• Maintain NEUTRAL, new MYR1.40 TP from MYR1.08, 4% upside. We remain cautiously optimistic on Kossan Rubber, underpinned by its relatively robust balance sheet (the only dividend-paying glove maker now), exposure to the industrial segment, and favourable cost outlook in 2H23. In view of the onset of cost-pass-through initiative (including Chinese makers), we are maintaining our call on Kossan pending more consistent customer demand. Our TP incorporates a 0% ESG premium/discount as its ESG score is in line with the country median.

• ASP. Industry-blended ASP is said to moderate slightly to USD20-21/1,000 pieces from c.USD20-22 during the previous quarter. The pace of ASP decline remains at 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 its ASP recently to USD15-20 from USD14-15. We also observed domestic glove makers engaging in cost-pass-throughs, eg Hartalega (HART MK, NEUTRAL, TP: MYR2.11) raised ASPs twice this year while Top Glove (TOPG MK, NEUTRAL, TP: MYR1) hiked ASPs in Oct 2022.

• Demand. We noticed a one-off uptick in client orders in Dec 2022 in association with a 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 January 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 the latter 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 of zero new capacity added. We lowered our 2023 industry supply assumptions to 397bn from 430bn, assuming that glove makers phase out their obsolete production lines. We believe a disciplined approach in commissioning new production lines could provide 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% from 10% (trimming Beta and equity risk premium to 0.8 and 9% from 0.82 and 12%) in view of a more balanced risk-reward outlook. Despite the recent correction, Kossan still trades at -4SD 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