nomura rubber glove sector review june 2013

Malaysia rubber gloves HEALTH CARE & PHARMACEUTICALS

EQUITY RESEARCH

Recent run sustainable?Unattractive valuations without clear positive catalysts in sight for the near term

June 17, 2013

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 KLCIs 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

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

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 [email protected] +603 2027 6894

Bineet Banka - NSFSPL [email protected] +91 22 4053 3784

Stock Rating Price (Jun 12) TP Potential(local) (local) up/downside (%)

HART MK Reduce 6.30 4.70 -25.4%KRI MK Neutral 4.45 4.35 -2.2%SUCB MK Neutral 1.95 2.15 10.3%TOPG MK Neutral 6.39 6.20 -3.0%

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

Nomura | Malaysia rubber gloves June 17, 2013

2

Contents 3 Recent run sustainable?

3 Strong demand for rubber gloves

4 but can margins stay just as strong?

4 Updating our assumptions

8 Valuations

10 Risks / catalysts

10 Pandemic outbreaks

10 Healthcare reforms

12 Hartalega Holdings

17 Kossan Rubber Industries

22 Supermax Corp Bhd

27 Top Glove Corp

32 Appendix A-1


3

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 KLCIs 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

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

Fig. 3: Malaysia exports of NR gloves

Source: MREPC, Nomura research

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Fig. 4: NR still dominant in most regions (2012 data)


Fig. 5: Malaysia exports of SR gloves


but can margins stay just as strong? In this regard, we do not downplay the visibility of demand for rubber gloves coming from across the world. Nonetheless, our concern remains on the margins of glovemakers given the keener competition coming and yet to come into play.

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. The four largest glove manufacturers have, together, planned to add on some 15bn pcs capacity of NBR gloves in calendar 2013 alone, with more of such plans in the bag for the near future. We note that while new production lines are all inter-switchable between NR and NBR gloves with minimal downtime, all of the new capacities are currently earmarked for NBR gloves.

Drawing comparison to Prisoners dilemma game We believe that as all players step up their productions in the NBR division, glovemakers will, in our view, likely be tempted to lower ASPs in order to lure customers, regardless of it being in the companies best interests to allow prices to stay high and reap maximum profits as demonstrated in Prisoners dilemma game. Indeed, our on-the-ground survey suggests that various companies already are, or do foresee themselves, producing NBR gloves at less profitable levels, and some seemingly contented with margins similar to that of NR gloves.

Moreover, we opine that as more NBR capacity comes on-stream progressively throughout the year, the intensifying competition in such space will likely provide customers with higher bargaining power, thus affecting the glovemakers ability to price such gloves at a significantly higher price than the NR counterparts. This suggests that the high-margin days of NBR glove-manufacturing could be no longer, as its scarcity factor would be gone with the large additional capacity coming onto the market.

Holding to our view of mounting pricing pressure Judging from the recent quarterly results, margins appear to have, generally, held up better than we have expected so far boosted also by the favourable raw material prices. 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, it will be somewhat difficult for the other glovemakers to keep their ASPs up without risking losing some customers. Hence, we expect ASPs to continue trending downward, reflecting both easing raw material costs and also declining margins due to keener competition in the NBR space.

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Updating our assumptions We fine-tune the assumptions we have applied to the key inputs into our models, including exchange rates, raw material prices and capacity expansions. Taking into account these changes, we also roll forward our earnings base for Kossan, Supermax and Top Glove to FY14F, arriving at our new TPs for each stock.

Now expecting a weaker ringgit Being an export-driven industry, goods sold are quoted in USD while the bulk of the costs are dealt with in MYR; the relative strength of the ringgit to the greenback therefore has an impact on the glovemakers earnings. We also note that while NBR raw materials are quoted in USD, providing a natural hedge to glovemakers, that of NR latex is quoted in MYR. However, we understand that glove manufacturers generally do convert their costs into USD before adjusting their ASPs to take into account any cost savings / inflation, thus the impact of exchange rates on earnings from the raw material perspective is less direct.

Our latest exchange rate forecasts are shown in the table below. Fig. 6: Nomuras in-house currency forecasts

1Q12 2Q12 3Q12 4Q12 1Q13 2Q13F 3Q13F 4Q13F 2012 2013F 2014FMYR / USD 3.06 3.18 3.06 3.06 3.10 3.10 3.05 3.02 3.06 3.02 2.92 THB / USD 30.80 31.80 30.80 30.60 29.30 28.70 28.60 28.50 30.60 28.50 27.80 THB / MYR 10.07 10.00 10.07 10.00 9.45 9.26 9.38 9.44 10.00 9.44 9.52

Note: Numbers in bold are actual values; others forecast. Forecasts are end of period and modal. Table reflects data available as of 6 June 2013. Source: CEIC, Nomura Global Economics

Raw material prices weaker than expected Due to a large newly planted and re-planted area of rubber trees, we have expected NR latex prices to remain soft in the mid-term on the back of ample upcoming supply. Nonetheless, we have seen flattish prices over this years wintering period while NR latex prices have remained below the 600sen/kg mark since early-April, owing largely to the weak automotive industry globally. We hence revise downwards our average NR latex price assumption to 590/615 sen/kg for FY13F/FY14F, from 630/620 sen/kg. We also lower our average grossed-up NBR raw material price assumption to 553/563 sen/kg for FY13F/FY14F, from 608/611 sen/kg. Fig. 7: New and re-planting of rubber trees by ANRPC countries

Note: The Association of Natural Rubber Producing Countries (ANRPC) account for c.94% of the worlds NR production based on our estimates. Source: ANRPC, Nomura research

Fig. 8: NR latex price typically peaks around February in the absence of other factors

Note: Pink highlights mark the end of February for each year. Source: Bloomberg, Nomura research

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Fig. 9: Automotive industry a main driver for NR latex prices

Source: OICA, CEIC, Nomura research

Fig. 10: TOCOM rubber stocks vs. NR latex prices

Source: Bloomberg, Nomura research

but cost savings are likely to be passed on As raw materials comprise the largest chunk of each glovemakers cost of production, lower NR latex and nitrile cost are likely to generally mean improved profits and margins for the manufacturers. While this is the case, we note also that ASPs are always adjusted in tandem with the change in raw material costs. 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. Thus, we expect the bulk of cost savings to be shared with the customers, muting somewhat the positive effect that softer raw material costs could have on earnings.

Among the four listed glove manufacturers, we note that Top Glove and Supermax are the ones which appear to be more sensitive to raw material prices. As depicted in the charts below, margins of the two firms are inversely correlated with average latex prices. Kossan on the other hand does not display the same pattern, while that of Hartalega is rather the opposite of that of Top Glove and Supermax. We attribute such observation to 1) the NR-heavy product mix of Top Glove and Supermax, rather balanced mix of Kossan, and the NBR-focused Hartalega; 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, while Top Glove and Supermax appear to be more keen to compete on price, in comparison. Fig. 11: EBITDA margins vs. NR latex price Top Glove

Source: Company data, Bloomberg, Nomura research

Fig. 12: EBITDA margins vs. NR latex price Supermax


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Fig. 13: EBITDA margins vs. NR latex price Kossan


Fig. 14: EBITDA margins vs. NR latex price Hartalega


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Valuations The Rubber Gloves sector has significantly outperformed the KLCIs 5.1% gain YTD; with the exception of Supermax, with its mere 2.6% gain, while the other three listed companies have rallied 15-34%. We note that most of the gain has been accumulated since April, with the onset of the first H7N9 case in China back in late-March 2013. 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- and bottom-lines for the glovemakers.

