Quantum Earnings Leap, Multi-year Re-rating - Kenanga Investment Bank Berhad
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Sector Update
08 July 2020
Rubber Gloves OVERWEIGHT
Quantum Earnings Leap, Multi-year Re-rating ↔
By Raymond Choo Ping Khoon l pkchoo@kenanga.com.my
Maintain OVERWEIGHT. Rubber glove stocks under our coverage have performed well following our
upgrade eight months ago. Despite easing off from recent peaks, they remain strong outperformers
YTD, led by SUPERMX (+643%), TOPGLOV (+329%), HARTA (+204%) and KOSSAN (+158%). Based on
our analysis in this report, we can conclude that: (i) ASP is going to be stubbornly high at least till 1H
2021 which supports exponential QoQ earnings growth over the next few quarters , (ii) share prices of
rubber glove stocks moves upwards ahead of two quarters of good results, (iii) gloves stocks trade at
+2.0SD based on historical upcycle. All in, we are excited with prospects over the next few quarters
due to supply tightness and strong demand. Specifically, industry trend of rising weekly and monthly
ASPs is expected to boost bottom-lines. Amplifying the growth are restocking and inventory-building
activities creating a supernormal demand spurt leading to acute supply shortage, due to the
prolonged pandemic. We have OUTPERFORM calls on HARTA (OP; TP: RM18.16); KOSSAN (OP; TP:
RM14.00) SUPERMX (OP; TP: RM14.00) and TOPGLOV (OP; TP: RM25.00). Our Top Pick for the sector
is TOPGLOV (OP; TP: RM25.00) due to its ability to raise ASP, and commanding the largest industry
capacity.
Based on historical valuation on rapidly rising earnings, rubber glove
stocks should trade >+2.0SD. We believe rubber glove stocks deserve
further multiple PER re-rating and should trade at above previous peak PER
valuations of +2.0SD in tandem with exponential QoQ earnings growth and
higher double-digit YoY growth in coming quarters given the following
factors:- (i) ASP upticks over the next few months indicating that consensus
earnings is potentially trailing, and (ii) re-stocking activities ramp-up as the
current outbreak of the pandemic enforces higher hygiene standards, (iii)
higher demand due to the pandemic, stock piling and new users following the
pandemic, and (iv) massive margins expansion due to higher ASPs.
ASPs higher than earlier guidance. We highlight that industry ASPs for
months of June to Dec 2020 is now higher by between 5% to 15%, as
opposed to previous expectation of +5% monthly increase from June to Sep 2020 indicating that supply tightness has further
propelled ASP higher.
Estimated incoming capacity indicating demand > supply further boost ASP. We have done an analysis to quash any
concerns of oversupply. In anticipation of higher demand due to the pandemic, stock piling and new users following the
pandemic, players are raising capacities to meet the surging demand. Our analysis (see table overleaf) suggests that acute
supply and supernormal demand could persist over the next two years. Interestingly, players are getting orders for new users
that include airlines, restaurants, retail apparel chains and hotel operators. If we look at the capacity expansion numbers in
isolation, it looks overwhelming. Juxtaposed against the annual demand growth and new pandemic-led demand, the additional
capacity is not a concern.
Consensus upgraded earnings by 50%-300% over the past five months. Standing testimony to the increasingly strong
prospects of the sector, analysts surveyed by Blomberg Consensus have over the last 5 months consistently upgraded the
earnings forecasts for glove players our coverage players such as TOPGLOV, KOSSAN, HARTALEGA and SUPERMX.
Nitrile gloves' market share to gain further momentum with potential 30% growth. Based on our analysis, we expect nitrile
gloves to continue growing and expropriating market share from latex gloves. The growth in nitrile segment is evident. For
illustration purposes, going forward, assuming nitrile:latex breakdown of 80:20 (currently at 67:37) and based on estimated
global demand of 324b pieces in 2020 (forecast for 2019 is 300b pieces and assuming 8% growth rate in 2020), this implies
nitrile growth rate of 20% or an additional 42b pieces from switching to nitrile gloves.
