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Malaysia rubber gloves

HEALTH CARE & PHARMACEUTICALS

EQUITY RESEARCH

Recent run sustainable? 

June 17, 2013

Unattractive valuations without clear positive catalysts in sight for the near term
Strong demand may not translate into better margins The rubber glove industry has certainly continued to see healthy demand globally, with sales volumes remaining on an uptrend. While we concur with the glovemakers’ views that demand will remain strong amid a growing population and rising healthcare awareness, we are concerned about the potentially weaker pricing power for glove manufacturers as the aggressive expansion plans being put up by each major player suggests that competition looks set to increase somewhat significantly as soon as the end of this year. While we continue to monitor closely ASP trends for the glovemakers, we maintain our view that as more nitrile (NBR) capacity comes onto the market progressively, heightened competition within the segment is likely to prompt downward revision of ASPs, resulting in less lucrative margins moving forth. Lower raw material costs to benefit, but likely to be passed on Due to lacklustre automotive industry globally, rubber prices have remained weak throughout the first half of the year. As natural rubber (NR) latex and NBR raw material account for c.50-60% of total cost of production, soft raw material prices should provide a boost to glovemakers’ earnings. Nonetheless, in line with our view highlighted in the above section that stiffer competition is likely to weaken the pricing power of glovemakers, we believe that much of the cost savings from such will be passed on to customers. Valuations appear unattractive with impressive YTD performance Owing to the H7N9 virus outbreak in China in late-March 2013, the four Malaysia-listed glovemakers have rallied between 15-34% YTD (except Supermax, at +2.6%), outperforming the KLCI’s 5.1% gain over the same time horizon. Following this, glove stocks trade between 0.7-2.7SD above their respective long-term averages, which are not cheap, in our view, considering the lack of near-term positive catalysts for the sector. Thus, we see limited upside potential for share prices from current levels. We think that Top Glove, Supermax and Kossan are currently fairly priced, but Hartalega appears to be trading at rather lofty valuations amid declining ROEs and high PEG of 2.2 on our estimates.
Fig. 1: Stocks for action
Stock HART MK KRI MK SUCB MK TOPG MK Rating Reduce Neutral Neutral ↑ Neutral Price (Jun 12) (local) 6.30 4.45 1.95 6.39 TP (local) 4.70 4.35 2.15 6.20 Potential up/dow nside (%) -25.4% -2.2% 10.3% -3.0%

Anchor themes We expect a healthy long-term demand outlook amid growing healthcare awareness and an aging population worldwide. Nonetheless, with competition set to increase in the years ahead, we see lower pricing power for glovemakers. Nomura vs consensus We are Neutral on the sector, diverging from the Bullish street view, on our expectation of mounting pricing pressure as a result of keener competition in the industry.
Research analysts Malaysia Health Care & Pharmaceuticals Celeste Yap - NSM celeste.yap@nomura.com +603 2027 6894 Bineet Banka - NSFSPL bineet.banka@nomura.com +91 22 4053 3784

↑ ↑ ↑ ↑

Source: Nomura research, Bloomberg. Note: Pricing as of 12 June, 2013. ↑ Upgrading

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Malaysia rubber gloves

June 17, 2013

Contents
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Recent run sustainable?
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Strong demand for rubber gloves…

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… but can margins stay just as strong?

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Updating our assumptions

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Valuations Risks / catalysts
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Pandemic outbreaks

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Healthcare reforms

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Hartalega Holdings Kossan Rubber Industries Supermax Corp Bhd Top Glove Corp Appendix A-1

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Nomura | Malaysia rubber gloves

June 17, 2013

Recent run sustainable?
With the exception of Supermax (+2.6% YTD), the other Malaysian-listed glovemakers (Top Glove, Kossan and Hartalega) have rallied between 15-34% YTD, significantly outperforming the KLCI’s 5.1% gain over the same time frame. While we expect rubber glove demand to remain strong globally, we remain cautious on the aggressive expansion plans by various manufacturers into the NBR segment – which in our view will likely lead to weakening pricing power and lower margins. Trading between 0.7-2.7SD above respective long-term means, on average, we do not think valuations of the glove stocks are attractive; we are Neutral on Top Glove, Supermax and Kossan, and Reduce on Hartalega.

Strong demand for rubber gloves…
We continue to see strong demand globally for rubber gloves, and the industry continues to grow at an average pace of 8-10% per year. While population growth contributes to organic growth in glove demand, increasing healthcare awareness along with rising affluence in developing countries are key drivers to the growth of the industry, too. We further believe that the ageing population worldwide will translate into a higher demand for rubber gloves in the long term, as age is likely to come with increased requirement of healthcare services – which many a time suggests higher usage of rubber gloves (please see our report Asia-Pacific Healthcare: Asia aging for more details). The (slower) nitrile wave continues It is an obvious trend that nitrile (NBR) gloves continue to gain popularity at the expense of natural rubber (NR) counterparts, particularly in developed/regions like North America and Europe. Nonetheless, in developing countries (eg, Asia and Latin America), the increase in number of NBR gloves exported by Malaysia outweighed that of NR. While North America is clearly a SR-heavy country, Europe and East Asia have a balanced mix of NR and SR gloves imports; other regions remain largely focused in NR gloves. We further note that the y-y growth rates for Malaysian SR glove exports to the US, Europe and the rest of the world have stabilised around the 25-30% region. Going forward, while we expect the NBR-switching trend to continue, we think the NBR growth rate is likely to slow further as: 1) the main glove importing country – US – is already at c.82% NBR glove usage; 2) stable / lower NR latex prices would make NR gloves more competitive, which could induce some (price sensitive) buyers to switch back into NR gloves; and 3) developing countries are likely to see the highest growth rate going forward, but appear to prefer NR gloves thus far – due to familiarity of NR latex and the more competitive NR glove prices, we believe.
Fig. 2: Malaysia exports of SR gloves
(mn prs) 12,000 10,000 8,000 6,000 4,000 2,000 0 2008 2009 2010 2011 2012 Europe N. America L. America Asia

NBR gloves continue to gain popularity in the developed world

We expect NBR to continue growing, but at a slower rate

Fig. 3: Malaysia exports of NR gloves
(mn prs) 12,000 10,000 8,000 6,000 4,000 2,000 0 2008 2009 2010 2011 2012 Europe N. America L. America Asia

Note: NBR makes up 99% of SR (synthetic rubber) gloves Source: MREPC, Nomura research

Source: MREPC, Nomura research

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S. in our view. We note that while new production lines are all interswitchable between NR and NBR gloves with minimal downtime. likely be tempted to lower ASPs in order to lure customers. Nonetheless. we expect ASPs to continue trending downward. Moreover. Indeed. The four largest glove manufacturers have.000 0 U. our concern remains on the margins of glovemakers given the keener competition coming and yet to come into play.000 5. with more of such plans in the bag for the near future. Hence. or do foresee themselves. the intensifying competition in such space will likely provide customers with higher bargaining power. it will be somewhat difficult for the other glovemakers to keep their ASPs up without risking losing some customers.Nomura | Malaysia rubber gloves June 17. Europe RoW Total 2010 2011 2012 Source: MREPC. regardless of it being in the companies’ best interests to allow prices to stay high and reap maximum profits – as demonstrated in Prisoner’s dilemma game. we opine that as more NBR capacity comes on-stream progressively throughout the year. We continue to monitor the ASP and raw material price trends closely. while maintaining our view that as some of the rather sizeable players begin to move towards competitive pricing. thus affecting the glovemakers’ ability to price such gloves at a significantly higher price than the NR counterparts. our on-the-ground survey suggests that various companies already are.000 10. 5: Malaysia exports of SR gloves y-y growth NR SR 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2009 U. producing NBR gloves at less profitable levels. glovemakers will. Drawing comparison to Prisoner’s dilemma game We believe that as all players step up their productions in the NBR division. planned to add on some 15bn pcs capacity of NBR gloves in calendar 2013 alone.000 20. Nomura research … but can margins stay just as strong? In this regard. Holding to our view of mounting pricing pressure Judging from the recent quarterly results. together. 4: NR still dominant in most regions (2012 data) mn pcs 30. margins appear to have. all of the new capacities are currently earmarked for NBR gloves. Nomura research Source: MREPC. and some seemingly contented with margins similar to that of NR gloves. East Asia EU27 North America West Asia Non-EU Africa Oceania ASEAN South America South Asia Others Fig. as its “scarcity factor” would be gone with the large additional capacity coming onto the market. generally. held up better than we have expected so far – boosted also by the favourable raw material prices. 2013 Fig.000 25. This suggests that the high-margin days of NBR glove-manufacturing could be no longer. We expect end users to gain from the NBR expansions as it is unlikely for manufacturers to cooperate and keep NBR as a high-margin product 4 . Riding on the swing onto the NBR bandwagon back in 2011 when NR latex prices went through the roof. all major glovemakers are now aggressively expanding into the NBR glove segment. we do not downplay the visibility of demand for rubber gloves coming from across the world. reflecting both easing raw material costs and also declining margins due to keener competition in the NBR space.000 15.S.