Nonetheless, following the recent rally, glove stocks are now trading between 0.7-2.7SD above their respective long-term means suggesting that the stocks are not cheap. We thus think that the favourable costs are already priced into the stocks at current levels. Taking into account current trading multiple and growth prospects, while Top Glove, Supermax and Kossan appear fairly priced, we believe Hartalegas valuations are lofty, considering the fact that its profitability is, in our view, set to look less attractive with declining ROEs amid the entrance of all other major glovemakers into its dominant NBR segment.

Thus we have a Neutral rating on Top Glove, Supermax (upgraded from Reduce) and Kossan, while we maintain our Reduce rating on Hartalega. Fig. 15: Valuations at a glance Based on consensus (Bloomberg) estimates 31-Dec-12 31-Mar-13 12-Jun-13 YTD gain 3y AvgTop Glove Share price 5.63 5.40 6.39 14.6%1y fwd P/E 15.03 13.99 15.70 15.35 Supermax Share price 1.93 1.82 1.95 2.6%1y fwd P/E 8.98 8.39 8.90 8.79 Kossan Share price 3.36 3.55 4.45 33.9%1y fwd P/E 9.21 9.21 10.78 8.47 Hartalega Share price 4.75 4.94 6.30 32.8%1y fwd P/E 13.77 14.16 17.81 11.51

Source: Bloomberg, Nomura research Fig. 16: Earnings growth estimates FY13F FY14F FY15F 3y CAGR PEG (FY14F)Top Glove Nomura 9.2% 14.4% 5.8% 9.8% 1.61 Consensus 13.0% 10.8% 10.2% 11.4% 1.38 Supermax Nomura 8.3% 12.1% 15.3% 11.8% 0.77 Consensus 15.1% 14.1% 8.5% 12.5% 0.73 Kossan Nomura 21.0% 11.8% 12.2% 14.9% 0.70 Consensus 19.0% 13.6% 13.3% 15.3% 0.68 Hartalega Nomura 15.0% 4.3% 7.4% 8.8% 2.17 Consensus 16.6% 8.1% 9.5% 11.3% 1.68

Source: Bloomberg, Nomura estimates


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Fig. 17: Local and regional comparables

Note: Pricing as of 12 June 2013 Source: Bloomberg (for Not rated stocks), Nomura research

Share TargetMkt cap Price Price

Companies Ticker (USDmn) (Local) (Local) Rating CY12 CY13F CY14F CY12 CY13F CY14F CY12 CY13F CY14F CY12 CY13F CY14FMalaysian glove-makersTop Glove Corp TOPG MK 1,264 6.39 6.20 NEUTRAL 9.5 14.7 3.6 18.9 17.0 15.4 3.1 2.8 2.5 2.6 2.9 3.2Supermax Corp SUCB MK 423 1.95 2.15 NEUTRAL 16.9 8.3 12.1 10.9 10.1 9.0 1.6 1.4 1.3 1.7 3.0 3.3Kossan Rubber Industries KRI MK 453 4.45 4.35 NEUTRAL 14.5 21.0 11.8 13.9 11.5 10.3 2.3 2.1 1.8 2.0 3.1 3.9Hartalega Holdings HART MK 1,476 6.30 4.70 REDUCE 16.6 6.8 11.3 20.4 18.7 17.0 6.3 5.4 4.7 2.0 2.3 2.5International glove-makersAnsell ANN AU 2,490 18.07 16.10 NEUTRAL 6.8 12.0 3.8 17.2 15.7 14.6 3.1 2.8 2.4 2.0 2.1 2.2Cardinal Health CAH US 16,120 47.16 NA N.R. 16.2 (2.9) 8.9 14.0 13.2 12.8 2.4 2.3 2.1 2.1 2.5 2.7Kimberly-Clark Corp KMB US 37,243 96.81 NA N.R. 27.3 5.3 3.7 16.7 15.9 15.3 7.2 7.6 5.9 3.3 3.5 3.9Semperit AG SEM AV 424 27.46 NA N.R. 1.4 14.6 11.5 12.0 10.5 9.4 1.3 1.2 1.1 2.8 3.2 3.4Sri-Trang Agro STA TB 554 13.40 NA N.R. 6.1 15.5 47.5 11.7 10.1 6.9 0.9 0.8 NA 3.7 3.8 NA3M Co MMM US 75,252 109.03 NA N.R. 5.5 1.9 1.0 16.1 15.8 15.6 3.9 3.5 3.1 2.3 2.5 2.5Other health-relatedMani Inc 7730 JP 393 3,180 NA N.R. (5.9) 6.7 7.6 17.7 18.0 16.8 1.8 1.7 1.6 1.9 2.0 2.0Nipro Corp 8086 JP 2,087 1,169 730.00 NEUTRAL 146.5 (34.5) 33.8 20.8 23.9 21.6 1.7 1.7 1.6 1.8 1.7 1.8Shandong Weigao 1066 HK 5,454 9.46 NA N.R. 19.4 23.2 20.0 28.1 22.8 19.0 3.4 3.1 2.8 1.0 1.2 1.3Microport Scientif ic Corp 853 HK 1,059 5.84 NA N.R. (0.2) 16.6 14.9 18.4 15.8 13.7 2.5 2.3 2.1 1.3 1.8 2.0Mindray Medical Intl Ltd-Adr MR US 4,769 41.21 NA N.R. 34.8 14.0 16.7 19.6 17.2 14.8 3.1 2.7 2.4 1.2 1.3 1.5Bangkok Dusit Med Service BGH TB 7,338 147.00 166.75 NEUTRAL 18.5 17.5 NA 31.1 26.5 NA 5.5 4.9 NA 1.3 1.6 NABumrungrad Hospital Pub Co BH TB 1,800 76.50 102.75 BUY 13.3 13.0 NA 23.6 20.9 NA 5.8 5.0 NA 2.1 2.4 NA

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Risks / catalysts

Pandemic outbreaks In the past, 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). We have, again, seen such an effect over the last two months when China began to report a spurt in cases of the H7N9 virus. On this front, 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, as per a China Daily report dated June 10, 2013). However, we cannot rule out completely any chance of this flu worsening further. We opine that the H7N9 virus touching off a pandemic outbreak will be the largest immediate positive catalyst for the sector, as glove demand is likely to spike up globally as a result. Fig. 18: Share price correlation with pandemics


Fig. 19: Market cap-weighted share price performance vs. number of new H7N9 cases reported

Source: Bloomberg, News reports, Nomura research

Healthcare reforms A catalyst from the more fundamental perspective will be any healthcare reforms introduced, particularly in the populous countries / regions. We note the vast discrepancy between glove usage and population between parts of the world (refer LHS chart), which suggests that using glove usage as a gauge for hygiene awareness, a large majority of the worlds population has a long way to go in terms of improving the healthcare regulations. Based on glove imports and population data, we put together the RHS chart below which shows, again, the gap between glove usage of the different countries.

