PP 7767/09/2010(025354)

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

B r ief ing Not e

25 June 2010
MARKET DATELINE

Top Glove Corporation Share Price

Fair Value
:
:
RM13.00
RM16.40
Recom : Outperform
Demand For Gloves Still Positive
(Maintained)

Table 1 : Investment Statistics (TOPGLOV; Code: 7113) Bloomberg: TOPG MK

Net Core Net
FYE Turnover profit EPS EPS# Growth# PER# C.EPS* P/NTA Gearing ROE GDY
Aug (RMm) (RMm) (sen) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009 1,529.1 169.1 57.3 57.3 54.2 22.7 - 4.9 net cash 22.6 2.3
2010f 2,062.3 262.7 89.0 89.0 55.3 14.6 89.0 4.0 net cash 28.7 3.5
2011f 2,342.1 283.8 96.2 96.2 8.1 13.5 97.0 3.4 net cash 26.0 3.6
2012f 2,648.1 300.6 101.9 101.9 5.9 12.8 102.0 2.9 net cash 23.6 3.9
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC # Excludes EI * Consensus Based On IBES Estimates

We attended Top Glove’s briefing yesterday and set out below the key Issued Capital (m shares) 308.8
takeaways that we gathered. Market Cap(RMm) 4,013.8

♦ Outlook still positive ... Top Glove is still positive on the demand for
Daily Trading Vol (m shs)
52wk Price Range (RM) 6.266-14.00
0.7

rubber gloves as gloves remain as a necessity in the healthcare industry as

Major Shareholders: (%)
a form of protection. Coupled with organic growth, rising healthcare Tan Sri Dr Lim & family 38.6
awareness, especially from developing countries, and restocking activities, Overlook Partners Fund 5.0
these should help support demand for rubber gloves moving forward. Matthews International 5.2
♦ … but not without some headwinds. While demand prospects remain FYE Aug FY10 FY11 FY12
favourable, latex price, however, hit an all-time high of RM7.80/kg in Apr EPS chg (%) - - -
’10 and the US$ has weakened against RM by 4.7% YTD. Past experience, Var to Cons (%) 0.0 (0.8) (0.1)
however, has shown that Top Glove has been able to pass on the higher
PE Band Chart
cost to their customers, albeit with a slight time lag. We believe this ability
remains intact and has not changed.
♦ Updates on capacity expansion. Management indicated that the PER
PER
=
=
25x
20x
commercial production for the additional eight new lines in F18 (+0.75 bn PER = 15x
PER = 10x
pieces p.a.) is set to start in Jul ’10 and the construction for F21 has
finished and is expected to commence commercial production in Aug ’10
(+1.5 bn pieces p.a.). Top Glove is also adding 16 new lines (+1.5 bn
pieces p.a.) at its existing F7 factory in Thailand. All in, these will boost
Top Glove’s annual production capacity to 36.8bn pieces by end-FY10, Relative Performance To FBM KLCI
from 33 bn pieces p.a. currently. As for 2012, the company is constructing
a new factory (F22) in Klang, which will house 16 new lines (+1.5 bn
pieces p.a) and is expected to start commercial production in Mar ’11. Top
Top Glove
Glove is also putting in 32 new lines (+3.0 bn pieces p.a.) in its recently
acquired land and building in Ipoh (land and building acquired for
RM4.2m). Commercial production is expected to start by May ‘11. In total, FBM KLCI

the expansion plans would increase Top Glove’s annual production capacity
to 41.3 bn pieces by end-FY11.
♦ Risks. The risks include: 1) sharp surge in raw material (latex) and/or
energy (natural gas) prices, which may result in margin squeeze; 2) an
appreciating RM against the US$; 3) execution risk from capacity
expansion; and 4) weaker-than-expected results from overseas operations.
♦ Forecasts. We have left our FY10-12 earnings forecasts unchanged for
now.
♦ Investment case. We maintain our fair value of RM16.40, based on David Chong, CFA
unchanged target FY11 PER of 17x. We reiterate our Outperform call on (603) 9280 2179
david.chong@rhb.com.my
the stock.

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Key Highlights From Briefing

♦ Still positive on the demand for rubber gloves. Top Glove is still positive on the demand for rubber gloves as
gloves remain as a necessity in the healthcare industry as a form of protection. The group continues to focus on
emerging markets, especially the Latin American countries (e.g. Brazil and Argentina) as well as China and India,
where the healthcare spending per capital is still low. Despite coming from a high base, the company has also seen
a slight surge in demand for gloves from the US following the new healthcare bill for uninsured Americans, as well
as the recent oil spill in Florida. As at 3Q10, Top Glove’s product mix consists of 57% powdered gloves, 24%
powder-free, 7% nitrile, 6% vinyl, 4% surgical and 2% others. Currently, Top Glove’s average utilisation rate
stands at approximately 80%, as compared to the average rate of 90% in 2Q10, following the commencement of
F20 during the quarter. The group is comfortable with its average utilisation rate of 80-85% as this would allow
the group to take advantage of any sudden surge in demand.

