Lower prices, softer demand in coming months to affect Top Glove, says HLIB

Lower prices, softer demand in coming months to affect Top Glove, says HLIB

The expected lower adjustment in average selling prices (ASP) of gloves and softer demand could persist in the coming months, which may affect Top Glove Corp Bhd in the short term. Pix by Bloomberg.

KUALA LUMPUR: The expected lower adjustment in average selling prices (ASP) of gloves and softer demand could persist in the coming months, which may affect Top Glove Corp Bhd in the short term.

Hong Leong Investment Bank Bhd (HLIB) analyst Sophie Chua Siu Li said headwinds would likely remain in the short term but stressed that concerted effort from industry players would be required to not tilt the market into an oversupply situation.

HLIB expectd the ASPs to decline at a lower rate month-on-month (MoM) going forward, but the headwinds are unlikely to dissipate immediately.

"As glove buyers continue to err on the side of caution, glove prices are expected to continue declining in the coming months.

"However, the (Top Glove) management expects ASPs to decline at a lower quantum of 5.0 per cent (MoM) as opposed to 10 per cent MoM earlier, as the glove ASPs have now fallen closer to pre-Covid levels," she said in a research report today.

Chua said the pricing gap between the United States (US) and European markets was also narrowing, to about US$5 difference currently (versus a difference of US$10 previously).

"Nitrile glove's ASP is currently hovering around US$28 to US$30 per thousand pieces and ASPs are expected to normalise by mid-2022."

She said the softening of demand had led to a lower utilisation rate of about 60 per cent currently compared to pre-pandemic of between 80 per cent and 85 per cent, and peak of pandemic of 95 per cent.

"Lead time has since fallen considerably as well and is currently back at pre-Covid levels of 30 to 45 days.

"Lead time for nitrile gloves is at about 30 days now, while the lead time for latex gloves is slightly higher at about 40 days."

Meanwhile, she said Top Glove's dual primary listing on Hong Kong Exchange would likely see the issue of a maximum 793.5 million shares, assuming over allotment option fully exercised.

"It could raise up to RM2.27 billion, assuming issue price of RM2.86 per share for the group. This exercise would have a dilutive effect of 9.02 per cent to its existing shareholders."

She said the bulk of the proceeds raised would be used for the expansion of production capacity, involving six new manufacturing plants in total.

"The exercise is expected to be completed in the first quarter of 2022.

"Overall we are neutral on this exercise as the positives from a larger war chest and larger pool of potential investors is balanced by the dilutive effect."

She said lower demand for nitrile gloves had also resulted in the tapering off of raw material prices.

"Nitrile butadiene prices are expected to decline by 37 per cent from September to a projected US$1.28 per kg in December, while latex prices are expected to remain largely flat for the same period.

Thus, she said the ASPs falling at a faster pace than the raw material price decline (about two to three months' time lag), margins were expected to be compressed further.

She said Top Glove had also resumed shipment of gloves to the US market in end-September, following the lifting of the US Customs and Border Protection (CBP) bans.

"We understand that sales to US is still recovering gradually, but have yet to reach pre-CBP ban levels as the buyers have redirected their purchases to other glove makers during the CBP-ban."

To date, she said Top Glove had recovered about half of its pre-CBP ban shipment volume to the US.

On its expansion plans, she said Top Glove's current capacity stood at 100 billion pieces per annum and is expected to grow by 11 per cent, 23 per cent, 18 per cent in 2022, 2023 and 2024 respecitvely.

"By end of 2025, Top Glove's production capacity should reach a high of 201 billion pieces per annum."

However, she said this planned capacity expansion had been revised downwards, in view of the current challenging operating environment.

"Top Glove's earlier expansion plan was more aggressive and has projected for production capacity to reach 205 billion pcs per annum by end of 2024.

HLIB's forecasts remained unchanged with a "hold" call and a target price of RM2.80, although the ASP decline going forward is expected to be less steep.

"Our target represents a price earning multiple of 11 times (at its three-year historical mean), on its 2022 earnings per share of 25.5 sen."

https://www.nst.com.my/business/2021/12/751704/lower-prices-softer-demand-coming-months-affect-top-glove-says-hlib