R e g i o n a l M o r n i n g N o t e s Wednesday, 17 June 2020

SECTOR UPDATE OVERWEIGHT

Rubber Gloves – Malaysia
(Maintained)
1Q20 Report Card: Prelude To Earnings Windfall
1Q20 reporting season saw glove producers’ earnings exceeding expectations on the 1Q20 NET PROFIT
back of burgeoning demand. However, the full extent of ASP pricing potential and ad 1Q20 qoq % yoy %
Company (RMm) chg chg Results
hoc sales mix will be realised in the coming quarters. Meanwhile, channel checks Top Glove 347.9 199.1 334.4 Above
suggest ASPs have reached a ceiling at US$160-175/’000 pieces. Despite valuations Hartalega 152.1 25.4 46.4 Above
surging over the recent months, we believe they have yet to fairly price in an impending Kossan
Total
64.8
564.8
6.2
89.1
29.6
141.4
Above

earnings windfall. Maintain OVERWEIGHT. Top pick: Top Glove. Source: UOB Kay Hian

WHAT’S NEW SECTOR COVERAGE

---Price (RM)---
• 1Q20 results round-up. Sector earnings came in well above expectations across the board. Company Rec 16 Jun 20 Target
Sector top-line grew 18.2% qoq on the back of higher volume growth of 12.9% qoq, primarily Top Glove BUY 15.95 21.90
Kossan BUY 8.23 10.95
on Top Glove reaching its utilisation limit and destocking of its inventory. ASPs for the period Hartalega HOLD 12.04 12.95
were only marginally higher at 0.9% qoq as glove producers’ ASP remained locked in and Source: UOB Kay Hian
were unable to benefit from the disproportionate demand surge. The RM/US$ was largely
unchanged (+0.4% qoq). Sector EBITDA margin improved considerably on: a) higher SECTOR VALUTIONS ONLY MODERATED IN
economies of scale; b) higher ASPs; and c) lower raw materials costs with nitrile (-6.6%) TANDEM WITH DECLINE IN SECTOR EARNINGS
(x) RMm
more than offsetting latex cost (+3.4%). Against improved margins, core earnings outpaced 20.0 147.3 160
18.0 135.9
revenue growth, at 89.1% qoq. 16.0
126.7 120.7 140

105.2 120
14.0
1Q20 SECTOR RESULTS SNAPSHOT 12.0 81.0 82.2
100
72.3
(RMm) 1Q19 4Q20 1Q20 qoq % chg yoy % chg 10.0
58.8
80
8.0 53.0
Revenue 2436.0 2604.4 3077.7 18.2 26.7 6.0
60

EBITDA 380.7 478.4 793.9 65.9 91.9 4.0

40

Net profit 222.1 298.6 564.8 89.1 141.4 2.0 20

0.0 0

qoq ppt chg yoy ppt chg

EBITDA margin (%) 15.6 18.4 25.8 7.4 8.8 Source: Respective companies, UOB Kay Hian
Hartalega 18.3 17.0 18.3 1.3 1.7
Kossan 20.2 23.3 26.5 3.1 2.0 PRODUCTION CAPACITY EXPANSION OUTLOOK
Top Glove 11.7 15.8 28.2 12.4 15.5 (bn pcs) growth yoy (%)
Net margin 9.1 11.5 18.4 6.9 8.7 Big 3
Source: Respective companies, UOB Kay Hian End 2019 132.0 13.6%
End 2020 150.8 14.3%
• On the brink of unprecedented windfall earnings. Over the coming quarters, we expect to End 2021 161.8 7.2%
see a step change in blended ASPs. After having largely locked in ASPs until April, glove Others^
producers are repricing its ASPs upwards on a monthly basis while raising ad hoc sales mix, End 2019 64.0 8.1%
which commands up to 3x the usual ASP. Furthermore, costs of raw materials (nitrile and End 2020 78.2 22.2%
End 2021 93.0 19.0%
latex) have dipped further by 6.6% and 0.9% qoq in 2Q20 respectively. However, beyond
2Q20, we expect raw materials costs to recover off multi-year lows and for glove producers to Total
share a fraction of their windfall earnings with their suppliers. End 2019 195.1 14.1%
End 2020 228.3 17.0%
ACTION End 2021 254.8 11.6%
Source: Respective companies, UOB Kay Hian
• Maintain OVERWEIGHT. We also believe elevated demand could well sustain ASPs up to ^Supermax, Sri Trang, Riverstone, Comfort Gloves, Rubberex
2Q21, largely underpinning our 2021 earnings outlook. Our OVERWEIGHT is premised on:
a) multi-fold valuation gains have yet to fully factor in the impending earnings surge over the ANALYST(S)
quarters ahead; b) sustained glove demand over 2021; and c) scarcity of safe haven Philip Wong
earnings growth (2-year earnings CAGR of 123% in 2019-21) as most other sectors face +603 2147 1996
multitude of headwinds. Our top pick for the sector is Top Glove. We also highlight Supermax philipwong@uobkayhian.com
as a major beneficiary of the glove ASP surge.