♦ … but not without some headwinds. While demand prospects remain favourable, latex price, however, hit an
all-time high of RM7.80/kg in Apr ’10 and the US$ has weakened against RM by 4.7% YTD. As a result, Top
Glove’s 3Q10 EBITDA margin contracted by 3.9%-pts qoq. Past experience, however, has shown that Top Glove
has been able to pass on the higher cost to their customers, albeit with a slight time lag. We believe this ability
remains intact and has not changed. As for the impact of the removal of subsidies for natural gas, management
does not expect this to impact earnings too significantly given that fuel cost (60%-natural gas, 25%-biomass and
15%-coal) only accounts for 9% of total production cost.

♦ Updates on capacity expansion. Management indicated that the commercial production for the additional eight
new lines in F18 (+0.75 bn pieces p.a.) is set to start in Jul ’10 and the construction for F21 has finished and is
expected to commence commercial production in Aug ’10 (+1.5 bn pieces p.a.). Top Glove is also adding 16 new
lines (+1.5 bn pieces p.a.) at its existing F7 factory in Thailand. All in, these will boost Top Glove’s annual
production capacity to 36.8bn pieces by end-FY10, from 33 bn pieces p.a. currently. As for 2012, the company is
constructing a new factory (F22) in Klang, which will house 16 new lines (+1.5 bn pieces p.a) and is expected to
start commercial production in Mar ’11. Top Glove is also putting in 32 new lines (+3.0 bn pieces p.a.) in its
recently acquired land and building in Ipoh (land and building acquired for RM4.2m). Commercial production is
expected to start by May ‘11. In total, the expansion plans would increase Top Glove’s annual production capacity
to 41.3 bn pieces by end-FY11. Total estimated capex required for FY10 and FY11 are about RM80m p.a..

Risks

♦ Risks to our view. The risks include: 1) sharp surge in raw material (latex) and/or energy (natural gas) prices,
which may result in margin squeeze; 2) an appreciating RM against the US$; 3) execution risk from capacity
expansion; and 4) weaker-than-expected results from overseas operations.

Forecasts

♦ No change to our net profit forecasts. We have left our FY10-12 earnings forecasts unchanged for now.

Valuations and Recommendation

♦ Investment case. Our fair value is maintained at RM16.40 based on unchanged target FY11 PER of 17x. We
continue to like Top Glove for its position as the world’s largest glove producers and its healthy cash pile of
RM283.8m as at end-May ’10. We remain positive on glove manufacturers given that demand for rubber gloves
continues to remain resilient. No change to our Outperform call on the stock.

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 Table 2: Earnings Forecasts Table 3: Forecast Assumptions
FYE Aug (RMm) FY09a FY10F FY11F FY12F FYE Aug FY10F FY11F FY12F

Turnover 1,529.1 2,062.3 2,342.1 2,648.1 Capacity (bn pcs p.a.) 34.4 39.9 41.8
Turnover growth (%) 54.0 34.9 13.6 13.1 Capacity utilisation (%) 85.0 85.0 90.0
Change in ASP (%) 0.1 1.0 1.0
EBITDA 288.5 410.8 443.2 470.9
EBITDA margin (%) 18.9 19.9 18.9 17.8

Depreciation (57.0) (61.1) (66.3) (72.8)

EBIT 231.5 349.7 376.9 398.1

EBIT margin (%) 15.1 17.0 16.1 15.0
Net Interest (8.5) (1.6) (1.8) (1.8)
Associates (1.0) 0.0 1.0 2.0

Pretax Profit 222.0 348.1 376.1 398.4

Tax (53.9) (80.1) (86.5) (91.6)
Minorities 1.1 (5.4) (5.8) (6.1)
Net Profit 169.1 262.7 283.8 300.6
Source: Company data, RHBRI estimates

Chart 1: TopGlov Technical View Point

♦ The share price of TopGlov trended along the UTL
since early Jan 2009, and experienced a powerful
surge on its buying momentum in Nov 2009.

♦ The surge led to a steeper rally on the stock and

pushed it across the RM10.60 – RM12.00 resistance
region in early Mar 2010.

♦ On the final push, the stock soared towards a

historical high of RM14.02, before finally losing the
RM14.00 psychological level in Apr 2010.

♦ The loss was followed by a steep correction to a low

of RM11.18, nearer to the UTL near RM11.00 then,
before stabilising at above RM12.00 in May 2010.

♦ The stock recharged with a fresh upward

momentum and rallied again in early Jun and
closed at RM13.00 in recent trading.

♦ Stuck between the RM12.00 support and the

RM14.00 resistance with two consecutive “doji”
candles registered on the chart, coupled with the
mixed momentum readings of late, its uptrend
appears exhausted and the stock is ready for a mild
retracement to RM12.00, in our view.

♦ However, as it still trades firmly at above the UTL

and RM12.00, its long-term uptrend remains intact.

IMPORTANT DISCLOSURES

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invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever and no

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Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more over
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Industry/Sector Ratings

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