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Tuesday, June 2, 2020

Top Glove Corporation - ASP Guidance Is Higher Again

Contrary to our earlier assumptions, the industry ASP has risen further month-on-month in anticipation of tighter supply and supernormal demand due to the pandemic. 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%. With a diverse customer base, we expect TOPLGOV to have better pricing power and hence potentially higher-than-expected industry average prices. Hence, we raised our FY20E/FY21E net profit by 18%/28%, to account for higher ASPs. TP is raised from RM15.60 to RM20.10 based on unchanged 36x CY21E revised EPS. Reiterate Outperform.

ASPs higher than earlier guidance. 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 supply tightness have further propelled ASP higher. However, spot price is about 3x the normal prices of USD28-30/1000 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 underappreciating 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.

Capacity expansion include: Factory 7A (operational by end-1Q 2020; 0.4bn pieces), Factory 2B (operational by 1Q 2020; 0.7b pieces), Factory 5A (operational by 1Q 2020; 2.5b pieces), Factory 40 (Phase 1 operational by 2Q 2020 and Phase 2 operational by 3Q 2020; 2.7b and 2.0b pieces), Factory F41 (2Q 2020; 4b pieces) and Factory 8A (by 4Q 2020; 3.5b pieces) to boost the group’s production capacity in 2020 by 11.8b gloves per annum to 81.9b (+17%).

Raised FY20E/FY211E net profit by 18%/28% after hiking our ASP from USD29/1,000 to USD32/1,000 and USD33/1000 pieces for FY20 and FY21, respectively.

Reiterate OP. Correspondingly, TP is raised from RM15.60 to RM20.10 based on unchanged 36x CY21E revised EPS of 55.9 sen (at slightly above +2.0SD above 5-year historical forward mean). Its merits are: (i) strong management, (ii) ability to supply in the current tight market conditions, and (iii) solid earnings growth averaging 105% per annum compared to FY20E and FY21E PERs of 40x and 28x, respectively. Historically, the stock moves ahead of two quarters of solid results.

A key risk to our call is lower-than-expected volume sales and ASP.

Source: Kenanga Research - 2 Jun 2020

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