TOPGLOV (OP; TP; RM25.00). We highlight that TOPGLOV’s ASPs for months of June to Aug is now higher by between 5%
to 15%, as opposed to earlier guidance of +5%, indicating that supply tightness have further propelled ASP higher. However,
spot price is about 3x the normal prices of USD28-30/1,000 pieces which accounts for 5%-10% of total allocation. With a
diverse customer base, we expect TOPLGOV to have better pricing power and hence potentially higher-than-expected industry
average prices.
SUPERMAX (OP; TP; RM14.00). The group is confident of raising ASP by between 5% to 10% each month from June till Dec
2020 indicating that supply tightness have further propelled ASP higher. Specifically, Supermax is expected to gain from higher
margins from both its gloves manufacturing and distribution divisions due to higher product mix skewed towards OBM
distribution which accounts for 95% compared to 70% pre Covid-19.
PP7004/02/2013(031762) Page 1 of 10Rubber Gloves Sector Update
08 July 2020
KEY POINTS
ASPs higher than earlier guidance. We highlight that industry ASP for months of June to Aug is now higher by between 5% to
15%, as opposed to earlier guidance of +5%, indicating supply tightness have further propelled ASP higher. We gather that
industry is confident of raising ASP by between 5% to 10% each month from June till Dec 2020, vs. our previous expectation of
5% monthly increase from June to Sep 2020 indicating supply tightness have further propelled ASP higher. With a diverse
customer base, we expect TOPLGOV to have better pricing power and hence potentially higher-than-expected industry average
prices. Elsewhere, Supermax is expected to gain from higher margins from both its gloves manufacturing and distribution. We
expect higher margins going forward due to higher product mix skewed towards OBM distribution which accounts for 95%
compared to 70% pre Covid-19 which we believe had caught us as well as the market by surprise at a time when supply is tight
due to aggressive stockpiling of critical medical supplies including gloves. Glove players are getting enquiries from foreign
government agencies, non-government organisations, retailers and restaurants chains. Amplifying the pent-up demand, buyers
are paying between 10% to 50% deposits in advance to secure glove supply and timely delivery. Typically, the current supply-
demand dynamics has led to lead time is now 12 months compared to 10 months and order-books are filled up between Mar
2021 and June 2021. This led to higher utilisation rate of >95% as compared to pre-COVID-19 level of 80-85%. Some players
are experiencing fast inventory depletion from the normal 4 months to within 6 weeks. Generally, players expect the heightened
demand to continue for the next 1 to 1.5 years. Despite players ramping up supply, we believe the gradual staggered incoming
capacity is likely to keep ASPs elevated over the medium term.
Estimated incoming capacity indicating acute shortage in supply. We have done an analysis to quash any concerns of
oversupply. In anticipation of higher demand due to the pandemic, stock piling and new users following the pandemic, players
are raising capacities to meet the surging demand. Our analysis (see table overleaf) suggests that acute supply and
supernormal demand could persist over the next two years. Interestingly, players are getting orders for new users that include
airlines, restaurants, retail apparel chains and hotel operators. If we look at the capacity expansion numbers in isolation, it looks
overwhelming. Juxtaposed against the annual demand growth and new pandemic-led demand, the additional capacity is not a
concern. In fact, the estimated new yearly capacity may not actually start as scheduled and hence the supply shortage will
continue to be acute in 2021. Typically, to cater for normal demand, glove makers essentially need to build just one plant per
year. However, from channel checks, to cater for this current pandemic-driven demand, two to three plants are required for each
glove maker (on average) annually in order to meet the supernormal demand, which take between 12 to 24 months to complete.
Hence, we conclude that ASP tightness will continue going into 2021. We highlight that rumours of a player in China ramping up
capacity by 30b pieces over 2-3 years appears absurd as it typically takes 8 to 10 years to build such capacity.