Thus, given the large population in the emerging countries (particularly China and India), we see a large latent demand in the region. We estimate that the current glove usage per capita of China is close to 1.3 pcs p.a. less than 1% that of the US. Thus, assuming that glove usage in China doubles to 2.6 (1.7% that of the US), that would imply an additional demand of more than 2bn pieces of gloves each year. While rising affluence could lead to higher healthcare awareness, we think that a spike in glove demand could only be seen if hard regulations are put in place by the government. Though we do not expect such to happen in the near future, we believe that the Chinese government is working towards this direction with its 12th Five-Year Plan (2011-15) depicting Chinas intention to improve the countrys healthcare standards including the prevention and control of major diseases outbreaks and communicable diseases. We view any healthcare reform as a longer-term catalyst for the rubber gloves sector.

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Fig. 20: Discrepancy between glove usage and population

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Fig. 21: Per capita glove usage

Source: World Bank, World Trade Atlas, Nomura research

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Hartalega Holdings HTHB.KL HART MK HEALTH CARE & PHARMACEUTICALS

EQUITY RESEARCH

Raising TP to MYR4.70; maintain ReduceValuations unattractive as dominant NBR segment sees keener competition

June 17, 2013

Rating Remains ReduceTarget price Increased from 4.15

MYR 4.70

Closing price June 12, 2013

MYR 6.30

Potential downside -25.4%

Action: Raising TP to MYR4.70; maintain Reduce We revise our TP upwards to MYR4.70 from MYR4.15, incorporating our updated raw material price assumptions, capacity estimates and exchange rate forecasts. Taking into account the new inputs, we adjust upward our FY13F/FY14F net profit by 6.4%/9.5%. While we acknowledge Hartalegas unparalleled efficiencies, we think that valuations are lofty in light of a more crowded NBR glove market, which should see pricing power come under pressure, in our view.

Catalyst: Margin downtrend likely as ASP continues to weaken We note that all major glovemakers are expanding aggressively in the nitrile (NBR) market, with additional capacity of c.15bn pcs slated to be put on-stream by the four main players alone in calendar 2013. While demand is likely to remain strong for rubber gloves, we think heightened competition will continue to prompt manufacturers to lower ASPs as customers enjoy better bargaining power. Thus we remain cautious on NBR-focused glovemakers as we believe that margins are likely to see a downward trend in the near term.

Valuation: Expensive amid stiffer competition in the NBR space Hartalega shares currently trade at 19.1x FY14F EPS of 33.04sen, which is a lofty valuation in our view, amid intensifying competition and declining ROEs. We arrive at our TP of MYR4.70 by pegging its FY14F EPS of 33.04sen to a target multiple of 14.2x the average one-year forward P/E it has traded at in the past 12 months. We do not use a long-term average as Hartalega saw a structural break in valuations back in 2012.

31 Mar FY13 FY14F FY15F FY16FCurrency (MYR) Actual Old New Old New Old New

Revenue (mn) 1,032 1,165 1,209 1,376 1,351 1,636

Reported net profit (mn) 235 236 251 254 279 322

Normalised net profit (mn) 235 236 251 254 279 322

FD normalised EPS 31.67c 32.29c 33.04c 34.73c 35.47c 39.72c

FD norm. EPS growth (%) 15.0 6.5 4.3 7.6 7.4 12.0

FD normalised P/E (x) 19.9 N/A 19.1 N/A 17.8 N/A 15.9

EV/EBITDA (x) 13.1 N/A 12.1 N/A 10.7 N/A 9.1

Price/book (x) 6.0 N/A 5.2 N/A 4.6 N/A 4.0

Dividend yield (%) 2.0 N/A 2.4 N/A 2.5 N/A 2.8

ROE (%) 33.9 28.8 29.8 26.1 27.9 27.4

Net debt/equity (%) net cash net cash net cash 1.7 net cash 0.2

Source: Company data, Nomura estimates

Anchor themes We expect healthy long-term demand outlook due to 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 Our TP is 16% below consensus on expectations of lower margins moving forth and TP being pegged to a lower P/E multiple; we think the stock is expensive at current levels.

Research analysts





Nomura | Hartalega Holdings June 17, 2013

13

Key data on Hartalega Holdings Incomestatement(MYRmn)Year-end 31 Mar FY12 FY13 FY14F FY15F FY16FRevenue 931 1,032 1,209 1,351 1,636Cost of goods sold -634 -731 -832 -930 -1,145Gross profit 297 301 377 421 492SG&A -36 6 -53 -58 -69Employee share expense

Operating profit 260 307 324 363 423

EBITDA 289 339 377 430 505Depreciation -29 -32 -53 -68 -82Amortisation

EBIT 260 307 324 363 423Net interest expense -2 -1 -1 -1 -1Associates & JCEs

Other income

Earnings before tax 258 306 323 361 421Income tax -57 -71 -72 -82 -99Net profit after tax 201 235 251 279 322Minority interests 0 0 0 0 0Other items

Preferred dividends

Normalised NPAT 201 235 251 279 322Extraordinary items

Reported NPAT 201 235 251 279 322Dividends -91 -91 -113 -126 -145Transfer to reserves 110 143 138 153 177

Valuation and ratio analysis

Reported P/E (x) 22.8 19.6 19.1 17.8 15.9Normalised P/E (x) 22.8 19.6 19.1 17.8 15.9FD normalised P/E (x) 22.9 19.9 19.1 17.8 15.9FD normalised P/E at price target (x) 17.1 14.9 14.2 13.3 11.8Dividend yield (%) 2.0 2.0 2.4 2.5 2.8Price/cashflow (x) 23.0 14.7 19.6 15.1 14.1Price/book (x) 7.4 6.0 5.2 4.6 4.0EV/EBITDA (x) 15.5 13.1 12.1 10.7 9.1EV/EBIT (x) 17.2 14.5 14.1 12.7 10.9Gross margin (%) 31.9 29.1 31.2 31.2 30.0EBITDA margin (%) 31.1 32.8 31.2 31.9 30.9EBIT margin (%) 27.9 29.7 26.8 26.8 25.8Net margin (%) 21.6 22.7 20.7 20.7 19.7Effective tax rate (%) 22.0 23.2 22.3 22.7 23.5Dividend payout (%) 45.3 38.9 45.0 45.0 45.0Capex to sales (%) 3.8 1.8 21.6 18.5 15.3Capex to depreciation (x) 1.2 0.6 4.9 3.7 3.0ROE (%) 36.2 33.9 29.8 27.9 27.4ROA (pretax %) 46.7 45.5 36.5 32.1 31.3

Growth (%)

Revenue 26.7 10.8 17.1 11.8 21.1EBITDA 7.0 17.1 11.4 14.1 17.4EBIT 6.0 17.9 5.6 11.9 16.6Normalised EPS 5.6 16.1 2.9 7.4 12.0Normalised FDEPS 5.4 15.0 4.3 7.4 12.0

Per share

Reported EPS (MYR) 27.65c 32.10c 33.04c 35.47c 39.72cNorm EPS (MYR) 27.65c 32.10c 33.04c 35.47c 39.72cFully diluted norm EPS (MYR) 27.53c 31.67c 33.04c 35.47c 39.72cBook value per share (MYR) 0.85 1.05 1.21 1.38 1.57DPS (MYR) 0.13 0.12 0.15 0.16 0.18Source: Company data, Nomura estimates

