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 Rubber Gloves- Quantum Earnings Leap, Multi-year Re-rating

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

Source: Kenanga Research - 8 Jul 2020
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