Estimated incoming capacity indicating potential acute supply shortage
Top Glove Supermax Kossan Hartalega Total
Estimated capacity in start of CY2020 (bn
pieces) 70.5 21.8 28.0 36.6 156.9
Estimated new capacity 15.9 4.4 3.0 2.8 26.1
Total estimated capacity by end CY2020 86.4 26.2 31.0 39.4 183.0
Top Glove Supermax Kossan Hartalega Total
Estimated capacity start of CY2021 (bn pieces) 86.4 26.2 31.0 39.4 183.0
Estimated new capacity 14.0 4.9 4.5 3.8 27.2
Total estimated capacity by end CY2021 100.4 31.1 35.5 43.2 210.2
Estimated new supply from Malaysia and new world demand in 2020 (demand > supply)
(a) Estimated world demand (b pieces) 360b
(b) Estimated new global demand growth [20% = pandemic demand (10%) + normal demand (10%)] 60b
(c)Top four (Kossan, Supermax, Top Glove and Hartalega) incremental net capacity increase in CY20 26.1
(d) Malaysia accounts for 65% world market share and new demand = (b) x 65% 39
(e) Total estimated of new supply in Malaysia (assumption: Top four accounts for an estimated 80% to total
33
production in Malaysia) = (C) / 80%
Estimated new supply from Malaysia and new world demand in 2021 (demand > supply)
(a) Estimated world demand (b pieces) 432b
(b) Estimated new global demand growth [20% = pandemic demand (10%) + normal demand (10%)] 72b
(c)Top four (Kossan, Supermax, Top Glove and Hartalega) new incremental net capacity increase in CY21 27.2
(d) Malaysia accounts for 65% world market share and new demand = (b) x 65% 47
(e) Total estimated of new supply in Malaysia (assumption: Top four accounts for an estimated 80% to total
34
production) = (C) / 80%
Source: Companies, Kenanga Research
PP7004/02/2013(031762) Page 2 of 10Rubber Gloves Sector Update
08 July 2020
China ramping up nitrile capacity leading over the next 3 years. From channel checks, we observed that Blue Sail (a
Chinese glove maker) is ramping up capacity by 30b pieces in nitrile from 6.3b to 36.3b and from year 2020 to 2023. Blue Sail is
predominantly in the production of vinyl gloves with a production mix of vinyl:nitrile at 80%:20%. Similarly, another player, Intco
with its current annual production capacity of 19.0bn pieces comprising 14.0bn PVC gloves and 5.0bn nitrile gloves is planning
to raise nitrile capacity from 10.7b in 2020 to 62.3b pieces in year 2023. Based on Hartalega’s NGC experience, it takes 8 to 10
years to build a 30b capacity. Moreover, we think the effective capacity coming onstream to the market could be much lower
assuming the Chinese players are cognizant of potential oversupply leading to lower ASPs.
China and low user per capita countries are potential high growth markets. We expect gloves consumption per capita in
China to surge sharply following the COVID-19 experience. For illustration purposes, assuming a population of 1.4b and
conservative 30 gloves per capita (from currently 9 – please refer to chart overleaf - compared to developed western countries
which averaged 200 pieces per capita), this implies a massive 42b piece (from currently 2.8bn pieces) of rubber gloves
consumption in China annually. Hence, any new supply from the Chinese players could be absorbed domestically.
Gloves per capita consumption
Source: Hartalega, various, Kenanga Research
Structural changes to global demand and users for examination rubber gloves. Incremental volume growth is expected
from new users of examination rubber gloves including nitrile and latex based. Typically, housewives don rubber gloves to do
their washing and cleaning, and sometimes even cooking. Maids use them, as do hospital janitors who have to handle medical
waste. At Japanese restaurants, cooks behind sushi counters maintain standards of hygiene by wearing rubber gloves as they
prepare the food. Those who have an allergic reaction to latex can opt for nitrile gloves as an alternative. With selling price per
piece averaging between USD0.06 to USD0.10 per piece, medical grade examination rubber gloves provide the cheapest form
of hygiene protection.