Relative performance chart (one year)

Source: ThomsonReuters, Nomura research (%) 1M 3M 12MAbsolute (MYR) 10.5 31.0 64.1Absolute (USD) 5.4 30.0 66.6Relative to index 10.0 22.7 51.4Market cap (USDmn) 1,473.0Estimated free float (%) 44.952-week range (MYR) 6.4/3.833-mth avg daily turnover (USDmn) 1.31 Major shareholders (%) Hartalega Industries Sdn Bhd 50.1 Budi Tenggara Sdn Bhd 5.0Source: Thomson Reuters, Nomura research

Notes We expect margins and returns above industry average; dividend payout policy of more than 45%


14

Cashflow(MYRmn)Year-end 31 Mar FY12 FY13 FY14F FY15F FY16FEBITDA 289 339 377 430 505Change in working capital -37 38 -61 -20 -42Other operating cashflow -52 -59 -73 -83 -100Cashflow from operations 200 317 244 327 363Capital expenditure -35 -18 -261 -250 -250Free cashflow 165 299 -17 77 113Reduction in investments 0 0 0 0 0Net acquisitions 0 0 0 0 0Reduction in other LT assets 0 0 0 0 0Addition in other LT liabilities 0 0 0 0 0Adjustments -25 -176 0 0 0Cashflow after investing acts 140 123 -17 77 113Cash dividends -87 -99 -113 -126 -145Equity issue 0 0 0 12 12Debt issue 0 0 0 0 0Convertible debt issue 0 0 0 0 0Others -7 -5 20 1 1Cashflow from financial acts -94 -104 -92 -112 -132Net cashflow 46 19 -110 -35 -18Beginning cash 117 163 182 73 38Ending cash 163 182 73 38 19Ending net debt -139 -170 -52 -16 3Source: Company data, Nomura estimates

Balancesheet(MYRmn)As at 31 Mar FY12 FY13 FY14F FY15F FY16FCash & equivalents 163 182 73 38 19Marketable securities 0 0 0 0 0Accounts receivable 117 125 156 176 212Inventories 98 87 117 125 158Other current assets 0 0 0 0 0Total current assets 378 394 346 338 389LT investments 0 1 1 1 1Fixed assets 370 486 693 876 1,043Goodwill 0 7 7 7 7Other intangible assets

Other LT assets 10 49 49 49 49Total assets 758 936 1,096 1,271 1,489Short-term debt 13 8 13 13 13Accounts payable 60 93 93 101 129Other current liabilities 12 15 15 15 15Total current liabilities 85 115 121 129 157Long-term debt 12 4 8 8 9Convertible debt 0 0 0 0 0Other LT liabilities 41 50 50 50 50Total liabilities 138 170 179 188 216Minority interest 1 1 1 1 2Preferred stock 0 0 0 0 0Common stock 183 367 379 391 403Retained earnings 437 399 537 691 868Proposed dividends

Other equity and reserves

Total shareholders' equity 620 766 916 1,082 1,271Total equity & liabilities 758 936 1,096 1,271 1,489

Liquidity (x)

Current ratio 4.42 3.42 2.87 2.63 2.48Interest cover 149.8 339.7 270.8 285.2 310.8

Leverage

Net debt/EBITDA (x) net cash net cash net cash net cash 0.01Net debt/equity (%) net cash net cash net cash net cash 0.2

Activity (days)

Days receivable 42.9 42.8 42.3 44.8 43.4Days inventory 46.8 45.9 44.7 47.5 45.2Days payable 33.9 38.2 40.9 38.2 36.8Cash cycle 55.7 50.5 46.2 54.0 51.7Source: Company data, Nomura estimates

Notes

Significantly higher capex for large, long-term capacity expansion plans which should see capacity more than triple upon completion (estimated completed in FY21F)

Notes Reducing cash pile in line with high capex; expected higher earnings should move Hartalega back to net cash position by FY16F


15

Raising TP to MYR4.70; maintain Reduce After a recent meeting with management, we were impressed by the companys ability to constantly upgrade its products and production processes via on-going R&D efforts. We also learned that Hartalega is looking for ways to diversify itself in terms of product offerings, geographical region and customer base. We note that Hartalega is currently highly concentrated on the NBR gloves segment (94% revenue), North American and European markets (>85% revenue), with a small customer base of 450 names (>100 active ones). While such a strategy has worked well for Hartalega in the past, we think that the lack of diversification of its revenue source potentially posts inherent risks to the company, and thus view its intention to diversify positively.

We also understand from management that Hartalegas 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. As a result, capacity expansion is likely to be muted in FY14F, as new production lines from the NGC will only start coming into operations from August 2014, as per management guidance. However, construction of the new production facility will be sped up by building two production plants concurrently. We expect construction of the NGC to be completed by FY20F, adding production capacity by nearly 30bn pcs upon completion.

Taking into account Hartalegas improved line speed and revised capacity expansion plans, while at the same time updating our raw material price assumptions and exchange rate forecasts, we adjust our FY14F/FY15F earnings estimates upward by 6.4%/9.5%.

Our changes of inputs are summarised in the table below: Fig. 22: Input assumptions changes Input assumptions (period average) 2014F 2015F 2016F Latex prices (MYR/kg) Old 6.20 6.23 6.35 New 5.96 6.19 6.35 Nitrile prices (MYR/kg) Old 6.10 6.13 6.25 New 5.56 5.64 5.78 MYR/USD Old 2.95 2.89 2.88 New 3.05 2.95 2.92

Note: Nitrile prices are grossed up to the same solid content as latex for comparison purpose. Source: Nomura estimates

We expect margins to trend downwards We note that Hartalegas ASPs have been trending south in the past few quarters, reflecting both a weaker raw material price and also lower profit margins. 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, albeit slightly, on the back of the previously mentioned two factors. As highlighted in the earlier section, Hartalega is highly concentrated in the NBR segment; we are thus cautious of its earnings growth prospects in the near term as pricing power is likely to come under pressure, in our view.

We arrive at our new TP of MYR4.70 by pegging our revised FY14F EPS of 33.04sen to a higher 14.2x target one-year forward P/E, which is the average multiple Hartalega has traded at in the past 12 months, after its structural break in 2012. We have previously attached a target multiple of 12.8x for Hartalega 1SD above its 3-year mean; we change our target multiple to reflect the continuous improvement in the companys operations and potential diversification as previously discussed.

Our P/E-based TP is well supported by our 10-year DCF valuation with cashflows discounted back to June 2013, which provides an intrinsic value of MYR4.77 per share.


16

Fig. 23: Historical P/E band chart


Fig. 24: Historical one-year forward P/E


While we believe that Hartalega deserves to trade at a premium to sector average P/E multiple, 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. We further note that we expect Hartalega to see ROE decline from 36% in FY12, 34% in FY13 down to 27% in FY16F, owing to shrinking EBIT margins and lower asset turnover. As well, a PEG ratio of 2.2 on our estimates suggests that current lofty valuations appear to be somewhat unjustified for its growth potentials.

Risks to our view Upside risks New, significant capacity expansion plans which will continue to boost capacity and

earnings, or innovative product types which could push up margins.

Higher/lower-than-expected pass-on rates of cost inflation/savings.

Faster-than-expected completion of its NGC expansion plans.

Further weakening of NBR raw material prices.