Fig. we also roll forward our earnings base for Kossan.Nomura | Malaysia rubber gloves June 17. We also note that while NBR raw materials are quoted in USD. thus the impact of exchange rates on earnings from the raw material perspective is less direct. 6: Nomura’s in-house currency forecasts 1Q12 MYR / USD THB / USD THB / MYR 3. Source: ANRPC. Now expecting a weaker ringgit Being an export-driven industry.60 10. providing a natural hedge to glovemakers.60 9. We also lower our average grossed-up NBR raw material price assumption to 553/563 sen/kg for FY13F/FY14F.80 10. Supermax and Top Glove to FY14F. that of NR latex is quoted in MYR.02 28.10 28. others forecast.60 10.50 9.02 28. Taking into account these changes. Nomura Global Economics Raw material prices weaker than expected… Due to a large newly planted and re-planted area of rubber trees. from 630/620 sen/kg. Nomura research Fig.44 2012 3. Source: Bloomberg. we have seen flattish prices over this year’s wintering period while NR latex prices have remained below the 600sen/kg mark since early-April.26 3Q13F 3.80 10. owing largely to the weak automotive industry globally.80 10. we have expected NR latex prices to remain soft in the mid-term on the back of ample upcoming supply. Our latest exchange rate forecasts are shown in the table below.00 1Q13 3. 8: NR latex price typically peaks around February in the absence of other factors sen / kg Newly planted area Re-planted area 1.06 30. we understand that glove manufacturers generally do convert their costs into USD before adjusting their ASPs to take into account any cost savings / inflation. 2013 Updating our assumptions We fine-tune the assumptions we have applied to the key inputs into our models. raw material prices and capacity expansions.52 Note: Numbers in bold are actual values. Forecasts are end of period and modal. including exchange rates.00 3Q12 3. Fig.05 28. Source: CEIC. We hence revise downwards our average NR latex price assumption to 590/615 sen/kg for FY13F/FY14F. Nomura research Jan-13 5 .06 30. Table reflects data available as of 6 June 2013.30 9.00 2013F 3. However.000 800 600 400 200 0 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Note: Pink highlights mark the end of February for each year.80 9.92 27. Nonetheless.07 4Q12 3.18 31.38 4Q13F 3. from 608/611 sen/kg.44 2014F 2. goods sold are quoted in USD while the bulk of the costs are dealt with in MYR.10 29.70 9.50 9. arriving at our new TPs for each stock. the relative strength of the ringgit to the greenback therefore has an impact on the glovemakers’ earnings.200 1.94% of the world’s NR production based on our estimates.07 2Q12 3.45 2Q13F 3.06 30.06 30. 7: New and re-planting of rubber trees by ANRPC countries '000 ha 600 500 400 300 200 100 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Note: The Association of Natural Rubber Producing Countries (ANRPC) account for c.

000. and 2) the different business strategy deployed by the firms – Hartalega and Kossan are relatively more focused on quality and do not adjust ASPs as aggressively.200 1. Nomura research EBITDA margin (%) (LHS) Avg EBITDA margin (%) (LHS) Avg NR latex price (RHS) sen/kg 1.000 14. we note that Top Glove and Supermax are the ones which appear to be more sensitive to raw material prices. muting somewhat the positive effect that softer raw material costs could have on earnings. NR latex price – Supermax % 40 30 20 10 0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 Source: Company data. While this is the case.000 12. 10: TOCOM rubber stocks vs. Such is likely to be especially true in the current operating environment where we expect the more intense competition to weaken the glovemakers’ pricing power.000.000.000 800 600 400 200 - Source: Company data.000 4.000 0 8/31/2006 200 800 MYR sen 1.200 1.000.000 65. Nomura research … but cost savings are likely to be passed on As raw materials comprise the largest chunk of each glovemaker’s cost of production.000. Bloomberg. Among the four listed glove manufacturers. Fig. CEIC. margins of the two firms are inversely correlated with average latex prices. lower NR latex and nitrile cost are likely to generally mean improved profits and margins for the manufacturers. Kossan on the other hand does not display the same pattern.200 TOCOM rubber stock (LHS) NR latex prices (RHS) 1. 11: EBITDA margins vs. in comparison.000.000 10.000 800 600 400 200 0 EBITDA margin (%) (LHS) Avg EBITDA margin (%) (LHS) Avg NR latex price (RHS) sen/kg 1. while Top Glove and Supermax appear to be more keen to compete on price. Bloomberg. NR latex price – Top Glove % 25 20 15 10 5 0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Fig. We attribute such observation to 1) the NR-heavy product mix of Top Glove and Supermax. 9: Automotive industry a main driver for NR latex prices Motor vehicles Production (LHS) 90.000 75. As depicted in the charts below. while that of Hartalega is rather the opposite of that of Top Glove and Supermax. we expect the bulk of cost savings to be shared with the customers. Nomura research Source: Bloomberg.000. 12: EBITDA margins vs.000 Natural Rubber price (MYR/KG RHS) 16 14 12 10 8 6 4 2 0 Fig.000 80.000.000 85.000 70. NR latex prices Short ton 16.000.000 2. and the NBR-focused Hartalega. 2013 Fig. Thus.000 8.000 60.Nomura | Malaysia rubber gloves June 17. rather balanced mix of Kossan. we note also that ASPs are always adjusted in tandem with the change in raw material costs.000 55. Nomura research 6 .000 50.000 600 400 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 0 8/31/2007 8/31/2008 8/31/2009 8/31/2010 8/31/2011 8/31/2012 Source: OICA.000 6.

000 800 600 400 200 - EBITDA margin (%) (LHS) Avg EBITDA margin (%) (LHS) Avg NR latex price (RHS) sen/kg 1.000 800 600 400 200 - Source: Company data. 2013 Fig. 13: EBITDA margins vs. Bloomberg. 14: EBITDA margins vs.200 1. Nomura research 7 . NR latex price – Hartalega % 60 50 40 30 20 10 0 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 Source: Company data.Nomura | Malaysia rubber gloves June 17.200 1. NR latex price – Kossan % 20 15 10 5 0 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 Fig. Bloomberg. Nomura research EBITDA margin (%) (LHS) Avg EBITDA margin (%) (LHS) Avg NR latex price (RHS) sen/kg 1.

39 15.7-2. following the recent rally.55 9.40 13. Nonetheless. 2013 Valuations The Rubber Gloves sector has significantly outperformed the KLCI’s 5. Supermax and Kossan appear fairly priced.63 15.3% 8.78 6. while Top Glove. Nomura research Fig.36 9.75 13.3% 8.2% 9. Nomura estimates 8 .21 4.0% 14. in our view. We note that most of the gain has been accumulated since April.30 17. with its mere 2.0% 16. Supermax (upgraded from Reduce) and Kossan.17 1.8% 5.9% 15.16 12-Jun-13 6. we believe Hartalega’s valuations are lofty.90 4. with the exception of Supermax.1% gain YTD.6% 3y Avg 15.and bottom-lines for the glovemakers.3% 0.39 3.1% 15. 16: Earnings growth estimates FY13F Top Glove Nomura Consensus Supermax Nomura Consensus Kossan Nomura Consensus Hartalega Nomura Consensus 15.35 2.2% 13.8% 10.3% 2.73 9.94 14.6% gain.82 8.1% 14.21 1.9% 8.6% 4.8% 11.95 8.93 8.4% 10.6% 12.6% 8.70 1.4% 9. while we maintain our Reduce rating on Hartalega.99 1.79 33. set to look less attractive with declining ROEs amid the entrance of all other major glovemakers into its dominant NBR segment.Nomura | Malaysia rubber gloves June 17.0% 19.2% 13. with the onset of the first H7N9 case in China back in late-March 2013.70 0.51 Source: Bloomberg. 15: Valuations at a glance Based on consensus (Bloomberg) estimates 31-Dec-12 Top Glove Share price 1y fwd P/E Supermax Share price 1y fwd P/E Kossan Share price 1y fwd P/E Hartalega Share price 1y fwd P/E 4.77 0.8% 11.5% 11.03 31-Mar-13 5.8% 12.8% 11.1% 12. Taking into account current trading multiple and growth prospects.3% 15.47 32.81 YTD gain 14. Thus we have a Neutral rating on Top Glove.68 8.5% 0. We thus think that the favourable costs are already priced into the stocks at current levels. while the other three listed companies have rallied 15-34%.61 1.8% 13. considering the fact that its profitability is. glove stocks are now trading between 0.3% 14.4% 1.0% 11. We believe that other factors driving the recent run likely include the favourable raw material prices and the weakening ringgit versus the US dollar – which will both contribute to better top.1% 7. Fig.5% 8.77 3.68 21.7SD above their respective long-term means – suggesting that the stocks are not cheap.98 5.45 10.38 FY14F FY15F 3y CAGR PEG (FY14F) Source: Bloomberg.

338 1.7 1.5 3.15 4.5 1.50 Target Price (Local) 6. Nomura research 9 .9 CY14F 15.1 2.8 18.7 (34.2 3.5 2.0 23.6 31.9 20.3 1.252 393 2.8 NEUTRAL 18.2 1.46 5.0 1.6 2.0 1.1 11.9 10. 34.9 3. N.1 1.5 20.6 1.8 P/B (x) CY13F 2.9 14.3 1.6 19.3 17. N.5 1.2 26.6 2.1 18.3 1.30 18. N.0 3.2 27.4 N.75 102.059 4.3 7.5 NA NA Com panies Malaysian glove-m akers Top Glove Corp Supermax Corp Kossan Rubber Industries Hartalega Holdings International glove-m akers Ansell Cardinal Health Kimberly-Clark Corp Semperit AG Sri-Trang Agro 3M Co Other health-related Mani Inc Nipro Corp Shandong Weigao Microport Scientific Corp Mindray Medical Intl Ltd-Adr Bangkok Dusit Med Service Bumrungrad Hospital Pub Co Ticker TOPG MK SUCB MK KRI MK HART MK ANN AU CAH US KMB US SEM AV STA TB MMM US 7730 JP 8086 JP 1066 HK 853 HK MR US BGH TB BH TB N.4 2. 19.0 17.4 2. 17: Local and regional comparables Mkt cap (USDm n) 1.7 3.9 3.03 3.9 2.9 1.4 NA 2.8 17.8 15.0 14.4 NA NA CY12 2.3 2.9) 5.2 15.9 6.0 CY14F 3.0 10.3 0.8 2.3 1.R.8 3.16 96.1 1.1 Yield (%) CY13F 2.Nomura | Malaysia rubber gloves June 17.21 147.3 14.264 423 453 1.8 3.0 10.0 7.0 CY14F 2.7 15.1 5.243 424 554 75.4 9.9 1.2 2.7 3. (5.70 16.4 6.6 14.2) N.8 20.2 16.R.R.5 CY13F 14.R.0 1.8 15.8 1.3 3.6 15.1 5.4 2.9 15.9 10.1 2.7 NA NA CY12 18.4 19.4 6.3 1.7 20.5 1.2 3.8 1.6 1. (0.46 13.3 9.0 14.0 13.180 1.9 16.9) NEUTRAL 146.7 8.7 2.5) 23.5 3.769 7.R.8 11.9 3.1 15.7 3.5 BUY 13.8 2.6 12.8 2.1 2.087 5.1 23.1 11.3 2.1 NA 3.4 CY14F 3.95 4.R.4 2.5 13.R.5 47.7 13.5 10.3 3.2 14.8 28.9 22.8 1.1 5.2 0.5 16.35 4.3 21.0 (2.7 16.7 11.7 2.81 27.0 2.6 33.75 EPS grow th (%) Rating NEUTRAL NEUTRAL NEUTRAL REDUCE NEUTRAL N.8 4.4 17.0 2.490 16.39 1.0 11.07 47.5 3.6 12.5 16.169 9.1 5.6 1.00 NA NA NA 166.7 14.10 NA NA NA NA NA NA 730.20 2.9 1.0 16. 2013 Fig.5 2.5 1.7 1.3 2.3 Note: Pricing as of 12 June 2013 Source: Bloomberg (for Not rated stocks).8 8.R.7 4.9 5.800 Share Price (Local) 6.5 2.6 6.5 N.6 2.1 17.9 3.8 NA NA CY12 3.6 P/E (x) CY13F 17.8 1.0 6.3 2.7 2.0 1.454 1.3 6.2 1.4 7.00 76.1 2.5 5.120 37.8 1. N.3 3.8 12. CY12 9.476 2.7 12.40 109.8 21.45 6.5 18.0 2.3 2.R.2 1.84 41.8 16.6 16.9 13.1 3.1 2.