PEER COMPARISON
Price @ 16 Target Mkt Cap ---------- PE (x) ---------- EV/EBITDA (x) P/B (x) Div Yield (%)
Company Ticker Rec Jun 20 (lcy) price (lcy) (US$m) 2020F 2021F 2020F 2021F 2020F 2020F
Hartalega HART MK HOLD 12.04 12.95 10,333.8 45.8 51.2 31.9 34.7 15.0 1.2
Top Glove TOPG MK BUY 15.96 21.90 9,387.6 46.1 31.1 31.7 22.0 13.9 1.1
Kossan KRI MK BUY 8.23 10.95 2,704.5 19.2 17.2 13.2 11.9 6.9 2.6
Sri Trang STA TB BUY 27.25 39.90 1,357.7 9.5 8.9 10.5 9.9 1.6 2.6
Riverstone RSTON SP BUY 2.41 3.15 1,266.8 21.9 20.4 14.3 13.7 5.6 1.1
Supermax SUCB MK N.R. 7.32 - 2211.4 31.3 27.7 19.8 17.7 19.8 1.3
Comfort Glove CG MK N.R. 2.85 - 388.7 41.3 22.8 21.0 13.8 21.0 0.6
Rubberex RBRX MK N.R. 2.99 - 194.0 59.8 42.7 25.3 20.7 25.3 0.7
Average 3,480.5 34.4 27.8 21.0 18.1 13.6 1.4
Source: UOB Kay Hian

Refer to last page for important disclosures. 121

R e g i o n a l M o r n i n g N o t e s Wednesday, 17 June 2020

ESSENTIALS SUPERMAX: RECENT ASP HAS CLIMBED TO

NEW HIGHS AT US$175/’000 PCS
 Supermax: Super strategy to maximise profit. We highlight Supermax as we believe it is
by far the best beneficiary of the recent surge in demand for gloves.
 Supermax with its OBM model could be an underappreciated diamond. Unlike
Hartalega, Top Glove and Kossan which are predominantly OEMs,Supermax has toiled for
years to establish its own brand and distribution channels. The benefits are coming to fruition
with the surge in ASPs. It currently commands ASPs of close to US$160-175/’000 pieces vs
US$150 in May and US$90 pre-COVID period. We gather there is limited upside to current
ASPs as various government agencies have implemented redirecting of personal protective
equipment (PPE) supplies of close to US$160-175/’000 pieces. That said, Supermax does
receive urgent ad hoc orders in the range of US$190/’000 pcs.
Source: Supermax
 OBM alongside its own distribution network fully captures elevated ASPs. Apart from SUPERMAX: CHANNEL SALES
its OBM model, Supermax uniquely distributes its own products as well which makes up
close to 55% of overall volume and derives the best margins of up to 700-800% at the gross
profit level (based on current prices). Meanwhile, sales through third-party distributors
command about 400% margins. Since the COVID-19 outbreak, Supermax has strived hard
to increase its sales exposure through these two channels (to 95% of volume mix from 70%
previously) to fully capitalise the disproportionate spike in demand to maximise its earnings.
With these established advantages, it allows Supermax to be a far superior beneficiary of
elevated ASPs relative to the likes of Top Glove.
 Most aggressive capacity expansion among Big 4 producers. Aside from commanding
Source: Supermax
margins in excess of peers, Supermax’s capacity expansion amid the windfall earnings is
ahead of peers as well at 21.5% CAGR over 2019-21. Top Glove is close behind at 19.7% SUPERMAX’S CAPACITY EXPANSION
yoy % 2-year CAGR
while Hartalega’s and Kossan’s capacity expansions are limited as available space has been b pcs/ year chg (2019-21
exhausted. By end-22, Supermax is due to usurp Kossan in terms of capacity. Apart from Hartalega
that, its capacity is dedicated to nitrile production. End 2019 32.9 13.0%
End 2020 35.2 7.2%
End 2021 39.2 11.1% 9.2%
 No change to dividend payout but distribution of treasury shares instead... Supermax
is not looking to increase its dividend payout although it anticipates windfall earnings for the Top Glove
End 2019 70.1 15.7%
year. However, it is looking to distribute its treasury shares as dividend-in-kind instead. It has End 2020 86.4 19.3%
68.9m treasury shares, translating into a 5% yield. End 2021 100.4 8.4% 19.7%

