• Upgrade to BUY from Neutral with new MYR4.80 TP from MYR3.18, and 41% expected total return. The glove shortage has worsened as COVID- 19 cases in the US surged 24% MTD. We raise our earnings estimates and TP on higher ASPs. Our TP is based on CY21F P/E of 25x, which is at a 30% discount against peer average. This reflects its smaller market cap/liquidity to peers. BUY for its FY21 (Jan) 128% earnings growth, supported by 10% ASP increase and 14% capacity expansion.

• Glove demand estimates raised as COVID-19 cases in the US surged 24% MTD. From 8-12 Jul, the number of new cases rose to above 60,000 per day. As of 12 Jul, total new cases increased by 367,000 or 24% on a MTD basis to 3.27m. As COVID-19 cases remain high in the US, demand for gloves should stay exceptionally strong, given its importance in protecting healthcare workers. As the US is the world’s biggest glove consumer, its stubbornly high number of cases means that demand for gloves should continue to rise.

• The glove shortage has worsened. Within two weeks, the number of new COVID-19 cases in the US increased beyond expectations. As a result, we estimate that glove demand has increased in the US, causing further depletion in global stock levels. Our estimates show that global stock levels could have declined by an additional 2% to 10.8bn pieces. This is enough for 15 days of demand (previously 15.2 days) and much lower than the prepandemic 60-day average.

• ASP assumptions raised. Our channel checks also revealed the shortage of certain raw materials used to manufacture gloves, capping near-term supply. We increase FY21F-23F ASP assumptions by 2-7%. We estimate that the impact of the higher ASP should exceed the additional logistics costs expected from the US Food & Drug Administration’s latest import alert.

• Capacity expansion. We expect Comfort Gloves to add six production lines in FY21. Upon completion, its production capacity will increase by 14% to 5.9bn pieces pa (ppa).

• Upgrade to BUY. We raise our FY21-23 earnings forecasts by 49-75%. In the short term, 2QFY21 core earnings should show significant QoQ improvement as ASP is on an increasing trend. Post COVID-19, the company’s earnings growth outlook remains positive, as we expect glove demand to continue its annual 8-10% growth due to higher hygiene awareness globally.

• Risks: Faster-than-expected global availability of effective COVID-19 vaccine, lower-than-expected sales volume/USD, and higher-thanexpected raw material prices.

Source: RHB Securities Research - 14 Jul 2020