Top Glove is optimistic of strong rebound in earnings recovery in 2QFY25 due to the absence of high-priced inventory and favourable forex. However, it expects flattish volume sale in the months of Jan and Feb 2025 due to the frontloading effects of US customers purchasing from Chinese glove makers.

Thereafter, the group expects order shipments from the US customers to accelerate from end-Feb 2025. Kenanga IB is maintaining its earnings forecasts, TP of RM1.30 and MARKET PERFORM call.

Some of the key takeaways from the meeting with top glove maker was that the company remains optimistic of a strong sequential rebound in earnings recovery in 2QFY25 due to the absence of high-priced inventory, a slight increase in ASP, and favourable forex. However, Top Glove does expect a flattish volume sale in the months of Jan and Feb 2025 due to the frontloading effects of US customers purchasing from Chinese glove makers before the 50% tariff imposition effective Jan 2025 compared to a 8%-10% M-o-M growth in Nov and Dec 2024. Thereafter, the group expects order shipments from the US customers to accelerate from end-Feb 2025.

The company noted that a more pronounced effects of rising ASP will only be felt after Feb 2025 due to the frontloading effects of US customers purchasing from Chinese glove makers. The house said it conservatively assumes ASP of USD20/1,000 pieces in its earnings model. It is optimistic that ASPs are expected to inch up gradually by 3% each month from Nov 2024 onwards. However, due to the lag effect, ASP increases will only be felt gradually starting from Dec

Typically, ASP for the US market is higher by USD1.00/1,000 pieces compared to the rest of the world. Currently, the ASP is at
USD19-20/1,000 pieces compared to Europe at USD17-18/1,000 pieces. Here Kenanga conservatively assumed ASP of USD20/1,000 pieces in its earnings model.

The group highlighted that its exports to the US are continuing to show improvement which rose 21% QoQ in 1QFY25. US sales accounted for 18% of total group volume sales, above the 15% mix for FY24,but still below the pre-pandemic average of 20%−30%.

The group is optimistic that the strong growth momentum will sustain, as customers continue replenishing their depleting glove
stockpiles. The group continues to see MoM uptrend in sales volume in Dec 2024 and expects orders form the US to pick up in
subsequent quarters, underpinned by inventory rebuilding by distributors and boosted by the US recent tariff imposition on
Chinese gloves. Presently, its utilisation rate is 66% compared to 60% in 4QFY24 and 45% in 3QFY24.

As for valuations, the house is keeping its FY25F and FY26F numbers unchanged with a TP of RM1.30 based on 2.2x FY26F BVPS, which is at the sector's early upcycle phase of between 2x and 4x, i.e. the levels seen emerging from an upcycle in 2012 but at a lower end of band that we believe is valid due to the emergence of Chinese glove makers.

For illustration purposes, if assumed an ASP of USD21/1,000 pieces in the earnings model, the stock PER would trade at 46x or 2.0SD above its pre-Covid 5-year historical 1-year forward average. Additionally, in terms of PBV, the stock is trading at -1.0SD pre-COVID 5-year historical average 1-year forward of 3.0x.

Oversupply is less acute, potentially achieving equilibrium faster than expected. Kenanga expects the oversupply situation to
be less acute and gradually improve following signs of players culling production capacity via decommissioning of selective
plants and exit of new entrants. Based on estimates, the demand-supply situation will only start to head towards
equilibrium in CY26 when there is virtually no more net new capacity coming onstream while the global demand for gloves
continues to rise by 15% per annum underpinned by rising hygiene awareness. MARGMA projects 12%−15% growth in the
global demand for rubber gloves annually from CY25, following an estimated 20% increase to 368b pieces in CY24.

Kenanga projects the demand for gloves to rise by 12% in CY25 to 368b pieces and resume its organic growth of 9% thereafter. This will result in an excess capacity of 109b. The overcapacity will continue to subside moving into CY26. The fall in excess capacity by 35% to 72b pieces from 264b pieces in 2023 is a key thesis to change to the fundamental improvement in supply-demand dynamics.

Key risks to recommendation include: (i) certain Chinese glove giants end predatory pricing practices (i.e. selling below
cost over an extended period of time to eliminate competitors), leading to a strong earnings rebound for the sector, (ii)
stronger-than-expected growth in demand for gloves driven by rising hygiene standards and health awareness globally, (iii)
further changes in tariffs which have happened before; recall that post the implementation of the initial 15% tariff on Chinese
glove imports, this figure was lowered to 7.5% during phase first US-China trade agreement back in 2019, and (iv) epidemic
and pandemic occurrences.