a large majority of the world’s population has a long way to go in terms of improving the healthcare regulations.6 (1. the gap between glove usage of the different countries. again. We view any healthcare reform as a longer-term catalyst for the rubber gloves sector. as per a China Daily report dated June 10. We have.Nomura | Malaysia rubber gloves June 17. we believe that the Chinese government is working towards this direction with its 12th Five-Year Plan (2011-15) depicting China’s intention to improve the country’s healthcare standards including the prevention and control of major diseases outbreaks and communicable diseases. 19: Market cap-weighted share price performance vs. the largest driver of share price performance for the rubber glove sector as a group has been pandemics – both with the SARS (2003-06) and the H1N1 (2009-10). given the large population in the emerging countries (particularly China and India). On this front. number of new H7N9 cases reported MYR 9 8 7 6 5 4 3 2 1 0 Jan 00 Jan 01 Jan 02 Top Glove Kossan Bulk latex (inverted) x10 Supermax Hartalega % 14 Mcap weighted performance (LHS) New H7N9 cases (RHS) 14 12 12 SARS H1N1 10 10 8 8 6 6 4 4 2 2 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 0 10-Apr-13 11-Apr-13 12-Apr-13 13-Apr-13 14-Apr-13 15-Apr-13 16-Apr-13 17-Apr-13 18-Apr-13 19-Apr-13 20-Apr-13 21-Apr-13 22-Apr-13 23-Apr-13 24-Apr-13 25-Apr-13 26-Apr-13 27-Apr-13 28-Apr-13 29-Apr-13 30-Apr-13 3-Apr-13 4-Apr-13 5-Apr-13 6-Apr-13 7-Apr-13 8-Apr-13 9-Apr-13 0 -2 -2 Source: Bloomberg. Though we do not expect such to happen in the near future. Thus. 2013). News reports. However. Based on glove imports and population data. again. Thus. we note that the H7N9 is beginning to quiet down with only 4 new cases reported between April 30 and June 10 (current total 131 cases. We opine that the H7N9 virus touching off a pandemic outbreak will be the largest immediate positive catalyst for the sector. we put together the RHS chart below which shows. we think that a spike in glove demand could only be seen if hard regulations are put in place by the government. 2013 Risks / catalysts Pandemic outbreaks In the past. Fig.7% that of the US). We note the vast discrepancy between glove usage and population between parts of the world (refer LHS chart). assuming that glove usage in China doubles to 2. Nomura research Healthcare reforms A catalyst from the more fundamental perspective will be any healthcare reforms introduced. While rising affluence could lead to higher healthcare awareness. particularly in the populous countries / regions. we see a large latent demand in the region. 10 . – less than 1% that of the US. we cannot rule out completely any chance of this flu worsening further. 18: Share price correlation with pandemics Fig. Nomura research Source: Bloomberg.3 pcs p. as glove demand is likely to spike up globally as a result.a. We estimate that the current glove usage per capita of China is close to 1. which suggests that using glove usage as a gauge for hygiene awareness. seen such an effect over the last two months when China began to report a spurt in cases of the H7N9 virus. that would imply an additional demand of more than 2bn pieces of gloves each year.

World Bank. 20: Discrepancy between glove usage and population 100% Fig. Nomura research 11 . Nomura research Source: World Bank. World Trade Atlas. 2013 Fig.S.Nomura | Malaysia rubber gloves June 17. EU27 % of global glove usage (2009) RoW 140 120 100 80 60 40 20 0 US Hong Kong Australia UK Japan Brazil Mexico Indonesia China India Source: MREPC. 21: Per capita glove usage pcs 160 80% 60% 40% 20% 0% % of world population (2009) U.

yap@nomura.9 9.73c 7.15 Closing price June 12.6 N/A N/A N/A N/A 26.5%. maintain Reduce  June 17.4 17.30 -25. we see lower pricing power for glovemakers.70.2 net cash net cash net cash 1.1 5. Reduce MYR 4. EPS growth (%) FD normalised P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%) 1. important disclosures and the status of non-US analysts.8 1.04sen to a target multiple of 14.com +91 22 4053 3784 31 Mar Currency (MYR) FY13 Actual Old FY14F New Old FY15F New Old FY16F New Revenue (mn) Reported net profit (mn) Normalised net profit (mn) FD normalised EPS FD norm. with additional capacity of c. We arrive at our TP of MYR4.8 27. we think that valuations are lofty in light of a more crowded NBR glove market. Catalyst: Margin downtrend likely as ASP continues to weaken We note that all major glovemakers are expanding aggressively in the nitrile (NBR) market.4 29.9 1.0 33.NSM celeste.0 15.7 net cash Source: Company data. which should see pricing power come under pressure. Nomura vs consensus Our TP is 16% below consensus on expectations of lower margins moving forth and TP being pegged to a lower P/E multiple.2x – the average one-year forward P/E it has traded at in the past 12 months. Thus we remain cautious on NBR-focused glovemakers as we believe that margins are likely to see a downward trend in the near term. in our view.0 2. incorporating our updated raw material price assumptions.1 12.7 4.636 322 322 39. While demand is likely to remain strong for rubber gloves.1 4.banka@nomura. Research analysts Malaysia Health Care & Pharmaceuticals Celeste Yap .4 0.70. capacity estimates and exchange rate forecasts.04sen. While we acknowledge Hartalega’s unparalleled efficiencies.8 10. with competition set to increase in the years ahead. . Taking into account the new inputs.9 13.4%/9.2 2.67c 15.1x FY14F EPS of 33. 2013 Potential downside Valuations unattractive as dominant NBR segment sees keener competition Action: Raising TP to MYR4. Nomura estimates See Appendix A-1 for analyst certification. we adjust upward our FY13F/FY14F net profit by 6.KL HART MK EQUITY RESEARCH Raising TP to MYR4.com +603 2027 6894 Bineet Banka .8 1.376 254 254 34.4% Anchor themes We expect healthy long-term demand outlook due to growing healthcare awareness and an aging population worldwide. We do not use a long-term average as Hartalega saw a structural break in valuations back in 2012.NSFSPL bineet. Key company data: See page 2 for company data and detailed price/index chart.032 235 235 31.6 2.1 6.165 236 236 32.0 19.5 27. Nonetheless.29c 6.70 MYR 6. we think the stock is expensive at current levels.9 N/A N/A N/A N/A 1.209 251 251 33. amid intensifying competition and declining ROEs.15bn pcs slated to be put on-stream by the four main players alone in calendar 2013.04c 4. we think heightened competition will continue to prompt manufacturers to lower ASPs as customers enjoy better bargaining power. 2013 Rating Remains Target price Increased from 4.70 by pegging its FY14F EPS of 33. which is a lofty valuation in our view.72c 12. maintain Reduce We revise our TP upwards to MYR4.Hartalega Holdings HEALTH CARE & PHARMACEUTICALS HTHB.3 19.1 1.15.70 from MYR4.5 N/A N/A N/A N/A 28. Valuation: Expensive amid stiffer competition in the NBR space Hartalega shares currently trade at 19.47c 7.351 279 279 35.0 2.

9 2. dividend payout policy of more than 45% 26.2 36.9 45.7 6.85 0.9 32.0 22.2 31.6 33.8 17.0 12.1 14.5 17.4 16.0 17.9 6.0 9.1 10.1 4.15 35.1 17.0 66.9 14.1 15.6 10.13 32.7 19.0 7.72c 1.4 15.8 29.0 27.9 17.7 31.8 19.65c 27.1 17.7 22.6 5.47c 35.9 15.05 0.7 23.21 0.5 17.10c 31.57 0.7 22.67c 1.65c 27.1 19.1 31.4 31.04c 33.04c 33.72c 39.0 15.4 19.473.1 15.9 1.7 22.8 36.8 14.12 33.83 1.0 18.1 11.47c 35.9 31.0 21.7 45.1 19.2 38.0 27.2 26.8 2.6 22.5 3.1 5.2 2.6 2.032 -731 301 6 307 339 -32 307 -1 FY14F 1. 2013 Key data on Hartalega Holdings Income statement (MYRmn)  Year-end 31 Mar Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) FD normalised P/E at price target (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (MYR) Norm EPS (MYR) Fully diluted norm EPS (MYR) Book value per share (MYR) DPS (MYR) Source: Company data.04c 1.3 2.1 5.7 51.9 25.3 3.3 We expect margins and returns above industry average.8 0.7 7.53c 0.9 4.3 11.0 14.636 -1.0 44.3 3.5 45.3 45.4 21.8 1.9 7.1 14.4 1.209 -832 377 -53 324 377 -53 324 -1 FY15F 1.5 29.5 31. Nomura research   (%) Absolute (MYR) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (MYR) 3-mth avg daily turnover (USDmn) Major shareholders (%) Hartalega Industries Sdn Bhd Budi Tenggara Sdn Bhd 1M 3M 12M 10.4 30.2 46.7 23.5 19.18   13 .16 39.7 12.2 31.0 45.8 22.1 2.7 27.1 4.2 12.0 Source: Thomson Reuters.1 27.9 26.9 11.9 29.1 14.6 10.31 258 -57 201 0 306 -71 235 0 323 -72 251 0 361 -82 279 0 421 -99 322 0 201 201 -91 110 235 235 -91 143 251 251 -113 138 279 279 -126 153 322 322 -145 177 50.8 17.0 23.0 5.5 15.0 30.6 12.Nomura | Hartalega Holdings June 17.4 10.6 5.47c 1.351 -930 421 -58 363 430 -68 363 -1 FY16F 1.0 13.9 21.8 20.0 64.145 492 -69 423 505 -82 423 -1 Source: ThomsonReuters.8 22.4 5. Nomura research Notes 22.1 11.6 4.8 13. Nomura estimates Relative performance chart (one year) FY12 931 -634 297 -36 260 289 -29 260 -2 FY13 1.6 19.38 0.1 32.8 17.6 19.4/3.8 14.9 15.0 6.8 20.10c 32.72c 39.9 30.2 31.9 16.4 7.