Nitrile gloves’ market share to gain further momentum with potential 30% growth. Based on our analysis, we expect nitrile
gloves to continue growing and expropriate market share from latex. The growth in nitrile segment is evident. For illustration
purposes, going forward, assuming nitrile:latex ratio of 80:20 (currently at 67:37) and based on estimated global demand of
324b pieces in 2020 (forecast for 2019 is 300b pieces and assuming a 8% growth rate in 2020), this implies nitrile growth rate at
20% or an additional 42b pieces from switching to nitrile.
Evolution of Latex and Nitrile % mix – Nitrile market share to gain further momentum
80
70
70
63 63
58 60
60 57
54
50 50 5149
50 48 46
42 42 43
40
40 37 37
30
30
20
10
0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Nitrile Latex
Source: Kenanga Research
PP7004/02/2013(031762) Page 3 of 10Rubber Gloves Sector Update
08 July 2020
Upward share price movement indicating massive earnings growth over the next two quarters. Based on historical
observation between share prices and earnings trend over the past few years, share prices of stocks reacted ahead by two
quarters of good or weak results. The current upward movement in share prices are indicating very strong earnings ahead
particularly TOPGLOV and HARTA.
Hartalega – Historical stock price movement indicating upcoming two quarters of good results
Hartalega Share Price vs Net Profit
14 140
125
121
117 120
12 120
113
120 104
113 116
10 100
96
Share Price (RM / share)
Net Profit (RM millions)
94
66 89 91
8 73 80
63 63 56
57
50
6 60
63 71
60 62
58
55
4 49 48 40
Share Price
2 20
0 -
12/19/2013
12/19/2014
12/19/2015
6/19/2015
6/19/2016
12/19/2016
12/19/2017
12/19/2018
6/19/2019
12/19/2019
6/19/2013
9/19/2013
3/19/2014
6/19/2014
9/19/2014
3/19/2015
9/19/2015
3/19/2016
9/19/2016
3/19/2017
6/19/2017
9/19/2017
3/19/2018
6/19/2018
9/19/2018
3/19/2019
9/19/2019
3/19/2020
6/19/2020
Share Price (Left hand side) Net Profit (Righ hand side)
Source: Bloomberg, Kenanga Research
Top Glove – Historical stock price movement indicating upcoming two quarters of good results
Top Glove Share Price vs Net Profit
18 400
16 350
348
14
300
12
Share Price (RM / share)
250
Net Profit (RM millions)
10
200
8
118 116
128
150
6 103 105 105 111
56 73 78 109
62 94
42 72 83 100
4 46
48 66 110
42 49
50 97 106
74 50
2
75
0 -
12/19/2013
12/19/2014
12/19/2015
12/19/2016
3/19/2017
12/19/2017
12/19/2018
12/19/2019
6/19/2020
6/19/2013
9/19/2013
3/19/2014
6/19/2014
9/19/2014
3/19/2015
6/19/2015
9/19/2015
3/19/2016
6/19/2016
9/19/2016
6/19/2017
9/19/2017
3/19/2018
6/19/2018
9/19/2018
3/19/2019
6/19/2019
9/19/2019
3/19/2020
Share Price (Left Hand Side) Net Profit (Right hand side)
Source: Bloomberg, Kenanga Research
PP7004/02/2013(031762) Page 4 of 10Rubber Gloves Sector Update
08 July 2020
Supermax – Historical stock price movement indicating upcoming two quarters of good results
Supermax Share Price vs Net Profit
10 80
9
71 70
8
60
7
50
Share Price (RM / share)
Net Profit (RM millions)
6
5 Quarterly Net Profit 38 40
38 39
36
35 36 36
4 33 35
30 30
25 27 27 28 25 28
3 25 25
23
20 20 20 20 20
2
Share Price 15
10 10
1 8
7
0 -
12/19/2013
12/19/2014
12/19/2015
12/19/2016
9/19/2017
12/19/2017
12/19/2018
6/19/2019
12/19/2019
6/19/2020
6/19/2013
9/19/2013
3/19/2014
