material price.

Source: RHB Securities Research - 20 Sept 2023