Top Glove Corp Bhd
(Jan 20, RM5.16)
Maintain add due to benefits from sustained US dollar strength with an unchanged target price of RM5.65: We recently brought Top Glove Corp Bhd to visit investors in Thailand, during our Asean Corporate Day. The response to the meetings was good, as Top Glove met a total of 15 analysts and fund managers. The company remains bullish about prospects going forward, which supports our view that the worst should be over for the stock and the company should record sequentially stronger earnings ahead.

Top Glove has highlighted that the operating environment has improved with the recent appreciation of the US dollar-ringgit post-Trump victory. Furthermore, the demand for gloves has remained robust as the total utilisation rate stands at between 82% and 85%. Another key highlight was the price revisions it implemented in the first quarter of financial year 2017 (1QFY17). The ability to raise prices while utilisation rates have remained healthy signifies that pricing competition has eased.

The group raised latex gloves’ average selling prices (ASPs) by an estimated 10% to 13% quarter-on-quarter (q-o-q) in 1QFY17, while we estimate it raised nitrile gloves’ ASPs by 4% to 5%. Despite the favourable US dollar-ringgit benefitting the group, it is positive that the group is able to raise its ASPs to pass on the recent increase in raw material prices (latex increased 34% q-o-q, nitrile butadiene increased 26% q-o-q). However, management did not discount the possibility of further ASP hikes given the spike in latex prices this week.

Overall, we believe the latex prices at current levels are unsustainable despite the upcoming wintering period (February to April). As the spike in latex prices can be attributed to a supply shortage due to floods in Southern Thailand, the supply is expected to improve going forward with reports of the floods subsiding. Furthermore, speculative demand from a spike in China car sales is unlikely to continue into 2017, as China recently lowered tax cuts for vehicle purchases to 5% from 10% in 2016.

It also touched upon its expansion plans in 2017. It plans to add 6.2 billion per annum (12% increase) in capacity this year. Although this looks aggressive at this juncture, management has highlighted plans to stagger the new incoming capacity to allow for better supply and demand dynamics. We understand that its 4.4 billion plant (due April 2017) is expected to come onboard throughout the whole year. On the other hand, the commercial production of Phase 1 of F31 (1.4 billion per annum) can potentially be deferred to 1Q18.

Management’s comments during the meetings supported our positive view on the stock. We continue to like Top Glove as a key beneficiary of the stronger US dollar-ringgit and a pickup in demand for Malaysian glove exports. The key risks to our view are sharp weakening of US dollar-ringgit and stronger pricing competition. — CIMB Research, Jan 20