6/19/2014
9/19/2014
3/19/2015
6/19/2015
9/19/2015
3/19/2016
6/19/2016
9/19/2016
3/19/2017
6/19/2017
3/19/2018
6/19/2018
9/19/2018
3/19/2019
9/19/2019
3/19/2020
Price (Left hand side) Net Profit (Right hand side)
Source: Bloomberg, Kenanga Research
Kossan - Historical stock price movement indicating upcoming two quarters of good results
Kossan Rubber Industries Share Price vs Net Profit
10 70
61
9 58 56
55 65 60
55
8 59
45 46 46 54 50
7 45 43
51 49
Share Price (RM / share)
Net Profit (RM millions)
47 41
6 46
35 37 47 45 40
34
5
39 38
34
35 30
4 33
3 20
2
10
1
0 -
12/19/2013
12/19/2014
12/19/2015
12/19/2016
12/19/2017
9/19/2018
12/19/2018
12/19/2019
6/19/2013
9/19/2013
3/19/2014
6/19/2014
9/19/2014
3/19/2015
6/19/2015
9/19/2015
3/19/2016
6/19/2016
9/19/2016
3/19/2017
6/19/2017
9/19/2017
3/19/2018
6/19/2018
3/19/2019
6/19/2019
9/19/2019
3/19/2020
6/19/2020
Share Price (Left hand side) Net Profit (Right hand side)
Source: Bloomberg, Kenanga Research
PP7004/02/2013(031762) Page 5 of 10Rubber Gloves Sector Update
08 July 2020
Consensus upgraded earnings by 50%-300% over the past 5 months. Standing testimony to the increasingly strong
prospects of the sector, analysts surveyed by Blomberg Consensus have over the last 5 months consistently upgraded the
earnings forecasts for glove players our coverage players such as TOPGLOV, KOSSAN, HARTALEGA and SUPERMX.
Top Glove – consensus upgraded net profit forecast >100% for FY20 (+161%) and FY21 (+330%)
Topglove Berhad
Consensus earnings estimates for FY ending 8/2020 and 8/2021
2350
Consensus earnings estimates (RM millions)
1850
1350
850
350
1/15/2020
1/22/2020
1/29/2020
2/12/2020
2/19/2020
2/26/2020
3/11/2020
3/18/2020
3/25/2020
4/15/2020
4/22/2020
4/29/2020
5/13/2020
5/20/2020
5/27/2020
6/10/2020
6/17/2020
1/1/2020
1/8/2020
2/5/2020
3/4/2020
4/1/2020
4/8/2020
5/6/2020
6/3/2020
Consensus FY Aug 2020 Consensus FY Aug 2021
Source: Bloomberg, Kenanga Research
Hartalega - consensus upgraded net profit forecast for FY21 (+79%) and FY22 (+49%)
Hartalega Berhad
Consensus earnings estimates for FY ending 3/2021 and 3/2022
Consensus earnings estimates (RM millions)
950
850
750
650
550
450
4/29/2020
5/27/2020
1/1/2020
1/8/2020
1/15/2020
1/22/2020
1/29/2020
2/5/2020
2/12/2020
2/19/2020
2/26/2020
3/4/2020
3/11/2020
3/18/2020
3/25/2020
4/1/2020
4/8/2020
4/15/2020
4/22/2020
5/6/2020
5/13/2020
5/20/2020
6/3/2020
6/10/2020
6/17/2020
Consensus FY Mar 2021 Consensus FY Mar 2022
Source: Bloomberg, Kenanga Research
Supermax - consensus upgraded net profit forecast for FY20 (+88%) and FY21 (+170%)
Supermax Berhad
Consensus earnings estimates for FY ending 6/2020 and 6/2021
420
370
Consensus earnings estimates (RM millions)
320
270
220
170
120
1/1/2020
1/8/2020
2/5/2020
3/4/2020
4/1/2020
4/8/2020
5/6/2020
6/3/2020
1/15/2020
1/22/2020
1/29/2020
2/12/2020
2/19/2020
2/26/2020
3/11/2020
3/18/2020
3/25/2020
4/15/2020
4/22/2020
4/29/2020
5/13/2020
5/20/2020
5/27/2020
6/10/2020
6/17/2020
Consensus FY June 2020 Consensus FY June 2021
Source: Bloomberg, Kenanga Research
PP7004/02/2013(031762) Page 6 of 10Rubber Gloves Sector Update
08 July 2020
Kossan – consensus upgraded net profit forecast for FY20 (+59%) and FY21 (+50%)
Kossan Rubber Industries Berhad
Consensus earnings estimates for FY ending 12/2020 and 12/2021
450
