This article first appeared in The Edge Financial Daily on December 21, 2017 - December 27, 2017

Top Glove Corp Bhd 
(Dec 20, RM8.05)
Maintain buy call with a higher target price (TP) of RM8.50 per share: The biggest positive surprise to us for the quarter was the high utilisation rate at around 85%, which is above its historical average of 80%, despite the new capacity from Factory 30, which has added capacity for around 2.8 billion pieces (or +5.7% increase) during the quarter. The peak utilisation rate was slightly above 90%, during the SARS pandemic back in 2002/03. We have revised our utilisation rate assumption for the financial year 2018 (FY18) to FY19 period from 80% to reflect the higher demand. 

Most rubber glove manufacturers have indicated that the increase in demand was somewhat related to the disruption in vinyl glove supply due to China’s strict enforcement against low value-added polluting industries. Assuming that all healthcare operators in China switch to rubber gloves, the incremental demand is estimated to be around 27.6 billion pieces or 20% of the current demand, based on the world average of 10 pairs of gloves per person per year (we estimate that people in the US and European Union [EU] use close to 50 pairs of gloves/year). But the demand would be higher in the first two years, as distributors will need to build up sufficient inventory of three to six months (or higher) based on their supply agreements and that is not inclusive of vinyl glove usage in other sectors like food and beverages. 

We raise our TP to RM8.50 from RM8 based on a 22 times estimated FY19E price-earnings ratio (PER), on the back of our 2.3% to 6.3% earnings forecast revisions for the FY18 to FY20E period, while maintaining our “buy” call and noting that the share price could trade above our TP in the near term, due to positive sentiments surrounding the sector. If Top Glove were to trade at a similar PER multiple to Hartalega (RM10.72, “hold”) at 33 times FY20E, its share price could reach RM12.70, which implies a 70% upside potential.

Downside risks to our call would be a sharp appreciation of the ringgit and a higher-than-expected increase in raw material prices. — Affin Hwang Investment Bank Research, December 20