 …to finance its capacity expansion and maintain a robust balance sheet. Supermax’s Kossan
End 2019 29 9.4%
addition of close to 20b pieces annually in capacity to its existing capacity of 21.8b pieces End 2020 32 10.3%
over the next 3-4 years would translate to close to RM1b capex. Therefore, to preserve its End 2021 32 0.0% 5.0%
balance sheet and maintain its net gearing at 0.2x, it necessitates a conservative dividend Supermax
payout despite the windfall earnings. End 2019 21.8 0.0%
End 2020 26.2 20.2%
 Higher raw materials costs going forward despite lower underlying prices. Latex and End 2021 32.2 22.7% 21.5%
Source: Respective companies
nitrile costs for Supermax fell 6.6% and 0.1% qoq in 4QFY20 respectively. However, going
forward, management expects overall raw materials including packaging and chemicals to SUPERMAX: 3-YEAR PE TRADING BAND
cost ~10% higher amid lower underlying prices as Supermax looks to trickle down some 30
windfall earnings to its suppliers. 25

 Appears to have well beaten consensus. Based on Supermax’s ASPs and product mix, it 20 +1SD = 18.5x
AVG = 14.8x
appears Supermax could significantly beat consensus expectations of RM395m and the 15

highest projected earnings of RM561m. 10 -1SD = 11.1x

5
 Supermax’s valuations could normalise sharply to single-digit PE. With the surge in
0
earnings, Supermax’s one-year forward PE could normalise sharply to single-digit PE. It
- 17 ul- 17 an - 18 ul- 18 an - 19 ul- 19 an - 20
would trade at a significant laggard to peers. We believe Hartalega, Top Glove and Kossan Jan J J J J J J
should be trading at 45.0x, 23.5x and 23.0x PE to their respective financial year ends. Other Source: Bloomberg
potential catalysts include being part of the FBMKLCI Index in Nov 20 should a vaccine be
not discovered by then. SUPERMAX: SHAREHOLDING STRUCTURE
(%) Jan 20 May 20
Institutional 24.5 31.5
Public 18.6 12.5
Foreign 21.3 20.4
Source: Supermax

Refer to last page for important disclosures. 22

R e g i o n a l M o r n i n g N o t e s Wednesday, 17 June 2020

 Top Glove Corporation (TOPG MK/BUY/Target: RM21.90). Our target price is based on TOP GLOVE: 3-YEAR FORWARD PE TRADING
23.5x 2021F PE, or -0.5 SD of its 3-year forward PE mean. We believe valuations should be BAND
at a slight discount to its historical PE mean as it is:- a) being pegged to windfall peak 40
earnings, b) upside to earnings have mostly been factored in, and c) the risk-to-reward at 35
this juncture is increasingly pronounced given the surge in its share price. That said, our PE 30 +1SD = 29.5x

peg is reasonable given Top Glove is an established FBMKLCI component index constituent 25 AVG = 25.5x

