We met up with TOPGLOV. It is optimistic of strong rebound in earnings recovery in 2QFY25 due to the absence of high-priced inventory and favourable forex. However, it expects flattish volume sale in the months of Jan and Feb 2025 due to the frontloading effects of US customers purchasing from Chinese glove makers.

Thereafter, the group expects order shipments from the US customers to accelerate from end-Feb 2025. We maintain our earnings forecasts, TP of RM1.30 and MARKET PERFORM call.

The key takeaways from a luncheon meeting yesterday are as follows:

1. It is optimistic of a strong sequential rebound in earnings recovery in 2QFY25 due to the absence of high-priced inventory, a slight increase in ASP, and favourable forex. However, it expects flattish volume sale in the months of Jan and Feb 2025 due to the frontloading effects of US customers purchasing from Chinese glove makers before the 50% tariff imposition effective Jan 2025 compared to a 8%-10% M-o-M growth in Nov and Dec 2024. Thereafter, the group expects order shipments from the US customers to accelerate from end-Feb 2025.
2. The company noted that a more pronounced effects of rising ASP will only be felt after Feb 2025 due to the frontloading effects of US customers purchasing from Chinese glove makers. We conservatively assume ASP of USD20/1,000 pieces in our earnings model. It is optimistic that ASPs are expected to inch up gradually by 3% each month from Nov 2024 onwards. However, due to the lag effect, ASP increases will only be felt gradually starting from Dec 2024. Typically, ASP for the US market is higher by USD1.00/1,000 pieces compared to the rest of the world. Currently, the ASP is at USD19-20/1,000 pieces compared to Europe at USD17-18/1,000 pieces. We conservatively assumed ASP of USD20/1,000 pieces in our earnings model.
3. It has seen more enquiries from its US customers. The group highlighted that its exports to the US are continuing to show improvement which rose 21% QoQ in 1QFY25. US sales accounted for 18% of total group volume sales, above the 15% mix for FY24, but still below the pre-pandemic average of 20%−30%.
4. The group is optimistic that the strong growth momentum will sustain, as customers continue replenishing their depleting glove stockpiles. The group continues to see MoM uptrend in sales volume in Dec 2024 and expects orders form the US to pick up in subsequent quarters, underpinned by inventory rebuilding by distributors and boosted by the US recent tariff imposition on Chinese gloves. Presently, its utilisation rate is 66% compared to 60% in 4QFY24 and 45% in 3QFY24.

Valuations. We keep our FY25F and FY26F numbers unchanged. Our TP is RM1.30 based on 2.2x FY26F BVPS, which is at the sector's early upcycle phase of between 2x and 4x, i.e. the levels seen emerging from an upcycle in 2012 but at a lower end of band that we believe is valid due to the emergence of Chinese glove makers. For illustration purposes, if we assume an ASP of USD21/1,000 pieces in our earnings model, the stock PER would trade at 46x or 2.0SD above its pre-Covid 5-year historical 1-year forward average. Additionally, in terms of PBV, the stock is trading at -1.0SD pre-COVID 5-year historical average 1-year forward of 3.0x.

Oversupply is less acute, potentially achieving equilibrium faster than expected. We expect the oversupply situation to be less acute and gradually improve following signs of players culling production capacity via decommissioning of selective plants and exit of new entrants. Based on our estimates, the demand-supply situation will only start to head towards equilibrium in CY26 when there is virtually no more net new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness. MARGMA projects 12%−15% growth in the global demand for rubber gloves annually from CY25, following an estimated 20% increase to 368b pieces in CY24. We project the demand for gloves to rise by 12% in CY25 to 368b pieces and resume its organic growth of 9% thereafter. This will result in an excess capacity of 109b. The overcapacity will continue to subside moving into CY26. The fall in excess capacity by 35% to 72b pieces from 264b pieces in 2023 is a key thesis to change to the fundamental improvement in supply-demand dynamics.

Key risks to our recommendation include: (i) certain Chinese glove giants end predatory pricing practices (i.e. selling below cost over an extended period of time to eliminate competitors), leading to a strong earnings rebound for the sector, (ii) stronger-than-expected growth in demand for gloves driven by rising hygiene standards and health awareness globally, (iii) further changes in tariffs which have happened before; recall that post the implementation of the initial 15% tariff on Chinese glove imports, this figure was lowered to 7.5% during phase first US-China trade agreement back in 2019, and (iv) epidemic and pandemic occurrences.

Source: Kenanga Research - 8 Jan 2025