Maintain Overweight. Taking the cue from Top Glove’s latest results briefing, we are now cutting our CY22E ASP assumption to USD28-35/1,000 pieces. Correspondingly, SUPERMX and KOSSAN are downgraded from Outperform to Market Perform. The recent round of reporting season for glove makers suggested that the ASP trend has softened faster than expected and will likely continue to remain weak in subsequent quarters. Due to over-ordering over the past 15 months since the pandemic started, the market is currently undergoing a phase of inventory adjustment. From Top Glove’s 4QFY21 results briefing recently, we gathered that its ASPs have dropped faster than expected at 31% QoQ to USD48/1,000 pieces. We believe this signals acceleration in overall market ASP normalization. We are unable to quantify as to how low ASP will fall to; however, glove manufacturers are of the view that ASP is unlikely to go below pre COVID pricing considering that the cost structure has risen amongst others including social compliance costs and the still stubbornly high nitrile feedstock cost. Our ratings are as follow: HART (Maintain OP; TP: RM8.85) and TOPGLOV (Maintain OP; TP: RM3.60). KOSSAN (Downgrade from OP to MP; TP: RM2.45) and SUPERMX (Downgrade from OP to MP; TP: RM2.35).

Faster-than-expected normalisation of ASP. The recent round of reporting season for glove makers suggested that the ASP trend is expected to soften faster than expected in subsequent quarters. Due to over-ordering over the past 15 months since the pandemic started, the market is currently undergoing a phase of inventory adjustment. From Top Glove’s 4QFY21 results briefing recently, we gathered that its ASPs have dropped faster than expected at 31% QoQ to USD48/1,000 pieces. We believe this signals acceleration in overall market ASP normalization. We are unable to quantify as to how low ASP will fall to; however, glove manufacturers are of the view that ASP is unlikely to go below pre-COVID pricing considering that the cost structure has risen amongst others including social compliance costs and the high nitrile feedstock cost compared to pre-COVID era. Post COVID-19 and/or lower ASP, inventory restocking cycle is expected to spur demand coupled with increased usage arising from new users and higher hygiene awareness.

Global demand growth expected at 15-20% per annum post COVID-19. According to the Malaysian Rubber Glove Manufacturers Association, the high global rubber gloves demand will sustain beyond 1Q 2022 with growth rate averaging between 15% and 20% per annum compared to pre-COVID of 8-10%. Players are getting orders from new users such as airlines, restaurants, retail apparel chains and hotel operators. Demand could also be led by better healthcare awareness leading to increased usage, especially from emerging economies (which traditionally have lower glove usage per capita). The estimated new yearly capacity may not actually materialise as scheduled and hence, total industry capacity may be unable to meet the post pandemic demand growth of 15% per annum moving into 2022. If past history is of any guide, players are cognizant of oversupply concerns and adopt a discipline approach to expansion which is expected to curtail excess supply. A quick check from its latest presentation slides revealed that Top Glove has scaled down new capacity expansion by 14% in CY21 which is positive. Kossan’s Bidor plant is only expected to commence in 2023 while Hartalega is only expected to commence its NGC 1.5 in early CY22.

Maintain Overweight. We now expect ASPs to normalize in 1HCY22 against earlier expectation in FY23. Since ASPs are no longer lofty, expectations of disappointments in subsequent quarters are expected to be capped. We make revisions to our ASP and margin assumptions for Supermax, Kossan and Hartalega due to ASP normalising faster-than-expected. HARTA (Maintain OP; TP: RM8.85): Our FY22E/FY23E net profits are downgraded by 10%/52% as follow; (i) FY22E – ASP cut to USD59 from USD62 per 1,000 pieces; EBITDA margin cut to 53% form 56%; and (ii) FY23E – ASP cut from USD40 to USD28 and reduce EBITDA margin assumption to 31% from 47%. Correspondingly, we downgrade our TP from RM11.35 to RM8.85 based on 16x CY22E EPS of 55.3 sen (at discount to 5-year pre-COVID forward historical mean of 26-28x). TOPGLOV (Maintain OP; TP: RM3.60). TP is RM3.60 based on 15x CY22E EPS of 24.0 sen (at -0.5 SD below pre-COVID 5-year forward historical mean). As we find the rationale to a Hong Kong Stock Exchange listing questionable with lower PE market and risk of dilutive impact being two concerns – we attach a 0.5 SD below mean PE to arrive at our TP. KOSSAN (Downgrade from OP to MP; TP: RM2.45) : Our FY22E net profit is downgraded by 59% as we cut our ASP assumption from USD40 to USD28 per 1,000 pieces and reduce EBITDA margin assumption to 25% from 36% and utilisation from 86% to 80%. Correspondingly, we downgrade our TP from RM5.00 to RM2.45 based on 12x FY22E EPS (at -0.5 SD below 5-year pre-COVID forward historical mean of 17x). We have raised our PER multiple from 10x to 12x since ASP is normalising faster-than-expected. SUPERMX (Downgrade from OP to MP; TP: RM2.35): Our FY22E/FY23E net profits are downgraded by 40%/47% as follow; (i) FY22E – ASP cut from USD48 to USD42 per 1,000 pieces and reduce EBITDA margin to 36% from 51%; (ii) FY23E – ASP reduce USD30 to USD28 per 1,000 pieces; EBITDA margin assumption reduced to 25% from 37%; and utilisation cut from 85% to 80%. Correspondingly, we downgrade our TP from RM5.00 to RM2.35 based on 12x FY23E EPS (at -0.5 SD below 5-year pre-COVID forward historical mean of 15x). We have raised our PER multiple from 9x to 12x since ASP is normalising faster than-expected.

Source: Kenanga Research - 30 Sept 2021