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P/E (x)

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+1SD = 13.1

-1SD = 7.6


Kossan Rubber Industries KRIB.KL KRI MK HEALTH CARE & PHARMACEUTICALS

EQUITY RESEARCH

Raising TP to MYR4.35; maintain NeutralFundamentals intact but recent rally leaves behind limited upside, in our view

June 17, 2013

Rating Remains NeutralTarget price Increased from 3.80

MYR 4.35


MYR 4.45

Potential downside -2.2%

Action: Raising TP to MYR4.35; maintain Neutral We revise our TP upwards to MYR4.35 from MYR3.80, as we update our raw material price assumptions, capacity estimates and exchange rate forecasts, while rolling forward earnings to FY14F. Taking into account the new inputs, we adjust upward our net profit estimates for FY13F/FY14F by 2.7%/7.5%. Despite foreseeing better earnings to flow through for Kossan, we think that its current share price upside is somewhat limited post its 27% run-up since the start of April; we thus maintain our Neutral rating.

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, our concern lies mainly on the weakening pricing power for glovemakers as upcoming supply is likely to result in heightened competition. Major delays in large expansion projects or a sudden surge in demand will, however, give glovemakers better pricing power, resulting in better-than-expected margins and profits.

Valuation: Fairly priced at current levels, in our view Kossan shares currently trade at 10.3x FY14F EPS of 43.36sen nearly +0.7SD above its long-term mean of 9.1x. We think such a valuation is fair as it is in line with the industrys long-term average one-year forward P/E. We arrive at our TP of MYR4.35 by pegging its FY14F EPS to a target multiple of 10x.

31 Dec FY12 FY13F FY14F FY15FCurrency (MYR) Actual Old New Old New Old New

Revenue (mn) 1,234 1,343 1,368 1,449 1,524 1,705









ROE (%) 18.6 19.5 19.1 18.3 18.9 19.0

Net debt/equity (%) 16.4 net cash 1.6 net cash net cash net cash



Nomura vs consensus While our FY13F/FY14F earnings estimates are in line with consensus, our TP is 7% below consensus as we think Kossan is already fairly priced at current multiples.

Research analysts





Nomura | Kossan Rubber Industries June 17, 2013

18

Key data on Kossan Rubber Industries Incomestatement(MYRmn)Year-end 31 Dec FY11 FY12 FY13F FY14F FY15FRevenue 1,090 1,234 1,368 1,524 1,705Cost of goods sold -761 -820 -903 -1,022 -1,154Gross profit 329 414 465 502 552SG&A -209 -269 -298 -314 -339Employee share expense 0 0 0 0 0Operating profit 120 145 168 187 213


EBIT 120 145 168 187 213Net interest expense -7 -6 -9 -10 -12Associates & JCEs 0 0 0 0 0Other income 0 0 0 0 0Earnings before tax 112 138 159 177 201Income tax -22 -34 -33 -37 -43Net profit after tax 91 105 125 140 158Minority interests -1 -3 -2 -2 -3Other items 0 0 0 0 0Preferred dividends 0 0 0 0 0Normalised NPAT 89 102 124 138 155Extraordinary items 0 0 0 0 0Reported NPAT 89 102 124 138 155Dividends -35 -29 -43 -55 -70Transfer to reserves 54 73 80 83 85



Growth (%)

Revenue 4.1 13.2 10.9 11.4 11.9EBITDA -12.1 18.2 14.0 10.6 12.5EBIT -19.4 21.0 15.7 11.9 13.4Normalised EPS -21.1 14.6 21.0 11.8 12.2Normalised FDEPS -21.1 14.6 21.0 11.8 12.2

Per share



Source: ThomsonReuters, Nomura research (%) 1M 3M 12MAbsolute (MYR) 10.4 30.5 46.9Absolute (USD) 5.3 29.6 49.2Relative to index 9.9 22.3 34.3Market cap (USDmn) 454.6Estimated free float (%) 48.852-week range (MYR) 4.5/2.973-mth avg daily turnover (USDmn) 1.03 Major shareholders (%) Kossan Holdings Sdn Bhd 51.2Source: Thomson Reuters, Nomura research

Notes Dividend payout policy increased from 25% to 35-40%, with managements intention to further raise it to 50%


19

Cashflow(MYRmn)Year-end 31 Dec FY11 FY12 FY13F FY14F FY15FEBITDA 161 190 217 240 269Change in working capital -58 -36 16 -37 -23Other operating cashflow -56 -61 -94 -96 -117Cashflow from operations 46 93 138 106 129Capital expenditure -40 -83 -60 -70 -70Free cashflow 6 10 78 36 59Reduction in investments 0 0 0 0 0Net acquisitions 0 0 0 0 0Reduction in other LT assets 0 0 0 0 0Addition in other LT liabilities 0 0 0 0 0Adjustments -8 2 2 2 3Cashflow after investing acts -1 13 80 38 62Cash dividends 0 0 0 0 0Equity issue 0 0 0 0 0Debt issue -12 43 8 17 23Convertible debt issue 0 0 0 0 0Others -20 -10 0 0 0Cashflow from financial acts -31 33 8 17 23Net cashflow -33 46 87 55 85Beginning cash 81 48 94 181 236Ending cash 48 94 181 236 321Ending net debt 108 99 11 -21 -75Source: Company data, Nomura estimates

Balancesheet(MYRmn)As at 31 Dec FY11 FY12 FY13F FY14F FY15FCash & equivalents 48 94 181 236 321Marketable securities 0 0 0 0 0Accounts receivable 156 217 195 218 243Inventories 164 149 179 209 232Other current assets 3 5 5 5 5Total current assets 371 464 561 667 801LT investments 0 0 0 0 0Fixed assets 433 514 525 543 556Goodwill 5 5 5 5 5Other intangible assets 0 0 0 0 0Other LT assets 0 0 0 0 0Total assets 809 984 1,091 1,216 1,362Short-term debt 130 155 146 153 160Accounts payable 103 115 139 153 178Other current liabilities 8 9 9 9 9Total current liabilities 242 278 294 315 347Long-term debt 26 38 46 63 86Convertible debt 0 0 0 0 0Other LT liabilities 34 50 50 50 50Total liabilities 302 366 390 428 483Minority interest 9 13 14 16 19Preferred stock 0 0 0 0 0Common stock 160 160 160 160 160Retained earnings 339 448 530 615 703Proposed dividends

Other equity and reserves -2 -4 -4 -4 -4Total shareholders' equity 497 605 687 771 859Total equity & liabilities 809 984 1,091 1,216 1,362

Liquidity (x)


Leverage

Net debt/EBITDA (x) 0.67 0.52 0.05 net cash net cashNet debt/equity (%) 21.8 16.4 1.6 net cash net cash

Activity (days)


Notes

Management expects MYR70-80mn capex in the next two years

Notes


20

Raising TP to MYR4.35; maintain Neutral Accounting for the new capacity, which Kossan has managed to and should continue to bring on-stream, alongside its improvement in production efficiencies, we adjust upwards our estimates for FY13F-FY15F sales volumes. With NR latex prices being weaker than we have initially expected, we revise downwards our estimates for raw material input prices, resulting in lower cost of goods sold for Kossan. 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.



