Top Glove - ASP to Decline From Here; Target Price Lowered by 44%

Date: 
2021-03-10
Firm: 
MAYBANK
Stock: 
Price Target: 
4.85
Price Call: 
HOLD
Last Price: 
1.33
Upside/Downside: 
+3.52 (264.66%)

Lowering Top Glove's Target Price; Downgrade to HOLD

  • Top Glove's earnings may peak in 3QFY21 and fall from 4QFY21 as ASPs decline. We maintain our FY21-23E net profit which has already assumed for lower ASPs ahead. However, our FY21-23E earnings per share forecast is reduced by 4%/14%/14% on a higher share base, as we assume that its proposed listing in Hong Kong will go through.
  • Additionally, in view of the aggressive expansion by the China’s glove-makers, our DCF-based target price for Top Glove (WACC: 8.2%, LTG: 3.5%) is cut to RM4.85 (-44%) as we roll forward our valuation to FY24E (from FY21E) and lower our LTG to 3.5% (from 4.5%).
  • Downgrade Top Glove to HOLD (from BUY).

Top Glove's 2QFY21 Within Our Expectation

  • Top Glove's 2QFY21 (Dec 2020 to Feb 2021) core net profit of RM2.87b (+13% q-o-q, +25x y-o-y) brought 1HFY21 core net profit to RM5.41b (+24x y-o-y), making up 48%/54% of our and street’s full-year forecasts.
  • A second interim dividend of RM0.252 per share was declared, implying 71% of profit payout.

Lower Volume, Higher ASP, Stable Margins

  • Key takeaways on Top Glove's 2QFY21 results:
    • Revenue rose 13% q-o-q as the higher blended ASP of US$80/k pcs (+25% q-o-q) was partially offset by the lower sales volume (-8% q-o-q; production at Klang affected by COVID-19 outbreak) and a weaker US$ vs RM (-2% q-o-q);
    • EBITDA margin was stable at 71% (+0.5-ppt q-o-q) as the higher ASPs offset the cost inflation (NBR: +63% q-o-q, latex: +16% q-o-q) and lower operating leverage.

Top Glove's Earnings May Peak in 3QFY21

  • Top Glove may reduce its nitrile glove ASP by 3-5% m-o-m in Apr-Jun 21, bringing its nitrile glove ASP to around US$100/k pieces by Jun 21 and converge with the ASPs of the price laggards.
  • For 3QFY21 (Mar 2021 - May 2021), we estimate net profit of RM3.1b (+10% q-o-q) on higher sales volume (+12% q-o-q), slight ASP increase (+5% q-o-q) and higher production cost (+23% q-o-q).
  • As for 4QFY21 (Jun 2021 - Aug 2021), we estimate net profit to drop to RM2.7b (-16% q-o-q) on higher sales volume (+11% q-o-q), lower ASP (-14% q-o-q) and higher production cost (+16% q-o-q).

China Expanding at Breakneck Speed

Intco: Aiming to be world’s largest player?

  • Intco’s expansion pace is a lot faster than our earlier expectation. In the next 12- 15 months, Intco aims to reach Top Glove’s targeted capacity size is 205b pieces by end-2024.

Blue Sail: World’s third largest player?

  • Blue Sail aims to increase its total capacity to approximately 76b pieces by end- 2022 (+3x from 28b pieces as at end-2020) and potentially becoming the world’s third largest player by capacity size.

China to Gain Market Share?

  • As the China’s glove-makers expansion pace is a lot faster than the global demand growth and Malaysia’s glove-makers expansion, we think head-on. As such, we lower our terminal growth rate in our DCF to 3.5% (from 4.5%).

Demand-supply to Balance by 2023?

  • We think the planned expansion for 2021-22 could face delays due to the constraint of supply chain (i.e. shortage of NBR raw material and formers). Hence, the planned supply may spill over to 2023 onwards, resulting in a more competitive environment.
  • In our DCF, we have assumed for Top Glove’s FY24E EBITDA margin at 14.5%, similar to its FY19 level, when there was intense competition in the latex segment.

Top Glove's Dual Primary Listing in Hong Kong

Share base to increase 16.2-18.7%

  • Top Glove proposed to issue based on the latest closing price of RM5.19, Top Glove could raise RM6.75b-7.76b cash.

EGM Potentially in Early-May 21

  • The proposed dual primary listing is conditional upon the fulfilment of all required approvals from:
    1. Securities Commission of Malaysia;
    2. Bursa Malaysia Hong Kong (HKEX);
    3. Securities and Futures Commission of Hong Kong; and
    4. Other relevant authorities and/or parties, if required.
  • At the upcoming EGM, Top Glove will need:
    • at least 50.1% of voting shares in favour of the dual primary listing; and
    • at least 75% of voting shares in favour of the amendments of its existing Constitution,
  • in order to align the Constitution with the provisions of the relevant laws, listing rules and regulations in Hong Kong.
  • Note that major shareholder, Tan Sri Dr Lim Wee Chai, who holds 35% equity stake, is allowed to vote.
  • The proposed listing is expected to be completed by Jun 21.

Assumes the Listing to Go Through

  • In our earnings model, we have assumed for Top Glove's dual primary listing to be successful. As such, we have incorporated for the following into our model:
    1. Total of 1.3b new shares to be issued (without over-allotment); and
    2. Cash raise of RM6.5b (assuming issue price of RM5.00).
  • Top Glove has a capex plant with capex of RM600m). Top Glove is also considering business expansion and strategic opportunities in China or North Asia.

Source: Maybank Kim Eng Research - 10 Mar 2021

Discussions
Be the first to like this. Showing 3 of 3 comments

AdCool

first of all, how can an analyst know or assume what would happen in 2024? that is freaking 3 years from now! It is out of the market norm to price a valuation for 3 years in advance in comparison with 6 months. Secondly, China consumption of glove is extremely low in comparison with the US and Europe. Whatever China going to produce would mostly be taken up by China itself. Not forgetting that China does not produce raw ingredients for gloves. Hence, China may not be able to expand as quickly as planned due to such restriction. They can build the plants and install all the equipment and hire all the manpower they need but without the raw ingredients, production wont move. Not forgetting that EU and US gonna give it a tough time to get China made gloves certified for medical usages. 3rdly, the IB mentioned in Q4 2021, the ASP would drop 14% while production cost would up 16%. Now here is the misinformation. We know the industry operates by passing the cost to the customers. Hence, with production cost up continuously for 2 quarters, 23% and 16%, how can you expect ASP to drop 14%? Isn't that out of economic senses? The ASP may drop but mostly in a single digit percentage.

2021-03-12 13:20

Rahmat_Daud086

MBB's jealous of TG's profit and dividends (all surpassed MBB's performance) caused them to run down TG.

2021-03-12 13:34

muk912

投行所谓的拿正牌分析师,他们所给的预测或目标价,看看笑笑就好,别太认真。毕竟他们都是在职场很多年了。假如他们的分析多数是准确的话,他们早就财务自由,享受人生了。网民也不需要埋怨或生气他们。毕竟他们也是打工一族。假如他们不写点什么出来的话,他们的工作就会被人取而代之,可怜啊…

2021-03-13 09:26

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