and its sublime earnings growth. ASPs are being adjusted 15% mom while lofty ad-hoc 20
-1SD = 21.5x
prices may represent upside surprise to our earnings. These translate into a 2-year CAGR of 15
218% (FY19-21F). Furthermore, its explosive qoq earnings growth over the subsequent 2-3 10
quarters should catalyse its valuations going forward. - 17 ul- 17 an - 18 ul- 18 an - 19 ul-19 an -20
J n
a J J J J J J
Source: Bloomberg, UOB Kay Hian
 Kossan Rubber Industries (KRI MK/BUY/Target: RM10.95). Our target price is based on
23x 2020F PE, or +1SD of its 3-year mean PE. We believe improved visibility over Kossan’s KOSSAN: 3-YEAR FORWARD PE TRADING
ASP revision is likely to catalyse its valuations going forward. On a qoq basis, we expect BAND
2Q20 ASPs to potentially improve by up to a high-single-digit growth rate. 2H20 is expected
30
to see a steep step change in ASPs. Aside from that, Kossan sees firm demand visibility up 28
till 1Q21. It is allocating 15% of volume to meet ad-hoc demand, potentially commanding a 26 +1SD = 23.2x
24
premium of 3x usual ASPs. This translates into an attractive 2-year earnings CAGR of 73% 22 AVG = 20.8x

over 2019-21). 20
18
16 -1SD = 18.4x
 Hartalega Holdings (HART MK/HOLD/Target: RM12.95). Our target price is based on an 14
unchanged 45.0x 2021F PE, or its +2SD of its 3-year forward PE mean. The premium can 12
10
be justified by Hartelega’s strong operating efficiency under ordinary circumstances and
- 17 - 17 an - 18 ul- 18 an - 19 ul- 19 an - 20
innovation ahead of peers. Aside from that, the Next Generation Manufacturing Complex Jan Jul J J J J J

(NGC) 2.0 provides visibility over medium-term growth. Nevertheless, our HOLD call is Source: Bloomberg, UOB Kay Hian
premised on Hartalega’s valuations being priced in at this juncture, which limits potential
price upside. Entry price is RM11.50. HARTALEGA: 3-YEAR FORWARD PE TRADING
BAND
RISK 53

 Discovery of a vaccine and/or treatment could cause negative newsflow, however, as we 48

43 +1SD = 39.8x
have previously highlighted, scaling of global manufacturing to achieve herd immunity may
38 AVG = 34.6x
take 12 months and beyond. Aside from that, peak mass testing may translate into lower
33
glove demand as well. 28
-1SD = 29.4x
 Downside risks are spikes in raw materials costs, a strengthening ringgit, sharp ASP 23
18
reversion and COVID-19 outbreak among the production workforce. Upside risks are supply
- 17 ul- 17 an - 18 ul - 18 an - 19 ul - 19 an - 20
disruption to the broader industry and a strengthening US$. Jan J J J J J J
Source: Bloomberg, UOB Kay Hian

EARNINGS OUTLOOK ASSUMPTIONS ON MALAYSIA GLOVE PRODUCERS UNDER OUR COVERAGE

----------------------- Top Glove ----------------------- ----------------------- Hartalega ----------------------- ----------------------- Kossan -----------------------
Year End (Aug) Year End (Mar) Year End (Dec)
2019 2020F 20212F 2022F 2020 2021F 2022F 2023F 2019 2020F 2021F 2022F
Revenue 4801.1 6556.6 10593.3 7214.0 2924.0 4100.0 4456.6 3935.0 2221.6 2937.3 3296.9 2559.6
Growth yoy (%) 13.9% 36.6% 61.6% -31.9% 3.4% 40.2% 8.7% -11.7% 3.6% 32.2% 12.2% -22.4%
Core net profit 364.7 1262.2 3686.5 878.0 462.1 973.8 870.9 405.6 227.3 609.0 679.8 323.7
Growth yoy (%) -16.1% 246.1% 192.1% -76.2% -2.0% 110.7% -10.6% -53.4% 13.2% 167.9% 11.6% -52.4%
Effective tax rate -13.2% -20.0% -22.0% -18.0% -20.6% -22.1% -22.6% -23.1% -18.6% 21.0% 21.0% 21.0%

ASP growth (%) 4.5% 17.0% 39.0% -33.0% -7.5% 13.0% 0.5% -14.2% -5.0% 15.0% 3.0% -18.0%
Volume growth (%) 10.6% 11.0% 15.9% 1.0% 8.4% 19.6% 10.9% -0.5% 7.8% 9.4% 5.0% 1.5%
Profit margin (%) 7.6% 19.3% 34.8% 12.2% 15.8% 23.8% 19.5% 10.3% 10.2% 20.7% 20.6% 12.6%
Source: UOB Kay Hian

Refer to last page for important disclosures. 33

R e g i o n a l M o r n i n g N o t e s Wednesday, 17 June 2020

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