As a result of the aforementioned changes, we revise our FY13F/FY14F earnings upwards by 2.7%/7.5%. We peg our revised FY14F EPS of 43.36sen to a 10x target one-year forward P/E, consistent with the industrys long-term average, arriving at TP of MYR4.35 with a Neutral rating. We cross-check our P/E-based TP with a 10-year DCF valuation with cashflows discounted back to June 2013, which provides an intrinsic value of MYR4.66 per share.

Recent rally leaves Kossan fairly priced, in our view We initiated on the Rubber Glove sector back in January 2013 with Kossan as our top pick, as we saw it as a laggard with potential upside to valuations. Nonetheless, since the start of April, Kossan has rallied a rather significant 27%, hitting an all-time high of MYR4.50 on June 11, 2013. With its recent run-up, we think Kossan is currently fairly priced at 10.3x FY14F EPS nearly +0.7SD above its long-term mean of 9.1x. We note that the last time Kossan traded at such levels was back during the outbreak of H1N1 in 2009/10, where Kossans net profit grew 70% y-y in 2010. Hence, we believe that current multiples are fair and see limited upside to share price.


21





Higher dividend payout on the cards Kossan has increased its dividend payout policy from 25% to 35-40%, and intends to raise it further to 50%. On this note, we highlight that Kossans dividend yields of 3.0-4.9% from FY13F-FY15F are among the highest in the industry. Fig. 28: Dividend yield Malaysian-listed glovemakers

FY13F FY14F FY15F Top Glove 2.9 3.2 3.4 Supermax 2.9 3.3 3.8 Kossan 3.0 3.9 4.9 Hartalega * 2.6 2.8 3.2

* Hartalega FY13F=FY14F, FY14F=FY15F, FY15F=FY16F Source: Nomura estimates

Risks to our view Upside risks Major delays in industry expansion projects or sudden surge in demand (eg, a

pandemic), which will likely result in better pricing power for glovemakers.

Higher/lower-than-expected pass-on rates of cost inflation/savings, as we have assumed that ASP will come under pressure amid increased competition.

Better-than-expected earnings contribution from TRP segment from an improved automotive outlook or Indonesian venture which would likely lower labour costs.

Downside risks An unexpected surge in latex prices, whereby cost inflation pass-on would likely see a

lag, affecting margins.

Expansion hiccups which would affect its penetration into higher-end segments and limit growth of its market share.

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Supermax Corp Bhd SUPM.KL SUCB MK HEALTH CARE & PHARMACEUTICALS

EQUITY RESEARCH

Raising TP to MYR2.15; upgrade to NeutralFlattish share price performance makes valuations less demanding

June 17, 2013

Rating Up from Reduce NeutralTarget price Increased from 1.90

MYR 2.15


MYR 1.95

Potential upside +10.3%

Action: Raising TP to MYR2.15; upgrade to Neutral Supermax shares have gained a mere 2.6% YTD vs its peers rallies of 15-34% over the same time frame. We upgrade the stock to Neutral as its underperformance against peers makes its valuations fair, in our view. Nonetheless, we do not see compelling reasons to buy into the stock now. We revise our TP upwards to MYR2.15, from MYR1.90, as we roll forward earnings to FY14F while taking into account our updated raw material price assumptions and exchange rate forecasts. We tweak slightly our net profit estimates for FY13F/FY14F by +1.1%/+1.9% with the new inputs.

Catalyst: Soft input prices a plus, but cost savings likely to be shared While weak raw material (NR and nitrile latex) prices are likely to benefit Supermax alongside other glovemakers, we believe that the bulk of such cost savings will likely be enjoyed by Supermaxs customers instead, as we expect the company to lower its ASPs to keep its goods competitive with peers. We maintain our view that Supermaxs margins are likely to come under pressure despite soft input prices.

Valuation: Rather fair, but no upside catalyst in sight for now Supermax shares currently trade at 9.0x FY14F EPS of 21.74sen, which is on the lower end of the industry and below the industrys long-term average one-year forward P/E of 10x. However, we think that the lack of near-term positive catalysts makes Supermax less attractive. Our TP of MYR2.15 is arrived upon pegging its FY14F EPS to a 10x target multiple.

31 Dec FY12 FY13F FY14F FY15FCurrency (MYR) Actual Old New Old New Old New

Revenue (mn) 997 1,200 1,216 1,291 1,347 1,485









ROE (%) 15.2 14.4 15.0 14.5 15.1 15.6

Net debt/equity (%) 18.6 22.9 22.2 20.4 21.1 16.8



Nomura vs consensus Our TP is 7% below consensus on expectations of compressed margins. We do not foresee significant downside to current levels as valuations seem undemanding for Supermax's size.

Research analysts





Nomura | Supermax Corp Bhd June 17, 2013

23

Key data on Supermax Corp Bhd Incomestatement(MYRmn)Year-end 31 Dec FY11 FY12 FY13F FY14F FY15FRevenue 1,021 997 1,216 1,347 1,485Cost of goods sold -819 -734 -933 -1,041 -1,145Gross profit 202 263 283 307 339SG&A -113 -141 -150 -159 -167Employee share expense



EBIT 90 123 134 148 172Net interest expense -13 -9 -13 -13 -13Associates & JCEs 35 23 29 34 38Other income

Earnings before tax 112 137 150 169 198Income tax -8 -16 -18 -22 -28Net profit after tax 104 121 132 147 170Minority interests 0 0 0 0 0Other items

Preferred dividends

Normalised NPAT 104 122 132 148 170Extraordinary items 0 0 0 0 0Reported NPAT 104 122 132 148 170Dividends -22 -22 -40 -44 -51Transfer to reserves 82 100 92 103 119



Growth (%)

Revenue 4.5 -2.3 21.9 10.8 10.2EBITDA -37.2 29.1 11.8 9.2 14.7EBIT -42.2 36.6 9.0 10.7 16.5Normalised EPS -41.8 17.0 8.3 12.1 15.3Normalised FDEPS -41.8 17.0 8.3 12.1 15.3

Per share



Source: ThomsonReuters, Nomura research (%) 1M 3M 12MAbsolute (MYR) -4.9 0.5 7.1Absolute (USD) -9.3 -0.2 8.8Relative to index -5.4 -7.7 -5.5Market cap (USDmn) 423.7Estimated free float (%) 64.452-week range (MYR) 2.25/1.793-mth avg daily turnover (USDmn) 2.28 Major shareholders (%) Dato' Seri Stanley Thai 20.4Datin Seri Cheryl Tan 15.1Source: Thomson Reuters, Nomura research

Notes

Dividend payout revised by management to 30% from FY12 onwards; 20% previously


24

Cashflow(MYRmn)Year-end 31 Dec FY11 FY12 FY13F FY14F FY15FEBITDA 114 147 164 180 206Change in working capital -66 31 -48 -52 -30Other operating cashflow 9 -14 9 -30 -35Cashflow from operations 56 164 126 98 141Capital expenditure -38 -69 -96 -60 -60Free cashflow 18 94 30 38 81Reduction in investments -31 18 -29 -34 -38Net acquisitions

Reduction in other LT assets 1 0 0 0 0Addition in other LT liabilities 5 2 0 0 0Adjustments 25 -20 29 34 37Cashflow after investing acts 18 94 30 38 81Cash dividends -27 -12 -40 -44 -51Equity issue 0 0 0 0 0Debt issue -22 -27 24 -1 -1Convertible debt issue