430
410
Consensus earnings estimates (RM millions)
390
370
350
330
310
290
270
250
2/5/2020
1/1/2020
1/8/2020
2/12/2020
2/19/2020
1/15/2020
1/22/2020
1/29/2020
2/26/2020
3/4/2020
3/11/2020
3/18/2020
3/25/2020
4/1/2020
4/8/2020
4/15/2020
4/22/2020
4/29/2020
5/6/2020
5/13/2020
5/20/2020
5/27/2020
6/3/2020
6/10/2020
6/17/2020
Consensus FY Dec 2020 Consensus FY Dec 2021
Source: Bloomberg, Kenanga Research
Stocks should trade >2.0SD above previous peak valuation because the exponential QOQ earnings growth leading to
massive YoY growth. Based on historical valuation at peak earnings, rubber glove stocks namely KOSSAN, HARTA and
TOPGLOV are trading at between +1.5SD to +2.0SD historical forward mean. Supermax benefits mainly from its unique
business model of dual income stream from OEM and OBM-distribution. We believe rubber glove stocks deserve further
multiple-year PER re-rating and should trade at above previous peak PER valuations of +2.0SD in tandem with exponential
QoQ earnings growth and higher double-digit YoY growth in coming quarters given the following factors:- (i) ASP upticks over
the next few months indicating that consensus earnings is potentially trailing, and (iI) re-stocking activities ramp-up as the
current outbreak of the Covid19 virus enforces higher hygiene standards, (iii) higher demand due to the pandemic, stock piling
and new users following the pandemic, and (iii) massive margins expansion due to higher ASPs.
Top Glove - Forward PER Hartalega - Forward PER
FWD PER FWD PER FWD AVG PER S.Dev +1 S.Dev -1 S.Dev +2 FWD PER S.Dev +2 Fwd Average PER S.Dev +1 S.Dev -1 S.Dev -2
S.Dev -2 FWD AVG PER S.Dev +1 S.Dev -1 S.Dev +2 S.Dev -2
PER (X) 54.00
42.0 51.00
39.0 48.00
36.0
45.00
33.0
42.00
30.0
39.00
36.00
27.0
33.00
24.0
30.00
21.0
27.00
18.0
24.00
15.0
21.00
12.0
18.00
9.0
15.00
6.0
Dec-15
Dec-16
Dec-17
Dec-18
Dec-19
Oct-15
Oct-16
Oct-17
Jun-15
Apr-16
Jun-16
Apr-17
Jun-17
Apr-18
Oct-18
Jun-18
Apr-19
Oct-19
Jun-19
Apr-20
Jun-20
Aug-15
Aug-16
Aug-17
Aug-18
Aug-19
Feb-16
Feb-17
Feb-18
Feb-19
Feb-20
3.0
Oct-18
Oct-15
Apr-16
Oct-16
Dec-16
Apr-17
Oct-17
Apr-18
Apr-19
Oct-19
Apr-20
Dec-15
Dec-17
Dec-18
Dec-19
Jun-15
Aug-15
Jun-16
Aug-16
Jun-17
Aug-17
Jun-18
Aug-18
Jun-19
Aug-19
Jun-20
Feb-16
Feb-17
Feb-18
Feb-19
Feb-20
Source: Bloomberg, Kenanga Research
Kossan - Forward PER Supermax - Forward PER
PER (X) FWD PER FWD AVG PER S.Dev +1 S.Dev -1 S.Dev +2 S.Dev -2
FWD PER FWD AVG PER S.Dev +1 S.Dev -1 S.Dev +2 S.Dev -2
36.00
PER (X) 34.00
32.00
40.00
30.00
28.00
35.00 26.00
24.00
30.00 22.00
20.00
25.00 18.00
16.00
20.00 14.00
12.00
10.00
15.00
8.00
6.00
10.00 4.00
Oct-16
Oct-15
Oct-19
Aug-15
Dec-15
Apr-16
Apr-17
Oct-17
Apr-18
Oct-18
Dec-18
Apr-19
Dec-19
Apr-20
Jun-15
Jun-16
Aug-16
Dec-16
Aug-17
Dec-17
Feb-16
Feb-17
Jun-17
Feb-18
Jun-18
Aug-18
Feb-19
Jun-19
Aug-19
Feb-20
Jun-20
2.00
Mar-17
Jun-15
Sep-15
Dec-15
Mar-16
Jun-16
Sep-16
Dec-16
Jun-17
Sep-17
Dec-17
Mar-18
Jun-18
Sep-18
Dec-18
Mar-19
Jun-19
Sep-19
Dec-19
Mar-20
Jun-20
Source: Bloomberg, Kenanga Research
