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Nomura

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Top Glove Corp

June 13, 2013

Top Glove Corp
HEALTH CARE & PHARMACEUTICALS

TPGC.KL TOPG MK

EQUITY RESEARCH

Lacklustre 9M13 results  

June 13, 2013 Rating Remains Target price Remains  Closing price June 12, 2013

Neutral
MYR 5.65 MYR 6.39

Quick Note

Research analysts

Above or below expectations? 9MFY13 results were slightly below expectations, with reported net profit meeting 65% of our and 64% of consensus full-year estimates. Although revenues were flat in 3QFY13, Top Glove’s bottom-line suffered due to competitive pricing structure and FX losses on its USD forward contracts. After adjusting for FX losses, net profit improved slightly y-y, as increasing volumes and easing raw material prices somewhat eclipsed the effects of higher labour costs and lower ASPs.
Fig. 1: Actual results vs. Nomura/consensus (Bloomberg), 9MFY13 MYR m n 9M13 Nom ura % m et Consensus Revenue 1,765.1 2,495.0 70.7 2,526.6 EBITDA 234.7 364.0 64.5 358.6 EBITDA m argins 13.30 14.59 14.19 Reported Net Profit 148.1 229.0 64.7 230.5 Net m argins 8.39 9.18 9.12
Source: Company data, Bloomberg, Nomura estimates

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

% m et 69.9 65.4 64.2

What does the result mean?  Strong demand, particularly from NBR segment. Total sales volumes were up 7% q-q and 17% y-y, with particularly strong figures coming from the nitrile (NBR) gloves front due to: 1) increased capacity for NBR gloves; and 2) continuous switching trend which keeps NBR demand up. Sales volumes for natural rubber (NR) gloves have increased too, although not to the same extent as those of NBR. Management notes that existing customers have contributed to the bulk of the new sales volumes; new customers only accounted for c.20% of these sales.  Emerging market sticks to NR. With low latex prices, emerging market users who are accustomed to NR gloves have no incentive to switch. We view this as a positive for TOPG as it is now among the few players who are able to supply NR gloves in large volumes, following the industry-wide rush into the NBR segment.  More pressure on the NR gloves. According to management, it has seen greater reduction in NR gloves ASPs compared to the NBR counterparts, as demand for NBR gloves appears to be growing strongly. We note, however, that TOPG products are already priced at the lower end of the spectrum to begin with, and thus are less susceptible to significant lowering of ASPs, in our view. On this front, we understand from other glove makers that most manufacturers are beginning to brace for a lowering of margins for NBR gloves; we thus maintain our view for now that margins are likely to be compromised as more NBR capacity continues to come on-stream in the near future.  European customers more cautious. While TOPG sees strong demand coming from North America, Asia and Latin America, the European market has shown some weaker numbers. Management

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.
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we believe that valuations are rather fair. CN New factories Factory 28 (formerly F18. Other key numbers  Raw material prices still soft. according to the company.2x. While we believe that much of the potential cost savings are likely to be shared.6 6.6 0. and will be internally funded.  10-15% annual capacity growth.8 2. With current installed capacity of 41.39mn for 3Q13. M'sia Factory 25 Klang. TH. Although up slightly q-q. Those lines – all dedicated for NBR gloves – are expected to cost c. 2013 guides that this is because of the healthcare institutions’ lower budget which have brought about a more cautious purchasing pattern. 80% of TOPG’s production lines are currently automated. Fig. With no visible near-term catalysts. The board has proposed a first singletier interim dividend of 7 sen per share payable on 18 July 2013.0 1. M'sia Factory 27.48bn pcs.9 Jun '13 Aug '13 Nov '13 Dec '13 Apr '14 Apr '13 Jul '13 Nov '13 Dec '13 Apr '14 Previous target Existing factories 25 glove factories MY. phase 2 Lukut. Nomura research Likely stock reaction We do not expect significant stock reaction to this announcement Currently trading at 15. TOPG is also on track to implement the SAP Enterprise Resource Planning application to standardize its business processes and improve operational efficiency. M'sia Factory 29 Klang. Nomura research 3Q13 5. of prod Capacity p.77 1.  Expect better performance in 4Q13.1 0. according to management. 2 .52 1. Current dividend payout target remains at 50%. M'sia Factory 23.a Target lines (bn pcs) completion 470 8 20 16 8 16 68 538 41. 2: On-going expansion plans – all powder-free NBR gloves Factory Location No. TOPG will likely be impacted positively on favourable raw material price trends. in the stripping and packing procedures.26sen).Nomura | Top Glove Corp June 13. we maintain our Neutral rating on the stock as we see limited upside potential to the current share price.6 2. We are reviewing our target price. although customers still continue to buy rubber gloves. The roll-out of first phase will happen by the beginning of FY14.22 % chg q-q 3. 3: Avg raw material prices Raw materials Latex price (MYR/kg) Nitrile (USD/kg) Source: Company data.25 3Q12 7. TOPG plans to add another 68 production lines by April 2014.8 47. NBR currently makes up 18% of TOPG’s product mix. bringing total capacity to c. M'sia Total add'l New total Source: Company data. This amounts to total dividend payments of MYR43. as per management information.5  Interim dividends proposed.5) (28.6) 2Q13 5. and management intends to see this share grow to 50% eventually.75 % chg y-y (20. We think that the gains from continuous automation upgrades will continue to reflect in next quarter’s results.1bn pcs. phase 2) Banting.98 1. both NR latex and NBR raw material prices in 3Q13 are significantly lower y-y. Fig.7x one-year forward P/E (FY14F EPS: 41. phase 2 Ipoh. and continues to remain weak.8 1.MYR140mn. as it trades just above its threeyear mean of 15. although management has guided for a possibility to see higher payout come FY14F.

