• Upgrade to BUY, new MYR1.06 TP from MYR0.97, 11% upside. Ourupgrade for Supermax Corp is premised on recent robust export data whichpotentially suggests a positive sign of demand recovery coinciding withsteady ASP performance. We expect the company to deliver a stellarperformance in the coming quarter following the uplift of US Customs &Border Protection (US CBP) ban on 20 Sept 2023. Our TP incorporates a13% ESG discount, as its ESG score is below the 3.0 country median.

• What triggered our upgrade? Malaysia’s monthly glove exports remain ona positive YoY growth for two consecutive months following a 2% YoYincrease in Nov 2023 (Oct 2023: +33%). Despite export volumescontracting 25% on a MoM basis, the export value was 1% MoM higher inNovember. We believe this may indicate cost pass-throughs starting to kickin and a better product mix in Nov 2023. On this front, we believe the abilityto initiate cost pass-through will serve as a crucial catalyst to driveprofitability moving forward, and also indicate that risks from a price war hasgradually dissipated. Based on our channel checks, Malaysian glovemakerssold at USD19-20/ 1,000 pieces in Dec 2023 – largely unchanged vs 3Q23.While Malaysian glovemakers suffered weaker ASPs in 3Q23, (lowered 3-7% QoQ), we think the pick-up in export value could substantiatemanagement teams’ guidance and our expectations of a stabilised ASPtrend that could gradually materialise in 2024.

• Demand-supply dynamic. Our 2024 industry supply is now at 376bn vs2023’s 373bn, taking into account 1bn in new capacity from Thailand andHartalega’s (HART MK, BUY, TP: MYR3.25) progressive capacity transitionplan (estimated 2bn from the Next Generation Integrated GloveManufacturing Complex or NGC 1.5). Malaysian glovemakers have yet toannounce any plans to commence new capacities in 2024, given thatdomestic industry plant utilisation is still running below 50%. We raised our2024 demand assumptions to 397bn from 386bn previously – indicating a7% YoY growth (from 4% previously). This is in comparison with the preCOVID-19 5-year average growth of 14%. Hence, we expect the industry toachieve equilibrium by 2H24, as bulk inventory stockpiled since 2020-21 isgradually consumed and is approaching shelf-life end (typically 3-5 years).

• Earnings revision and valuation. We raise our FY24F-25F (Jun) earningsfor SUCB to MYR17m and MYR90m from MYR10m and MYR76m, takinginto account a better demand visibility and improving plant utilisation rate.Our WACC is lowered 8% from 10% after we trim our cost of equity to 9%from 10% previously. Our DCF-derived TP represents 7x FY25 ex-cash PE,below its pre-COVID-19 5-year mean of 10x.

• Key risks: Decrease in glove ASPs, slower-than-expected capacityexpansion, lower utilisation rate, higher-than-expected raw material price.

Source: RHB Securities Research - 5 Jan 2024