PP7004/02/2013(031762) Page 7 of 10Rubber Gloves Sector Update 08 July 2020 TOPGLOV (OP; TP; RM25.00). We highlight that TOPGLOV’s ASP for months of June to Aug is now higher by between 5% to 15%, as opposed to earlier guidance of +5%, indicating that supply tightness have further propelled ASP higher. However, spot price is about 3x the normal prices of USD28-30/1,000 pieces which accounts for 5%-10% of total allocation. With a diverse customer base, we expect TOPLGOV to have better pricing power and hence potentially higher-than-expected industry average prices. We highlight that market consensus is still under-appreciating the potential impact from higher-than-expected ASPs in this continuing pandemic and tight supply condition. Due to the tight supply, we expect buyers to jockey for position in order to secure allocation which will push up ASPs. Personal Protective Equipment (PPE) of which glove is one of the components is presently much sought after due to limited supply. Longer delivery lead times are indicating that demand will outstrip supply at least over the medium-term. Management highlighted that requests for huge volumes of gloves to the tune of 400m to 500m pieces are coming from countries that include Spain, France, Italy, Germany, and Saudi Arabia. This lends us the confidence that mid to high-teens growth in volume sales are achievable in FY20 and FY21 since orders have been secured up till end Dec 2020 to early 2021. The robust demand has led to longer delivery lead times which has risen to >300 days from 80 to 100 days two months ago. HARTA (OP; TP: RM18.16). YTD, the stock is up >100%, and looking at the previous up-cycle when the stock rose 200%, this indicates potential further upside because of the quantum leap in earnings and hence growth over the next few quarters. We like Hartalega for: (i) its solid management, (ii) constantly evolving via innovative products development, and (iii) its booming nitrile gloves segment. SUPERMAX (OP; TP; RM14.00). Dual-stream incomes from manufacturing and distribution. We gather that it is confident of raising ASP by between 5% to 10% each month from June till Dec 2020, vs. our previous expectation of 5% monthly increase from June to Sep 2020 indicating that supply tightness have further propelled ASP higher. Specifically, Supermax is expected to gain from higher margins from both its gloves manufacturing and distribution divisions. We expect higher margins going forward due to higher product mix skewed towards OBM distribution which accounts for 95% compared to 70% pre Covid-19 which we believe had caught us as well as the market by surprise at a time when supply is tight due to aggressive stockpiling of critical medical supplies including gloves. Supermax is getting enquiries from foreign government agencies, non-government organizations, retailers and restaurants chains. Amplifying the pent-up demand, buyers are paying between 30% to 50% deposits in advance to secure glove supply and timely delivery. From a conference call with its investor relations, we understand that demand has continued to climb over the past 2 weeks indicating that lead time is now 12 months compared to 10 months and its order-book is filled up to June 2021. This led to higher utilisation rate of >95% as compared to pre-COVID-19 level of 80- 85%. Case in point is Supermax’s overseas distribution centers which are experiencing fast inventory depletion from the normal 4 months to within 6 weeks. Supermax expects the heightened demand to continue for the next 1 to 1.5 years. KOSSAN (OP; TP: RM14.00). We are positive on Kossan’s prospects ahead over the next few quarters. Management is confident of sustained strong demand at least till end-1QCY21, wringing extra earnings from an additional 10% utilisation from pre-pandemic 85%-90% level and margins expansion from four new lines catering to spot customers. However, the lag impact from ASP hike can only be felt in 2H 2020. 