4: Quarterly financial summary MYR '000 Revenue Other opg income Operating expenses Results from opg activities Finance costs Share of gain (loss) of assoc Net finance income (cost) PBT Income tax expense Net profit before MI Minority interests Equity holders of com pany FX gains/ losses NPAT adj.50 6.373 (1.036 53.082 7.523 6.649 (31) 65 34 63.061 (568.2 1.69 % chg y-y 0.0 (25.6 (25.274 40.837) 54.1 46.3) (25.992 47.389 (10.326 1.683 (8.271 (9.Diluted Source: Company data.9 (31.846 1.252) 49.3) 2Q13 576.418 5.810 5.49 3Q12 603.9) (79.009.3) (24.818 8. 2013 Fig.4) 3.725 (73) 721 648 43.960) 61.831 (544.805. Nomura research 3Q13 604.545 1.011 50.Nomura | Top Glove Corp June 13.883 35.315 14.418) 42.70 8.828) 41.207 (60) 242 182 61.432 8.2 4.749 (520.11 3 .3) 23.5 1.4 (32.063) 51.295 4. for FX gains/losses EPS .Basic EPS .2) (254.9) 135.477) 63.13 8.

10 Suspended 5. 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. to arrive at our target price of MYR5. and may refer to one or more Nomura Group companies. limiting volume growth.56 5.56 6.57 Not Rated 4. its 3-year average. (2) no part of my compensation was.07 3. 4 . 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.99sen to a 15.82 5.07 5.65 5.07 Reduce 4.00 4. Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings. and 2) synergistic acquisitions undertaken to contribute to cost-saving measures.42 4.89 Neutral 5. Inc.2x target multiple.8bn pieces per year. and 3) expansion coming in at a slower pace than the projected c.4.8% and terminal growth of 2% and implies a fair value of MYR5. Inc. to which Top Glove has large exposure. Celeste Yap.54 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.80 5. 2) higher-than-expected raw material prices. 2013 Appendix A-1 Analyst Certification I.Nomura | Top Glove Corp June 13.39 Price date Stock rating Sector rating Disclosures 12-Jun-2013 Neutral Not rated Top Glove Corp (TOPG MK) Rating and target price chart (three year history) MYR 6. Materially mentioned issuers Issuer Top Glove Corp Ticker TOPG MK Price MYR 6.65. Our 10-year DCF valuation discounted back to March 2013 is based on a WACC of 8. Downside risks include 1) lower-than-expected ASPs as a result of pricing pressure from peers.39 (12-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 09-Mar-11 13-Dec-10 13-Dec-10 06-Oct-10 Rating Neutral Target price Closing price 5.57 5. or any of its affiliates or subsidiaries. Nomura International plc or any other Nomura Group company.69 For explanation of ratings refer to the stock rating keys located after chart(s) Valuation Methodology We peg our FY13F EPS of 36..

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