8 47.096 13 93 15 121 8 0 50 179 1 0 379 537 FY15F 38 0 176 125 0 338 1 876 7 49 1.096 1.5 38.8 51.8 33. 2013 Cashflow (MYRmn)  Year-end 31 Mar EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt Source: Company data. long-term capacity expansion plans which should see capacity more than triple upon completion (estimated completed in FY21F) Balance sheet (MYRmn)  As at 31 Mar Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle Source: Company data.9 38.7 14 .8 2.2 36.2 44.4 45.9 46.9 55.2 50.7 42. Nomura estimates   FY12 289 -37 -52 200 -35 165 0 0 0 0 -25 140 -87 0 0 0 -7 -94 46 117 163 -139 FY13 339 38 -59 317 -18 299 0 0 0 0 -176 123 -99 0 0 0 -5 -104 19 163 182 -170 FY14F 377 -61 -73 244 -261 -17 0 0 0 0 0 -17 -113 0 0 0 20 -92 -110 182 73 -52 FY15F 430 -20 -83 327 -250 77 0 0 0 0 0 77 -126 12 0 0 1 -112 -35 73 38 -16 FY16F 505 -42 -100 363 -250 113 0 0 0 0 0 113 -145 12 0 0 1 -132 -18 38 19 3 Notes Significantly higher capex for large.9 46.2 2.Nomura | Hartalega Holdings June 17.42 339.42 149.2 54.7 40.0 43.489 13 129 15 157 9 0 50 216 2 0 403 868 Notes Reducing cash pile in line with high capex.271 13 101 15 129 8 0 50 188 1 0 391 691 FY16F 19 0 212 158 0 389 1 1.489 4.082 1.8 3.87 270.63 285.2 42.8 net cash net cash net cash net cash net cash net cash net cash net cash 0.48 310.3 44.7 2. expected higher earnings should move Hartalega back to net cash position by FY16F 620 758 766 936 916 1.271 1.043 7 49 1.8 45.01 0. Nomura estimates FY12 163 0 117 98 0 378 0 370 0 10 758 13 60 12 85 12 0 41 138 1 0 183 437 FY13 182 0 125 87 0 394 1 486 7 49 936 8 93 15 115 4 0 50 170 1 0 367 399 FY14F 73 0 156 117 0 346 1 693 7 49 1.5 42.271 1.

25 5.95 2016F 6. We have previously attached a target multiple of 12.5%. reflecting both a weaker raw material price and also lower profit margins. we think that the lack of diversification of its revenue source potentially posts inherent risks to the company. Our changes of inputs are summarised in the table below: Fig. in our view. 2013 Raising TP to MYR4. we adjust our FY14F/FY15F earnings estimates upward by 6.96 6. construction of the new production facility will be sped up by building two production plants concurrently.8x for Hartalega – 1SD above its 3-year mean. and thus view its intention to diversify positively. While such a strategy has worked well for Hartalega in the past. which is the average multiple Hartalega has traded at in the past 12 months. we were impressed by the company’s ability to constantly upgrade its products and production processes via on-going R&D efforts. However. We also learned that Hartalega is looking for ways to diversify itself in terms of product offerings.10 5. Our P/E-based TP is well supported by our 10-year DCF valuation with cashflows discounted back to June 2013. 15 .19 6.70.23 6.56 2. we are thus cautious of its earnings growth prospects in the near term as pricing power is likely to come under pressure. which provides an intrinsic value of MYR4. We arrive at our new TP of MYR4.77 per share.13 5.92 Note: Nitrile prices are grossed up to the same solid content as latex for comparison purpose.88 2.95 3. Management acknowledges the fact that stiffer competition in the NBR market has prompted industry players to lower prices. and expects itself to continue dropping prices in the rest of the year. We also understand from management that Hartalega’s long-term expansion programme – the Next Generation Integrated Glove Manufacturing Complex (NGC) – has been delayed by eight months due to some setback in getting various approvals from the relevant authorities.35 6.89 2. capacity expansion is likely to be muted in FY14F. As a result. we change our target multiple to reflect the continuous improvement in the company’s operations and potential diversification as previously discussed. Taking into account Hartalega’s improved line speed and revised capacity expansion plans. maintain Reduce After a recent meeting with management.20 5. as new production lines from the NGC will only start coming into operations from August 2014. geographical region and customer base. adding production capacity by nearly 30bn pcs upon completion. Hartalega is highly concentrated in the NBR segment. As highlighted in the earlier section. while at the same time updating our raw material price assumptions and exchange rate forecasts.64 2. on the back of the previously mentioned two factors.35 6.70 by pegging our revised FY14F EPS of 33.4%/9.78 2. We note that Hartalega is currently highly concentrated on the NBR gloves segment (94% revenue). after its structural break in 2012.2x target one-year forward P/E. albeit slightly. with a small customer base of 450 names (>100 active ones).Nomura | Hartalega Holdings June 17. as per management guidance.04sen to a higher 14. We expect margins to trend downwards We note that Hartalega’s ASPs have been trending south in the past few quarters. North American and European markets (>85% revenue). 22: Input assumptions changes Input assumptions (period average) Latex prices (MYR/kg) Old New Nitrile prices (MYR/kg) Old New MYR/USD Old New Source: Nomura estimates 2014F 6.05 2015F 6. We expect construction of the NGC to be completed by FY20F.

4 +1SD = 13. 34% in FY13 down to 27% in FY16F. We further note that we expect Hartalega to see ROE decline from 36% in FY12. we opine that its current valuations are expensive – particularly given the upcoming keen competition in the NBR segment which has previously been dominated by Hartalega. Risks to our view Upside risks • New. As well.Nomura | Hartalega Holdings June 17.6 Mean = 10. • Faster-than-expected completion of its NGC expansion plans. owing to shrinking EBIT margins and lower asset turnover.2 on our estimates suggests that current lofty valuations appear to be somewhat unjustified for its growth potentials. significant capacity expansion plans which will continue to boost capacity and earnings. Nomura research While we believe that Hartalega deserves to trade at a premium to sector average P/E multiple.1 Source: Bloomberg. a PEG ratio of 2. 16 . or innovative product types which could push up margins. • Further weakening of NBR raw material prices. 2013 Fig. 24: Historical one-year forward P/E P/E (x) 18 16 14 12 10 8 6 4 2 May 08 May 09 May 10 May 11 May 12 -1SD = 7. 23: Historical P/E band chart MYR 7 6 5 4 3 2 1 0 May 08 May 09 May 10 May 11 May 12 17x 14x 11x 8x 5x Fig. Nomura research Source: Bloomberg. • Higher/lower-than-expected pass-on rates of cost inflation/savings.

in our view Action: Raising TP to MYR4.1 3. in our view Kossan shares currently trade at 10.66c 12.449 129 129 40.8 N/A N/A N/A N/A 18.0 18. We think such a valuation is fair as it is in line with the industry’s long-term average one-year forward P/E.3 N/A N/A N/A N/A 19.2 9.8 3.3 2.78c 12.705 155 155 48.7SD above its long-term mean of 9.3 1.6 1. give glovemakers better pricing power.1 5.5%.KL KRI MK EQUITY RESEARCH Raising TP to MYR4. Major delays in large expansion projects or a sudden surge in demand will.6 net cash net cash Source: Company data.0 11.33c 6. as we update our raw material price assumptions.35 by pegging its FY14F EPS to a target multiple of 10x.35.9 N/A N/A N/A N/A 1. with competition set to increase in the years ahead. Nonetheless.Kossan Rubber Industries HEALTH CARE & PHARMACEUTICALS KRIB. 2013 Potential downside Fundamentals intact but recent rally leaves behind limited upside.0 net cash 16. Valuation: Fairly priced at current levels.35 from MYR3.6 2.45 -2.0 2.3 5.524 138 138 43. .35 MYR 4.9 18.NSM celeste. Despite foreseeing better earnings to flow through for Kossan.78c 21.1 1.3x FY14F EPS of 43. Key company data: See page 2 for company data and detailed price/index chart.com +603 2027 6894 Bineet Banka .80.35.36sen – nearly +0. our TP is 7% below consensus as we think Kossan is already fairly priced at current multiples. we think that its current share price upside is somewhat limited post its 27% run-up since the start of April. while rolling forward earnings to FY14F.06c 14.0 1.7%/7.NSFSPL bineet. EPS growth (%) FD normalised P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%) 1. our concern lies mainly on the weakening pricing power for glovemakers as upcoming supply is likely to result in heightened competition. however.234 102 102 32.1x. we adjust upward our net profit estimates for FY13F/FY14F by 2.1 19.9 1.com +91 22 4053 3784 31 Dec Currency (MYR) FY12 Actual Old FY13F New Old FY14F New Old FY15F New Revenue (mn) Reported net profit (mn) Normalised net profit (mn) FD normalised EPS FD norm. maintain Neutral  June 17. Nomura estimates See Appendix A-1 for analyst certification.5 6.368 124 124 38. Nomura vs consensus While our FY13F/FY14F earnings estimates are in line with consensus.2% Anchor themes We expect a healthy long-term demand outlook amid growing healthcare awareness and an aging population worldwide.4 net cash 1.8 10.80 Closing price June 12.6 13. important disclosures and the status of non-US analysts. 2013 Rating Remains Target price Increased from 3. Research analysts Malaysia Health Care & Pharmaceuticals Celeste Yap . Catalyst: Any slowdown in upcoming supply could mean higher pricing power and better margins While we believe that demand for rubber gloves is likely to remain on the back of increasing healthcare awareness. we thus maintain our Neutral rating.5 1.yap@nomura. maintain Neutral We revise our TP upwards to MYR4.9 8.banka@nomura.343 120 120 37. capacity estimates and exchange rate forecasts. Taking into account the new inputs. Neutral MYR 4. resulting in better-than-expected margins and profits.36c 11. we see lower pricing power for glovemakers.6 4.9 19. We arrive at our TP of MYR4.