1QCY20 results season pleasantly within expectations. The recently concluded 1QCY20 results season for glove makers under our coverage was pleasant with results coming in between within and above expectations. All in, all players recorded markedly quarterly earnings improvement which we believe is gathering momentum for a good year ahead. The star performer was SUPERMX and TOPGLOV which recorded 136% and 200% QoQ growth led by double-digit volume and higher ASP. Harta’s results excluding a one-off forex loss came in within expectations. Kossan’s 1QFY20 results appear to be in line; however, due the galloping ASP going forward, the overall result is above expectations. PP7004/02/2013(031762) Page 8 of 10
Rubber Gloves Sector Update
08 July 2020
Peer Comparison
Revenue Core Earnings ROE Net Div
Name Price Price Market PER (x) - Core Earnings PBV (x) Target
Shariah Current Growth Growth (%) Yld (%)
@ 6/7/20 Cap Price Rating
Compliant FYE 1-Yr. 2-Yr. 1-Yr. 2-Yr. 1-Yr. 2-Yr. 1-Yr. 1-Yr. 1-Yr.
(RM'm) Hist. Hist. (RM)
Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd. Fwd.
RUBBER GLOVES
HARTALEGA HOLDINGS BHD 16.50 55,902 Y 03/2021 68.4% 17.3% 182% 19.5% 126.4 44.8 37.5 21.6 17.4 43.1% 1.1% 18.16 OP
KOSSAN RUBBER INDUSTRIES 10.38 13,275 Y 12/2020 46.8% 19.1% 128% 29.5% 59.1 25.9 20.0 9.3 7.3 31.6% 1.0% 14.00 OP
SUPERMAX CORP BHD 10.36 13,379 Y 06/2020 29.4% 61.2% 126% 181% 110.5 52.8 18.8 12.6 11.0 22.3% 0.4% 14.00 OP
TOP GLOVE CORP BHD 19.96 53,773 Y 08/2020 36.7% 23.0% 226% 50.8% 137.1 43.8 29.0 20.9 17.4 44.2% 1.1% 25.00 OP
Source: Bloomberg, Kenanga Research
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PP7004/02/2013(031762) Page 9 of 10Rubber Gloves Sector Update 08 July 2020 Stock Ratings are defined as follows: Stock Recommendations OUTPERFORM : A particular stock’s Expected Total Return is MORE than 10% MARKET PERFORM : A particular stock’s Expected Total Return is WITHIN the range of -5% to 10% UNDERPERFORM : A particular stock’s Expected Total Return is LESS than -5% Sector Recommendations*** OVERWEIGHT : A particular sector’s Expected Total Return is MORE than 10% NEUTRAL : A particular sector’s Expected Total Return is WITHIN the range of -5% to 10% UNDERWEIGHT : A particular sector’s Expected Total Return is LESS than -5% ***Sector recommendations are defined based on market capitalisation weighted average expected total return for stocks under our coverage. This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees. Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies. Published and printed by: KENANGA INVESTMENT BANK BERHAD (15678-H) Level 17, Kenanga Tower, 237, Jalan Tun Razak, 50400 Kuala Lumpur, Malaysia Telephone: (603) 2172 0880 Website: www.kenanga.com.my Email: research@kenanga.com.my PP7004/02/2013(031762) Page 10 of 10
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