Others 38 -37 -13 -13 -13Cashflow from financial acts -11 -76 -29 -58 -64Net cashflow 7 18 1 -20 17Beginning cash 97 104 123 124 104Ending cash 104 123 124 104 121Ending net debt 226 155 206 217 192Source: Company data, Nomura estimates

Balancesheet(MYRmn)As at 31 Dec FY11 FY12 FY13F FY14F FY15FCash & equivalents 104 123 124 104 121Marketable securities 0 0 0 0 0Accounts receivable 206 206 250 280 307Inventories 223 234 213 250 263Other current assets 8 1 1 1 1Total current assets 541 564 588 635 691LT investments 229 210 239 274 311Fixed assets 402 447 512 540 567Goodwill 29 29 29 29 29Other intangible assets 0 0 0 0 0Other LT assets 5 5 5 5 5Total assets 1,205 1,254 1,373 1,482 1,603Short-term debt 190 163 190 183 176Accounts payable 87 118 93 108 118Other current liabilities 0 4 4 4 4Total current liabilities 278 285 288 295 298Long-term debt 140 115 139 138 137Convertible debt

Other LT liabilities 18 20 20 20 20Total liabilities 436 420 447 454 456Minority interest 0 0 0 -1 -1Preferred stock 0 0 0 0 0Common stock 170 340 340 340 340Retained earnings 599 494 586 689 808Proposed dividends

Other equity and reserves 0 0 0 0 0Total shareholders' equity 769 834 926 1,029 1,148Total equity & liabilities 1,205 1,254 1,373 1,482 1,603

Liquidity (x)


Leverage

Net debt/EBITDA (x) 1.99 1.06 1.25 1.21 0.93Net debt/equity (%) 29.4 18.6 22.2 21.1 16.8

Activity (days)


Notes

Significantly higher capex in FY13F for the additional 40 production lines which should increase NBR capacity by 5.4bn pcs pa

Notes Receivable, inventory and payable days include both manufacturing and distribution arms


25

Raising TP to MYR2.15; upgrade to Neutral As both NR latex and NBR raw material prices have been weaker than we initially expected, we revise downwards our estimates for raw material input prices, resulting in lower cost of goods sold. We build into our model our updated exchange rate forecasts as well.



However, taking into account the aforementioned changes, 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. As a result, we only tweak our FY13F/FY14F earnings estimates slightly upwards by 1.1%/1.9%. We peg our revised FY14F EPS of 21.74sen to a 10x target one-year forward P/E, consistent with the industrys long-term average, arriving at TP of MYR2.15. We also run a 10-year DCF valuation with cashflows discounted back to June 2013 as a sense check to our P/E-based TP; we arrived at an intrinsic value of MYR2.07 per share via this methodology. Fig. 30: Historical P/E band chart




Undemanding valuations, but unexciting near-term prospects Traditionally a higher beta stock within the glove manufacturing sector, Supermax shares surged 18% within a week of the first H7N9 case in late-March 2013. It has however pared down some gains with 8% correction from its recent peak. We note that shares have gained a sheer 2.6% YTD while peers have enjoyed run-ups anywhere between 15-34% over the same horizon. Hence, from a valuation perspective, we think that Supermax is currently fairly priced, leading to our upgrade to a Neutral rating.

0

1

2

3

4

5

Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13

MYR

14x

11x

8x

5x

2x0

2

4

6

8

10

12

14

Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13

P/E (x)

Mean = 7.7

+1SD = 9.7

-1SD = 5.7


26

Nevertheless, alongside managements strategy of moving towards competitive pricing, we expect weaker margins for Supermax. While we expect raw material input prices to remain soft, 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, as Supermax will likely have to absorb a larger proportion of the squeeze in margins, in our view. We thus opine that operationally, Supermax remains unattractive in the near-term, justifying our Neutral view of the stock.

Risks to our view Upside risks Higher/lower-than-expected pass-on rates of cost inflation/savings, as we have

assumed that ASP will come under pressure amid increased competition.

Increased hygiene awareness from emerging markets like Brazil, which Supermax already has large exposure to and would readily benefit from such increase in demand.

Major delays in expansion projects by other industry players or sudden surge in demand (eg, a pandemic), which will likely result in better pricing power for glovemakers, limiting ASP downward adjustments.

Downside risks An unexpected surge in latex prices, whereby cost inflation pass-on would likely see a

lag, affecting margins.

Delays in its expansion plans which will stunt volume growth, resulting in flattish earnings growth.


Top Glove Corp TPGC.KL TOPG MK HEALTH CARE & PHARMACEUTICALS

EQUITY RESEARCH

Raising TP to MYR6.20; maintain NeutralLacking catalyst(s) for further run-up in the near term

June 17, 2013

Rating Remains NeutralTarget price Increased from 5.65 MYR 6.20

Closing price June 12, 2013 MYR 6.39

Potential downside -3%

Action: Raise TP to MYR6.20; maintain Neutral We raise our TP to MYR6.20 from MYR5.65 as we incorporate Top Gloves revised timeline for its capacity expansion plan, and our new raw material price assumptions and exchange rate forecasts, while rolling forward our earnings base to FY14F from FY13F. As a result, we tweak our FY13F/FY14F net profit estimates by -3.1%/-0.2%. We peg our FY14F EPS of 40.92sen at an unchanged target P/E of 15.2x, to arrive at our new TP of MYR6.20.

Catalyst: Cost savings from soft raw material prices unlikely to translate into better margins Given Top Gloves large(r) exposure to the natural rubber (NR) segment, it is likely to be the main beneficiary of weak NR latex prices as well as a strengthening USD, to some extent, in our view. Nonetheless, we see little upside for margin expansion as keener competition will, in our view, urge glovemakers to pass on any cost savings to respective customers.

Valuations: Fair with no visible near-term catalysts Though we expect volumes to remain strong for Top Glove, 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. Currently trading at 15.6x one-year forward P/E (FY14F EPS: 40.92sen), we believe that valuations are rather fair, as it trades just above its three-year mean of 15.2x. With no visible near-term catalysts, we maintain our Neutral rating on the stock as we see limited upside potential to the current share price.

31 Aug FY12 FY13F FY14F FY15FCurrency (MYR) Actual Old New Old New Old New

Revenue (mn) 2,314 2,495 2,443 2,809 2,743 3,041 2,962

Reported net profit (mn) 203 229 222 255 255 260 270

Normalised net profit (mn) 203 229 222 255 255 260 270

FD normalised EPS 32.74c 36.99c 35.76c 41.22c 40.92c 41.90c 43.31c

FD norm. EPS growth (%) 79.2 13.2 9.2 11.4 14.4 1.7 5.9





ROE (%) 17.1 17.4 16.9 17.7 17.6 16.5 17.0

Net debt/equity (%) net cash net cash net cash net cash net cash net cash net cash


Anchor themes We expect healthy long-term demand outlook due to 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 Our FY14F earnings estimates and TP are in line with consensus.