6 1.5 46.9 5.2 9.6 14.36c 2.9 15.2 21.9 14.3 8.66c 48.78c 38.022 502 -314 0 187 240 -52 187 -10 0 0 177 -37 140 -2 0 0 138 0 138 -55 83 FY15F 1.36c 43.2 27.705 -1.3 15.2 19.154 552 -339 0 213 269 -57 213 -12 0 0 201 -43 158 -3 0 0 155 0 155 -70 85 Source: ThomsonReuters.3 2.8 3.6 49.3 10.3 39.6 48.5 33.8 12.8 4.2 2.1 -21.0 6.1 10.4 -21.0 15.8 30.0 21.6 10.0 3.7 12.99c 27.2 18.4 10.6 8.1 35.7 1.3 10.2 12.2 9.0 4.17 48.2 19.8 12.14 43.0 14.2 19.234 -820 414 -269 0 145 190 -45 145 -6 0 0 138 -34 105 -3 0 0 102 0 102 -29 73 FY13F 1.7 11.0 21.1 18.3 9.9 13.7 21.1 21.3 18.5 30.0 10.8 18.3 454.1 6.8 11.4 45. Nomura research Notes 15.9 13.3 3.36c 43.0 1.9 13.4 1.97 1.9 7.90 0.6 34.42 0.6 10.06c 32.4 30.9 11.1 8.6 5.09 38.0 15.03 51.1 -19.3 32.5 11.15 0.5 11.5 13.2 Source: Thomson Reuters.5 12.1 9.4 12.7 4.5 32.0 19.0 8.Nomura | Kossan Rubber Industries June 17.2 14.99c 27.3 29. with management’s intention to further raise it to 50% 4.9 22.0 4. Nomura research   (%) Absolute (MYR) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (MYR) 3-mth avg daily turnover (USDmn) Major shareholders (%) Kossan Holdings Sdn Bhd 1M 3M 12M 10.368 -903 465 -298 0 168 217 -49 168 -9 0 0 159 -33 125 -2 0 0 124 0 124 -43 80 FY14F 1.9 13. Nomura estimates Relative performance chart (one year) FY11 1.5 11.6 11.1 21.7 1.8 11.5 9.3 28.8 9.66c 2.99c 1.0 Dividend payout policy increased from 25% to 35-40%.0 4.9 9.06c 32.1 1.1 13.9 15.7 8.0 16.06c 1.5 15.0 21.78c 38.22   18 .8 5.78c 2.9 19.9 12.9 11.0 40.1 6.6 17.4 11.9 15.70 0. 2013 Key data on Kossan Rubber Industries Income statement (MYRmn)  Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) FD normalised P/E at price target (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (MYR) Norm EPS (MYR) Fully diluted norm EPS (MYR) Book value per share (MYR) DPS (MYR) Source: Company data.3 34.5/2.0 15.6 13.9 15.0 11.4 1.11 32.3 24.3 2.3 2.56 0.1 9.5 11.9 2.3 9.66c 48.524 -1.1 -12.090 -761 329 -209 0 120 161 -41 120 -7 0 0 112 -22 91 -1 0 0 89 0 89 -35 54 FY12 1.

4 2.6 49.0 55.67 22.0 68.6 net cash net cash net cash net cash 51.67 21.91 18.Nomura | Kossan Rubber Industries June 17.2 66. Nomura estimates   FY11 161 -58 -56 46 -40 6 0 0 0 0 -8 -1 0 0 -12 0 -20 -31 -33 81 48 108 FY12 190 -36 -61 93 -83 10 0 0 0 0 2 13 0 0 43 0 -10 33 46 48 94 99 FY13F 217 16 -94 138 -60 78 0 0 0 0 2 80 0 0 8 0 0 8 87 94 181 11 FY14F 240 -37 -96 106 -70 36 0 0 0 0 2 38 0 0 17 0 0 17 55 181 236 -21 FY15F 269 -23 -117 129 -70 59 0 0 0 0 3 62 0 0 23 0 0 23 85 236 321 -75 Notes Management expects MYR70-80mn capex in the next two years Balance sheet (MYRmn)  As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle Source: Company data.5 66.3 69.091 FY14F 236 0 218 209 5 667 0 543 5 0 0 1.362 Notes 1.8 0.7 76.3 52.9 0.4 51.5 19 .52 16.091 146 139 9 294 46 0 50 390 14 0 160 530 -4 687 1.3 70.8 48.362 160 178 9 347 86 0 50 483 19 0 160 703 -4 859 1.216 153 153 9 315 63 0 50 428 16 0 160 615 -4 771 1. Nomura estimates FY11 48 0 156 164 3 371 0 433 5 0 0 809 130 103 8 242 26 0 34 302 9 0 160 339 -2 497 809 FY12 94 0 217 149 5 464 0 514 5 0 0 984 155 115 9 278 38 0 50 366 13 0 160 448 -4 605 984 FY13F 181 0 195 179 5 561 0 525 5 0 0 1.12 18.216 FY15F 321 0 243 232 5 801 0 556 5 0 0 1.0 66.0 68.3 69.4 55.9 52.7 52.6 1. 2013 Cashflow (MYRmn)  Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt Source: Company data.9 2.4 0.1 49.53 16.05 1.5 69.30 17.0 1.

22 6. as we saw it as a laggard with potential upside to valuations. which Kossan has managed to and should continue to bring on-stream.7%/7.36sen to a 10x target one-year forward P/E.35 with a Neutral rating.31 6. We cross-check our P/E-based TP with a 10-year DCF valuation with cashflows discounted back to June 2013. 2013.63 2.90 6.Nomura | Kossan Rubber Industries June 17.3x FY14F EPS – nearly +0. As a result of the aforementioned changes.11 5.97 2015F 6.1x. 2013 Raising TP to MYR4.25 5. Our changes of inputs are summarised in the table below: Fig.08 5.96 3. since the start of April.72 2. we think Kossan is currently fairly priced at 10. maintain Neutral Accounting for the new capacity.35. hitting an all-time high of MYR4. resulting in lower cost of goods sold for Kossan. We peg our revised FY14F EPS of 43.20 5.07 2014F 6. With its recent run-up. we believe that current multiples are fair and see limited upside to share price. Recent rally leaves Kossan fairly priced. However we expect cost savings to be shared with customers amid competitors’ willingness to produce at lower margins in light of increased competition in the glove-making industry. 20 . Kossan has rallied a rather significant 27%. where Kossan’s net profit grew 70% y-y in 2010. Hence. we adjust upwards our estimates for FY13F-FY15F sales volumes.30 6. in our view We initiated on the Rubber Glove sector back in January 2013 with Kossan as our top pick. we revise downwards our estimates for raw material input prices. alongside its improvement in production efficiencies. which provides an intrinsic value of MYR4.53 2.7SD above its long-term mean of 9.50 on June 11.92 Note: Nitrile prices are grossed up to the same solid content as latex for comparison purpose.5%. we revise our FY13F/FY14F earnings upwards by 2.15 6.88 2. arriving at TP of MYR4. We note that the last time Kossan traded at such levels was back during the outbreak of H1N1 in 2009/10. Nonetheless. 25: Input assumptions changes Input assumptions (period average) Latex prices (MYR/kg) Old New Nitrile prices (MYR/kg) Old New MYR/USD Old New Source: Nomura estimates 2013F 6.90 2.66 per share. With NR latex prices being weaker than we have initially expected. consistent with the industry’s long-term average.

2013 Fig.2 3.0 2.6 * Hartalega FY13F=FY14F.4 Source: Bloomberg.9 2. and intends to raise it further to 50%. 21 . • Better-than-expected earnings contribution from TRP segment from an improved automotive outlook or Indonesian venture which would likely lower labour costs.8 4.1 +1SD = 11. Downside risks • An unexpected surge in latex prices.9% from FY13F-FY15F are among the highest in the industry. 26: Historical P/E band chart MYR 8 7 6 5 4 3 2 1 0 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 11x 8x 5x 17x 14x Fig.Nomura | Kossan Rubber Industries June 17. On this note. 27: Historical one-year forward P/E P/E (x) 18 16 14 12 10 8 6 4 2 0 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 +1SD = 6. which will likely result in better pricing power for glovemakers. FY14F=FY15F. whereby cost inflation pass-on would likely see a lag. Nomura research Higher dividend payout on the cards Kossan has increased its dividend payout policy from 25% to 35-40%. Nomura research Source: Bloomberg.7 Mean = 9. Fig. we highlight that Kossan’s dividend yields of 3. FY15F=FY16F Risks to our view Upside risks • Major delays in industry expansion projects or sudden surge in demand (eg. • Expansion hiccups which would affect its penetration into higher-end segments and limit growth of its market share.4 3. a pandemic). 28: Dividend yield – Malaysian-listed glovemakers FY13F Top Glove Supermax Kossan Hartalega * Source: Nomura estimates FY14F 3. • Higher/lower-than-expected pass-on rates of cost inflation/savings. as we have assumed that ASP will come under pressure amid increased competition.2 2.04.9 3.3 3.8 FY15F 3.9 3.9 2. affecting margins.

