Glovemakers face little impact from China flu scare
Business & Markets 2013
Written by theedgemalaysia.com
Friday, 12 April 2013 10:26
Glove sector
Maintain overweight: Fears that the new deadly H7N9 strain bird flu could turn pandemic continued to drive stocks of rubber glove manufacturers higher with share prices of glovemakers under our coverage, namely Top Glove Corp Bhd, Supermax Corp Bhd and HARTALEGA HOLDINGS BHD [], outperforming the KLCI by 8% to 9% in the past two weeks.
Nevertheless, promising signs that some of the flu patients are recovering saw share prices of Top Glove and Supermax easing slightly on Wednesday.
We gather from the management of Top Glove, Supermax and Hartalega that there has been no immediate impact on demand due to the new flu outbreak in China.
We opine that this is due to: i) the virus being confined to eastern China, for now; and ii) no evidence of ongoing person-to-person transmission.
However, management did note that there was some sense of urgency by customers when making their current orders. Should there be an outbreak across the region, we believe orders would spike — similar to the 20% surge seen in demand and consumption of gloves during the H1N1 pandemic in 2009. At the same time, the average selling prices of gloves could remain stable — cushioning the current decline due to easing latex prices.
For now, we do not think the current H7N9 outbreak in China would materially impact our local glove manufacturers. Firstly, we understand that China mainly uses powder free latex and vinyl gloves. Secondly, the bulk of gloves used there is sourced from local manufacturers in China.
As such, Top Glove, Supermax and Hartalega have little exposure to that part of the world, with China only making up less than 5% of each group’s sales.
However, should H7N9 turn pandemic, we believe Top Glove and Supermax would benefit the most from the potential surge in demand and consumption due to their ability to fulfil orders as they have the capacity to do so.
Compared with Hartalega, whose current capacity utilisation rate stands at close to 90%, the average utilisation rate for Top Glove and Supermax is currently around 75% to 80%. To recap, the utilisation rate for Top Glove and Supermax ballooned to some 90% to 95% during the H1N1 outbreak.
We believe it is still too early to speculate if the H7N9 virus would turn pandemic and cause global panic. As such, we foresee a 8% to 10% growth in demand and consumption, and an average utilisation rate of 75%, along with healthy earnings growth of around 12%.
No change to our earnings estimates. However, we take this opportunity to raise the sector’s target price-earnings ratio (PER) to 14 times from 12 times on the back of the strong underlying demand for gloves which has resulted in manufacturers investing significantly to enhance production capacity, especially for the production of nitrile gloves, as well as softening raw material prices.
To recap, the sector’s average PER climbed to 10 times from seven times during the H1N1 scare. With that, we also raise our target price for Top Glove, Supermax and Hartalega to RM7.10, RM2.60 and RM6.15 respectively from RM6.55, RM2.45 and RM5.50 respectively. “Buy” maintained on all the glove players under our coverage. — TA Securities Research, April 11
This article first appeared in The Edge Financial Daily, on April 12, 2013.