1%/+1.216 132 132 19. We upgrade the stock to Neutral as its underperformance against peers makes its valuations fair.yap@nomura.291 145 145 21.0 15. Nonetheless.0 10.9 15. upgrade to Neutral  June 17. .15.banka@nomura.9 1.6% YTD vs its peers’ rallies of 15-34% over the same time frame.1 7. Nonetheless. We maintain our view that Supermax’s margins are likely to come under pressure despite soft input prices. with competition set to increase in the years ahead.0x FY14F EPS of 21. Valuation: Rather fair.05c 15. Research analysts Malaysia Health Care & Pharmaceuticals Celeste Yap . Our TP of MYR2.8 Source: Company data. important disclosures and the status of non-US analysts.90 Closing price June 12. Catalyst: Soft input prices a plus.90. However.3% Anchor themes We expect a healthy long-term demand outlook amid growing healthcare awareness and an aging population worldwide. but no upside catalyst in sight for now Supermax shares currently trade at 9.6 1.9% with the new inputs.6 16. we think that the lack of near-term positive catalysts makes Supermax less attractive. we see lower pricing power for glovemakers.15 is arrived upon pegging its FY14F EPS to a 10x target multiple.15. which is on the lower end of the industry and below the industry’s long-term average one-year forward P/E of 10x.1 9.8 6. Neutral MYR 2. EPS growth (%) FD normalised P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%) 997 122 122 17.17c 3. We revise our TP upwards to MYR2.2 1.7 15.NSFSPL bineet.0 22. We tweak slightly our net profit estimates for FY13F/FY14F by +1.3 3.Supermax Corp Bhd HEALTH CARE & PHARMACEUTICALS SUPM.15.92c 17.74sen.9 8.NSM celeste. from MYR1. in our view.2 1.9 1.2 1.2 18.30c 11.0 7.3 15. as we roll forward earnings to FY14F while taking into account our updated raw material price assumptions and exchange rate forecasts. Nomura estimates See Appendix A-1 for analyst certification.1 N/A N/A N/A N/A 1. but cost savings likely to be shared While weak raw material (NR and nitrile latex) prices are likely to benefit Supermax alongside other glovemakers.15 MYR 1.3 7.1 21.6 1.485 170 170 25.2 3.4 3.1 N/A N/A N/A N/A 14. 2013 Potential upside Flattish share price performance makes valuations less demanding Action: Raising TP to MYR2.0 N/A N/A N/A N/A 14.4 1. as we expect the company to lower its ASPs to keep its goods competitive with peers’.74c 12. Nomura vs consensus Our TP is 7% below consensus on expectations of compressed margins.40c 8.347 148 148 21. we believe that the bulk of such cost savings will likely be enjoyed by Supermax’s customers instead. we do not see compelling reasons to buy into the stock now.3 10.com +603 2027 6894 Bineet Banka . 2013 Rating Up from Reduce Target price Increased from 1.95 +10. Key company data: See page 2 for company data and detailed price/index chart.4 22.200 130 130 19.7 1. upgrade to Neutral Supermax shares have gained a mere 2. We do not foresee significant downside to current levels as valuations seem undemanding for Supermax's size.com +91 22 4053 3784 31 Dec Currency (MYR) FY12 Actual Old FY13F New Old FY14F New Old FY15F New Revenue (mn) Reported net profit (mn) Normalised net profit (mn) FD normalised EPS FD norm.KL SUCB MK EQUITY RESEARCH Raising TP to MYR2.5 20.

7 12.36 0.0 7.26 0.9 -9. Nomura research Notes 12.3 15.021 -819 202 -113 90 114 -24 90 -13 35 112 -8 104 0 FY12 997 -734 263 -141 123 147 -24 123 -9 23 137 -16 121 0 FY13F 1.0 10.03 19.1 36.145 339 -167 172 206 -34 172 -13 38 198 -28 170 0 Source: ThomsonReuters.08   23 .2 8.4 23.8 9.2 21.7 16.0 9.2 8.9 2.9 10.9 11.1 26.2 -7.0 4.7 7.3 8.1 10.31c 15.9 15.8 13.8 10.1 10.2 22. 2013 Key data on Supermax Corp Bhd Income statement (MYRmn)  Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) FD normalised P/E at price target (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (MYR) Norm EPS (MYR) Fully diluted norm EPS (MYR) Book value per share (MYR) DPS (MYR) Source: Company data.0 8.4 2.4 1.28 3M 12M 0.0 13.52 0.7 Dividend payout revised by management to 30% from FY12 onwards.8 7.7 12.7 10.79 2.69 0.4 15.7 9.05c 25.2 11.05c 1.0 10.1 104 0 104 -22 82 122 0 122 -22 100 132 0 132 -40 92 148 0 148 -44 103 170 0 170 -51 119 Source: Thomson Reuters.1 12.1 10.9 10.3 12.3 13.5 11.2 7.0 21.1 1.92c 17.3 15. Nomura estimates Relative performance chart (one year) FY11 1.31c 2.5 1.0 17.1 9.9 7.5 22.2 6.0 1.6 1.7 3.74c 1. Nomura research   (%) Absolute (MYR) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (MYR) 3-mth avg daily turnover (USDmn) Major shareholders (%) Dato' Seri Stanley Thai Datin Seri Cheryl Tan 1M -4.041 307 -159 148 180 -32 148 -13 34 169 -22 147 0 FY15F 1.92c 1.8 7.4 7. 20% previously 4.4 3.23 0.3 23.40c 19.92c 17.Nomura | Supermax Corp Bhd June 17.2 -42.31c 15.3 29.8 3.2 10.5 15.4 12.9 10.5 0.9 3.6 3.8 9.6 11.1 8.5 -0.0 30.7 12.0 11.06 21.6 17.3 10.6 18.40c 19.2 -41.8 -2.347 -1.05c 25.07 25.7 12.0 30.3 -5.9 9.8 12.6 8.74c 21.1 10.8 7.7 8.2 13.0 9.0 8.6 14.74c 21.5 14.3 11.5 20.216 -933 283 -150 134 164 -31 134 -13 29 150 -18 132 0 FY14F 1.8 -5.5 19.3 13.0 13.7 1.0 4.8 13.6 14.2 7.25/1.5 -37.2 14.1 13.4 423.2 3.8 15.9 10.40c 1.9 11.6 1.9 9.2 30.7 12.3 7.3 12.0 10.8 -41.8 15.7 64.485 -1.2 6.06 17.1 15.4 14.8 11.5 1.

2013 Cashflow (MYRmn)  Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt Source: Company data.95 7.7 1.254 FY13F 124 0 250 213 1 588 239 512 29 0 5 1.8 72.603 176 118 4 298 137 20 456 -1 0 340 808 0 1.0 2.4 1.9 24 . Nomura estimates FY11 104 0 206 223 8 541 229 402 29 0 5 1.93 16.98 14.8 81.25 22.1 81. Nomura estimates   FY11 114 -66 9 56 -38 18 -31 1 5 25 18 -27 0 -22 38 -11 7 97 104 226 FY12 147 31 -14 164 -69 94 18 0 2 -20 94 -12 0 -27 -37 -76 18 104 123 155 FY13F 164 -48 9 126 -96 30 -29 0 0 29 30 -40 0 24 -13 -29 1 123 124 206 FY14F 180 -52 -30 98 -60 38 -34 0 0 34 38 -44 0 -1 -13 -58 -20 124 104 217 FY15F 206 -30 -35 141 -60 81 -38 0 0 37 81 -51 0 -1 -13 -64 17 104 121 192 Notes Significantly higher capex in FY13F for the additional 40 production lines which should increase NBR capacity by 5.99 29.9 121.254 163 118 4 285 115 20 420 0 0 340 494 0 834 1.6 1.1 117.482 183 108 4 295 138 20 454 -1 0 340 689 0 1.205 FY12 123 0 206 234 1 564 210 447 29 0 5 1.2 138.482 FY15F 121 0 307 263 1 691 311 567 29 0 5 1.8 36. inventory and payable days include both manufacturing and distribution arms 1.4 32.148 1.5 87.9 51.3 35.603 Notes Receivable.373 FY14F 104 0 280 250 1 635 274 540 29 0 5 1.04 10.373 190 93 4 288 139 20 447 0 0 340 586 0 926 1.2 1.15 11.1 0.2 1.4 2.3 117.3 114.6 113.205 190 87 0 278 140 18 436 0 0 170 599 0 769 1.4bn pcs pa Balance sheet (MYRmn)  As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle Source: Company data.8 74.32 13.06 18.4 75.5 41.6 2.029 1.4 68.7 71.21 21.9 79.Nomura | Supermax Corp Bhd June 17.

7 6 4 2 0 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 -1SD = 5.07 per share via this methodology. from a valuation perspective. We build into our model our updated exchange rate forecasts as well.63 2.20 5.08 5.53 2.90 2. leading to our upgrade to a Neutral rating. we think that Supermax is currently fairly priced. We peg our revised FY14F EPS of 21. We also run a 10-year DCF valuation with cashflows discounted back to June 2013 as a sense check to our P/Ebased TP.74sen to a 10x target one-year forward P/E. As a result. 2013 Raising TP to MYR2. It has however pared down some gains with 8% correction from its recent peak. Nomura research Undemanding valuations.31 6.15 6.72 2.92 Note: Nitrile prices are grossed up to the same solid content as latex for comparison purpose. 30: Historical P/E band chart MYR 5 4 3 2 1 0 Mar 06 14x 11x 8x 5x 2x Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 14 12 10 8 Mean = 7.25 5. Supermax shares surged 18% within a week of the first H7N9 case in late-March 2013.11 5. consistent with the industry’s long-term average.6% YTD while peers have enjoyed run-ups anywhere between 15-34% over the same horizon. Nomura research Source: Bloomberg. resulting in lower cost of goods sold. Our changes of inputs are summarised in the table below: Fig.88 2.30 6. we only tweak our FY13F/FY14F earnings estimates slightly upwards by 1. Fig. upgrade to Neutral As both NR latex and NBR raw material prices have been weaker than we initially expected.1%/1.7 Fig. arriving at TP of MYR2. 25 . We note that shares have gained a sheer 2.07 2014F 6. However. but unexciting near-term prospects Traditionally a higher beta stock within the glove manufacturing sector.97 2015F 6.9%.15.90 6. we arrived at an intrinsic value of MYR2. taking into account the aforementioned changes.7 +1SD = 9. we revise downwards our estimates for raw material input prices. Hence.15.22 6.96 3. the estimated impact on our FY13F/FY14F earnings are rather negligible as we expect Supermax to share with its customers most of the cost savings via lower ASPs.Nomura | Supermax Corp Bhd June 17. 31: Historical one-year forward P/E P/E (x) Source: Bloomberg. 29: Input assumptions changes Input assumptions (period average) Latex prices (MYR/kg) Old New Nitrile prices (MYR/kg) Old New MYR/USD Old New Source: Nomura estimates 2013F 6.

Risks to our view Upside risks • Higher/lower-than-expected pass-on rates of cost inflation/savings. we foresee Supermax sharing such cost savings with customers by adjusting ASPs downward in tandem with changes in raw material prices. We also believe that its distribution arm could stand as a liability to the group in the event of margin compression. in our view. limiting ASP downward adjustments.Nomura | Supermax Corp Bhd June 17. We thus opine that operationally. as Supermax will likely have to absorb a larger proportion of the squeeze in margins. resulting in flattish earnings growth. While we expect raw material input prices to remain soft. • Delays in its expansion plans which will stunt volume growth. Supermax remains unattractive in the near-term. Downside risks • An unexpected surge in latex prices. alongside management’s strategy of moving towards competitive pricing. which will likely result in better pricing power for glovemakers. • Increased hygiene awareness from emerging markets like Brazil. justifying our Neutral view of the stock. affecting margins. a pandemic). whereby cost inflation pass-on would likely see a lag. which Supermax already has large exposure to and would readily benefit from such increase in demand. 2013 Nevertheless. we expect weaker margins for Supermax. • Major delays in expansion projects by other industry players or sudden surge in demand (eg. 26 . as we have assumed that ASP will come under pressure amid increased competition.

92c 14.NSM celeste.2%.31c 5.8 2.9 2.2 19. Nonetheless. to some extent.5 2. 2013 Rating Remains Target price Increased from 5.74c 79. and our new raw material price assumptions and exchange rate forecasts.314 203 203 32.5 12. we believe our expectations of further ASP cuts make the stock less attractive – particularly following the 19% run-up in stock price since April 2013.2x. Nonetheless.com +91 22 4053 3784 Revenue (mn) Reported net profit (mn) Normalised net profit (mn) FD normalised EPS FD norm.4 N/A N/A N/A N/A 17.8 8.Top Glove Corp HEALTH CARE & PHARMACEUTICALS TPGC.8 3. with competition set to increase in the years ahead.9 14.65 as we incorporate Top Glove’s revised timeline for its capacity expansion plan.banka@nomura. we see lower pricing power for glovemakers.809 255 255 41. we tweak our FY13F/FY14F net profit estimates by -3.041 260 260 41.4 2.20 MYR 6.0 net cash net cash net cash net cash net cash net cash net cash Source: Company data.20 from MYR5.2x.90c 1.2 17.743 255 255 40.6 3. We peg our FY14F EPS of 40. Key company data: See page 2 for company data and detailed price/index chart. we maintain our Neutral rating on the stock as we see limited upside potential to the current share price. 31 Aug Currency (MYR) FY12 Actual Old FY13F New Old FY14F New Old FY15F New Neutral MYR 6.2 17. it is likely to be the main beneficiary of weak NR latex prices as well as a strengthening USD.22c 11.7 N/A N/A N/A N/A 16.5 17.92sen). Currently trading at 15.8 16.KL TOPG MK EQ U I T Y R E S E A R C H Raising TP to MYR6. in our view. maintain Neutral We raise our TP to MYR6.20. maintain Neutral  June 17. to arrive at our new TP of MYR6. we see little upside for margin expansion as keener competition will. Valuations: Fair with no visible near-term catalysts Though we expect volumes to remain strong for Top Glove. . Nomura estimates See Appendix A-1 for analyst certification.9 2.495 229 229 36.1 2.99c 13.65 Closing price June 12.443 222 222 35. as it trades just above its threeyear mean of 15.1 2.2 N/A N/A N/A N/A 17.9 10. 2013 Potential downside Lacking catalyst(s) for further run-up in the near term Action: Raise TP to MYR6.6x one-year forward P/E (FY14F EPS: 40.92sen at an unchanged target P/E of 15.20.962 270 270 43.9 2. in our view. As a result. EPS growth (%) FD normalised P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%) 2.39 -3% Anchor themes We expect healthy long-term demand outlook due to growing healthcare awareness and an aging population worldwide.NSFSPL bineet.7 2. important disclosures and the status of non-US analysts. we believe that valuations are rather fair.76c 9.6 2.6 9. Research analysts Malaysia Health Care & Pharmaceuticals Celeste Yap .4 17. Catalyst: Cost savings from soft raw material prices unlikely to translate into better margins Given Top Glove’s large(r) exposure to the natural rubber (NR) segment.com +603 2027 6894 Bineet Banka . urge glovemakers to pass on any cost savings to respective customers.6 3.1%/-0. Nomura vs consensus Our FY14F earnings estimates and TP are in line with consensus.4 3. With no visible near-term catalysts. while rolling forward our earnings base to FY14F from FY13F.20.yap@nomura.4 15.

9 60.2 1.819 235 -101 134 196 -61 134 10 1 145 -30 115 -2 FY12 2.4 28.7 17.267 476 -170 305 402 -97 305 11 0 316 -57 259 -5 FY15F 2.6 15. 2013 Key data on Top Glove Corp Income statement (MYRmn)  Year-end 31 Aug Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) FD normalised P/E at price target (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (MYR) Norm EPS (MYR) Fully diluted norm EPS (MYR) Book value per share (MYR) DPS (MYR) Source: Company data.31c 2.4 8. Nomura estimates Relative performance chart (one year) FY11 2.0 12.8 14.9 17.77c 32.3 2.8 14.92c 2.8 15.2 -2.3 17.77c 32.9 9.4 2.1 6.5 20.3 14.2 38.9 48.18 40.3 14.0 17. given the strong net cash position -1.2 2.27c 1.5 14.7 11.0 9.8 14.8 14.21 43.6 -54.5 18.76c 35.5 19.2 14.1 -54.2 -45.3 2.2 11.2 11.7 16.9 25.5 18. there is potential for an upward revision in dividend payout.5 The 50% dividend payout policy is the highest among peers.9 14. Nomura research   (%) Absolute (MYR) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (MYR) 3-mth avg daily turnover (USDmn) Major shareholders (%) Tan Sri Lim Wee Chai KWAP 1M 3M 12M -1.5 6.2 15.3 3.4 9.7 51.5 5.962 -2.6 16.2 12.76c 2.16 35.314 -1.2 5.3 14.0 14.1 9.0 113 113 -68 45 203 203 -99 104 222 222 -111 111 255 255 -127 127 270 270 -135 135 Source: Thomson Reuters.29c 18.92c 40.454 508 -184 324 431 -107 324 11 0 335 -60 274 -4 Source: ThomsonReuters.0 -6.8 9.67 0.44 0.9 17.4 11.265.9 6.9 70.57 3.9 18.0 79.743 -2.8 -55.3 10.0 33.3 2.74c 2.1 12.5 10.3 17.9 35.6 18.4 14.9 2.5 71.0 3.9 2.76c 35.8 16. Nomura research Notes 34.0 9.019 424 -154 270 353 -83 270 9 0 279 -54 225 -3 FY14F 2.81 0.31c 43.7/4.9 10.9 17.929 385 -157 228 297 -69 228 12 0 241 -33 207 -5 FY13F 2.2 79.0 5.22 0.2 50.9 1.31c 43.9 17.0 50.6 17.0 7.2 3.29c 18.7 23.6 1.8 18.1 9.1 19.7 16.5 19.92c 40.0 50.0 13.4 28.1 17.8 2.7 2.22   28 .1 5.3 18.4 8.6 12.8 13.443 -2.1 6.6 15.9 3.Nomura | Top Glove Corp June 17.1 9.2 12.3 19.0 8.6 15.1 6.054 -1.11 32.1 18.8 6.2 14.8 11.1 16.9 17.03 0.9 34.6 9.6 17.5 19.9 5.9 8.4 11.3 40.6 12.21 7.

7 40.902 FY15F 171 377 233 170 951 7 1.722 FY14F 108 349 214 170 841 7 1.0 29 .72 na 2.4 39.3 44.722 0 231 43 273 3 0 41 317 28 0 491 861 24 1.12 na 2.90 na net cash net cash net cash net cash net cash net cash net cash net cash net cash net cash 46.423 FY12 167 294 179 170 811 7 734 20 0 26 1.7 33.2 33.598 0 232 43 274 3 0 41 318 24 0 484 747 24 1.89 na 2.3 41.122 1.6 34.6 41.6 44.902 0 267 43 309 3 0 41 353 32 0 499 993 24 1.8 37.377 1.2 45. strong net cash position to support potential upcoming M&A deals 3.423 0 195 35 229 3 0 44 277 25 0 481 626 15 1. Nomura estimates FY11 149 262 176 129 715 7 661 20 0 20 1. Nomura estimates   FY11 196 -74 51 172 -141 31 -2 2 10 -66 -25 -88 1 -1 -2 -89 -114 263 149 -146 FY12 297 -32 0 266 -143 123 0 -7 -3 -11 102 -85 1 0 1 -84 18 149 167 -164 FY13F 353 -31 -54 268 -227 41 0 0 0 12 54 -111 1 0 7 -103 -50 167 117 -115 FY14F 402 -24 -57 322 -227 95 0 0 0 15 110 -127 1 0 7 -120 -9 117 108 -105 FY15F 431 -29 -60 342 -167 175 0 0 0 15 190 -135 1 0 7 -127 63 108 171 -168 Notes Large capex going forward to account for rubber plantation and long-term capacity expansion plans Balance sheet (MYRmn)  As at 31 Aug Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle Source: Company data.0 36.8 41.Nomura | Top Glove Corp June 17.0 33.8 40.0 43.255 1.4 37.598 FY13F 117 311 193 170 791 7 878 20 0 26 1.0 37.008 20 0 26 1.072 0 285 43 328 3 0 41 371 36 0 507 1.067 20 0 26 2.133 24 1.664 2.95 na 2. 2013 Cashflow (MYRmn)  Year-end 31 Aug EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt Source: Company data.9 32.517 1.072 Notes Close to nil borrowings.

68 2.93 Raw material cost savings to benefit customers more We note that Top Glove is arguably the glovemaker which most swiftly adjusts its ASP in tandem with the changes in raw material prices. resulting in lower cost of goods sold for Top Glove.00 6.2x. which fetches an intrinsic value of MYR6. reflecting its price-maker status due to its unrivalled size as well as its high-volume and low-margin business model. We. 32: Input assumptions changes Input assumptions (period average) Latex prices (MYR/kg) Old New Nitrile prices (MYR/kg) Old New MYR/USD Old New Source: Nomura estimates 2013F 6. 2013 Raising TP to MYR6. We also revise our raw material price assumptions as NR latex prices remain weaker-than-expected. tweak our estimates for its volume slightly downwards to take into account such delays in target completion for its expansion plans.09 5.92 3.26 per share.92sen with our unchanged target one-year forward P/E of 15. thus. foresee Top Glove sharing most of the cost savings with its customers via more competitively priced goods – particularly as competition heightens in the industry. thus. Nonetheless. only tweak our FY13F/FY14F earnings estimates by 3.2%. maintain Neutral Top Glove had previously expected additional capacity of 4. 30 . hence limiting somewhat a potential margin compression.00 2015F 6. thus. We maintain our Neutral rating on the stock. this figure was subsequently lowered to 3. we.07 2014F 6.28 6. in line with its own three-year mean.98 3.25. We roll forward our earnings estimate base and peg our revised FY14F EPS of 40.20 6.07 6.88 2. however.8bn pieces for FY13. On the back of this scenario.74 2. Our valuation methodology remains unchanged.20.30 6.Nomura | Top Glove Corp June 17.6bn due to several delays. We. as Top Glove’s goods are already priced at the lower end of the spectrum. we believe that ASPs will not have to be lowered significantly in order to remain competitive.25 6. Our changes in input estimates are summarised in the table below: Fig. Our P/E-based valuation is supported by our 10-year DCF methodology discounted back to June 2013.15 5. our input assumption changes highlighted above largely neutralise each other.59 2.14 5.1%/-0. arriving at our new TP of MYR6.

Nomura research Risks to our view Positive surprises • Stronger-than-expected demand from the emerging Latin American and Asian markets. 33: Historical P/E band chart MYR 10 8 17x Fig. • Synergistic acquisitions undertaken to contribute to cost-saving measures. to which Top Glove has large exposure. 31 .3 15 10 5 0 Jan 06 6 4 2 0 Jan 06 14x 11x 8x 5x Mean = 11. Negative surprises • An unexpected surge in NR latex prices.Nomura | Top Glove Corp June 17. • Delays of expansion plans which will impede volume growth. 2013 Fig.9 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13 Source: Bloomberg. Nomura research Source: Bloomberg.1 -1SD = 6. which will affect pass-on rates. • Higher/lower-than-expected pass-on rates from cost inflation/savings. 34: Historical one-year forward P/E P/E (x) 25 20 +1SD = 15.

15 Closing price 4.95 4. Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings.70 is pegged to a one-year forward P/E of 14. or innovative product types which could push up margins. or any of its affiliates or subsidiaries. and may refer to one or more Nomura Group companies. significant capacity expansion plans which will continue to boost capacity and earnings.77..89 MYR 6. and 4) further weakening of NBR raw material prices. Inc.04sen. on FY14F EPS of 33. Our 10-year DCF valuation. (2) no part of my compensation was.2x.29 MYR 1. 3) faster-than-expected completion of its NGC expansion plans.95 For explanation of ratings refer to the stock rating keys located after chart(s) Valuation Methodology Our target price of MYR4.32 MYR 4.32 (13-Jun-2013) Reduce (Sector rating: Not rated) Date 09-Jan-13 09-Jan-13 Rating Target price Reduce 4. Risks that may impede the achievement of the target price Upside risks to our view include 1) new. discounted back to June 2013 on a WACC of 7. Materially mentioned issuers Issuer Hartalega Holdings Kossan Rubber Industries Supermax Corp Bhd Top Glove Corp Ticker HART MK KRI MK SUCB MK TOPG MK Price MYR 6. hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report.35 Price date 13-Jun-2013 13-Jun-2013 13-Jun-2013 13-Jun-2013 Stock rating Reduce Neutral Neutral Neutral Sector rating Disclosures Not rated Not rated Not rated Not rated Hartalega Holdings (HART MK) Rating and target price chart (three year history) MYR 6. provides a fair value of MYR4.Nomura | Malaysia rubber gloves June 17. 32 . Celeste Yap. Inc.6% and terminal growth of 2%. Nomura International plc or any other Nomura Group company. 2) higher/lower-than-expected pass-on rates of cost inflation/savings. 2013 Appendix A-1 Analyst Certification I. is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International.

215 MYR 1.09 Suspended 3.89 (13-Jun-2013) Neutral (Sector rating: Not rated) For explanation of ratings refer to the stock rating keys located after chart(s) Valuation Methodology We arrive at our target price of MYR2.09 Neutral 1.88 1. Supermax Corp Bhd (SUCB MK) Rating and target price chart (three year history) Date 09-Jan-13 09-Jan-13 21-May-12 13-Feb-12 19-Nov-11 19-Nov-11 27-Sep-11 Rating Reduce Target price Closing price 2. using WACC of 7.35.03 1. Risks that may impede the achievement of the target price Upside risks include 1) higher/lower-than-expected pass-on rates of cost inflation/savings.15 by pegging FY14F EPS of 21. 2) increased hygiene awareness in emerging markets like Brazil which Supermax already has large exposure to.48 Not Rated 3. 2) expansion hiccups which would affect penetration into higher-end segments and market share growth.66.65 For explanation of ratings refer to the stock rating keys located after chart(s) Valuation Methodology We peg Kossan’s FY14F EPS of 43.03 Not Rated 1.0% and terminal growth of 2%.48 3. which is the sector average since 2007.0x. and 3) major delays in expansion projects by other industry players or sudden surge in demand which will likely result in better pricing power for glovemakers.0x. and.Nomura | Malaysia rubber gloves June 17.80 3.0% and terminal growth of 2%. Downside risks to our view include: 1) an unexpected surge in latex prices. 2013 Kossan Rubber Industries (KRI MK) Rating and target price chart (three year history) MYR 4.845 4. Downside risks include 1) an unexpected surge in latex prices. Risks that may impede the achievement of the target price Upside risks to our view include: 1) delay in industry expansion or sudden surge in demand.74sen to one-year forward P/E of 10.845 2.00 1. whereby 33 . which is the sector average since 2007. arriving at target price of MYR4. With a WACC of 9.07.29 (13-Jun-2013) Neutral (Sector rating: Not rated) Date 09-Jan-13 09-Jan-13 21-May-12 13-Feb-12 27-Sep-11 27-Sep-11 Rating Neutral Target price Closing price 3. Our 10-year DCF valuation discounted back to June 2013. gives us a fair value of MYR4. our 10-year DCF valuation discounted back to June 2013 provides a fair value of MYR2.36sen to target one-year forward P/E of 10.67 Suspended 2. and 3) better-than-expected earnings contribution from TRP segment.51 2.57 Neutral 2.90 2. 2) higher/lower-than-expected pass-on rates of cost inflation/savings.65 2.

and 3) expansion coming in at a slower pace than the projected c.70 MYR 4.07 3.8% and terminal growth of 2% and implies a fair value of MYR6.07 Reduce 4.20 34 .20. Risks that may impede the achievement of the target price Upside risks to our view include 1) stronger-than-expected demand from the Latin American and Asian markets.89 Neutral 5.57 Not Rated 4.57 5. Top Glove Corp (TOPG MK) Rating and target price chart (three year history) Date 09-Jan-13 09-Jan-13 21-May-12 13-Feb-12 27-Sep-11 27-Sep-11 09-Mar-11 13-Dec-10 13-Dec-10 06-Oct-10 Rating Neutral Target price Closing price 5.82 5.15 MYR 3. and 2) delays in its expansion plans which will stunt volume growth.42 4.56 6.69 MYR 6.35 (13-Jun-2013) Neutral (Sector rating: Not rated) For explanation of ratings refer to the stock rating keys located after chart(s) Valuation Methodology We peg our FY14F EPS of 40.26. resulting in flattish earnings growth.8bn pieces per year. Rating and target price changes Issuer Ticker Old stock rating New stock rating Old target price New target price Hartalega Holdings Kossan Rubber Industries Supermax Corp Bhd Top Glove Corp HART MK KRI MK SUCB MK TOPG MK Reduce Neutral Reduce Neutral Reduce Neutral Neutral Neutral MYR 4. and 2) synergistic acquisitions undertaken to contribute to cost-saving measures. 2) higher-than-expected raw material prices.80 5. its 3-year average.65 5. 2013 cost inflation pass-on would likely see a lag.65 MYR 4.00 4. to arrive at our target price of MYR6.Nomura | Malaysia rubber gloves June 17.2x target multiple.56 5. Downside risks include 1) lower-than-expected ASPs as a result of pricing pressure from peers.15 MYR 6.4. to which Top Glove has large exposure.92sen to a 15. Our 10-year DCF valuation discounted back to June 2013 is based on a WACC of 8.90 MYR 5.35 MYR 2.10 Suspended 5. limiting volume growth.80 MYR 1.07 5.

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