Research analysts

Malaysia Health Care & Pharmaceuticals Celeste Yap - NSM [email protected] +603 2027 6894



Nomura | Top Glove Corp June 17, 2013

28

Key data on Top Glove Corp Incomestatement(MYRmn)Year-end 31 Aug FY11 FY12 FY13F FY14F FY15FRevenue 2,054 2,314 2,443 2,743 2,962Cost of goods sold -1,819 -1,929 -2,019 -2,267 -2,454Gross profit 235 385 424 476 508SG&A -101 -157 -154 -170 -184Employee share expense



EBIT 134 228 270 305 324Net interest expense 10 12 9 11 11Associates & JCEs 1 0 0 0 0Other income

Earnings before tax 145 241 279 316 335Income tax -30 -33 -54 -57 -60Net profit after tax 115 207 225 259 274Minority interests -2 -5 -3 -5 -4Other items

Preferred dividends

Normalised NPAT 113 203 222 255 270Extraordinary items

Reported NPAT 113 203 222 255 270Dividends -68 -99 -111 -127 -135Transfer to reserves 45 104 111 127 135



Growth (%)

Revenue -1.2 12.7 5.5 12.3 8.0EBITDA -45.8 51.9 18.8 14.0 7.1EBIT -55.6 70.0 18.1 13.2 6.1Normalised EPS -54.1 79.2 9.1 14.4 5.9Normalised FDEPS -54.0 79.2 9.2 14.4 5.9

Per share



Source: ThomsonReuters, Nomura research (%) 1M 3M 12MAbsolute (MYR) -1.7 16.2 38.0Absolute (USD) -6.2 15.3 40.2Relative to index -2.2 7.9 25.4Market cap (USDmn) 1,265.5Estimated free float (%) 71.152-week range (MYR) 6.7/4.573-mth avg daily turnover (USDmn) 3.21

Major shareholders (%) Tan Sri Lim Wee Chai 28.9KWAP 6.0Source: Thomson Reuters, Nomura research

Notes

The 50% dividend payout policy is the highest among peers; there is potential for an upward revision in dividend payout, given the strong net cash position


29

Cashflow(MYRmn)Year-end 31 Aug FY11 FY12 FY13F FY14F FY15FEBITDA 196 297 353 402 431Change in working capital -74 -32 -31 -24 -29Other operating cashflow 51 0 -54 -57 -60Cashflow from operations 172 266 268 322 342Capital expenditure -141 -143 -227 -227 -167Free cashflow 31 123 41 95 175Reduction in investments -2 0 0 0 0Net acquisitions

Reduction in other LT assets 2 -7 0 0 0Addition in other LT liabilities 10 -3 0 0 0Adjustments -66 -11 12 15 15Cashflow after investing acts -25 102 54 110 190Cash dividends -88 -85 -111 -127 -135Equity issue 1 1 1 1 1Debt issue -1 0 0 0 0Convertible debt issue

Others -2 1 7 7 7Cashflow from financial acts -89 -84 -103 -120 -127Net cashflow -114 18 -50 -9 63Beginning cash 263 149 167 117 108Ending cash 149 167 117 108 171Ending net debt -146 -164 -115 -105 -168Source: Company data, Nomura estimates

Balancesheet(MYRmn)As at 31 Aug FY11 FY12 FY13F FY14F FY15FCash & equivalents 149 167 117 108 171Marketable securities

Accounts receivable 262 294 311 349 377Inventories 176 179 193 214 233Other current assets 129 170 170 170 170Total current assets 715 811 791 841 951LT investments 7 7 7 7 7Fixed assets 661 734 878 1,008 1,067Goodwill 20 20 20 20 20Other intangible assets 0 0 0 0 0Other LT assets 20 26 26 26 26Total assets 1,423 1,598 1,722 1,902 2,072Short-term debt 0 0 0 0 0Accounts payable 195 232 231 267 285Other current liabilities 35 43 43 43 43Total current liabilities 229 274 273 309 328Long-term debt 3 3 3 3 3Convertible debt 0 0 0 0 0Other LT liabilities 44 41 41 41 41Total liabilities 277 318 317 353 371Minority interest 25 24 28 32 36Preferred stock 0 0 0 0 0Common stock 481 484 491 499 507Retained earnings 626 747 861 993 1,133Proposed dividends

Other equity and reserves 15 24 24 24 24Total shareholders' equity 1,122 1,255 1,377 1,517 1,664Total equity & liabilities 1,423 1,598 1,722 1,902 2,072

Liquidity (x)

Current ratio 3.12 2.95 2.89 2.72 2.90Interest cover na na na na na

Leverage

Net debt/EBITDA (x) net cash net cash net cash net cash net cashNet debt/equity (%) net cash net cash net cash net cash net cash

Activity (days)


Notes

Large capex going forward to account for rubber plantation and long-term capacity expansion plans

Notes Close to nil borrowings; strong net cash position to support potential upcoming M&A deals


30

Raising TP to MYR6.25; maintain Neutral

Top Glove had previously expected additional capacity of 4.8bn pieces for FY13; however, this figure was subsequently lowered to 3.6bn due to several delays. We, thus, tweak our estimates for its volume slightly downwards to take into account such delays in target completion for its expansion plans. We also revise our raw material price assumptions as NR latex prices remain weaker-than-expected, resulting in lower cost of goods sold for Top Glove.

Our changes in input estimates are summarised in the table below: Fig. 32: Input assumptions changes Input assumptions (period average) 2013F 2014F 2015F Latex prices (MYR/kg) Old 6.30 6.20 6.28 New 6.00 6.07 6.25 Nitrile prices (MYR/kg) Old 6.14 6.09 6.15 New 5.74 5.59 5.68 MYR/USD Old 2.98 2.92 2.88 New 3.07 3.00 2.93

Source: Nomura estimates

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, reflecting its price-maker status due to its unrivalled size as well as its high-volume and low-margin business model. We, 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. Nonetheless, as Top Gloves 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, hence limiting somewhat a potential margin compression.

On the back of this scenario, our input assumption changes highlighted above largely neutralise each other; we, thus, only tweak our FY13F/FY14F earnings estimates by -3.1%/-0.2%. We roll forward our earnings estimate base and peg our revised FY14F EPS of 40.92sen with our unchanged target one-year forward P/E of 15.2x, in line with its own three-year mean, arriving at our new TP of MYR6.20. We maintain our Neutral rating on the stock. Our P/E-based valuation is supported by our 10-year DCF methodology discounted back to June 2013, which fetches an intrinsic value of MYR6.26 per share. Our valuation methodology remains unchanged.


31





Risks to our view Positive surprises Stronger-than-expected demand from the emerging Latin American and Asian markets,

to which Top Glove has large exposure. Higher/lower-than-expected pass-on rates from cost inflation/savings. Synergistic acquisitions undertaken to contribute to cost-saving measures. Negative surprises An unexpected surge in NR latex prices, which will affect pass-on rates. Delays of expansion plans which will impede volume growth.

0

2

4

6

8

10

Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13

MYR

17x

14x

11x

8x

5x

0

5

10

15

20

25

Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Jan 13

P/E (x)

Mean = 11.1

+1SD = 15.3

-1SD = 6.9

Mean = 11.1

+1SD = 15.3

-1SD = 6.9


32

Appendix A-1

Analyst Certification I, Celeste Yap, 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, (2) no part of my compensation was, 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, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.

Materially mentioned issuers Issuer Ticker Price Price date Stock rating Sector rating Disclosures Hartalega Holdings HART MK MYR 6.32 13-Jun-2013 Reduce Not rated Kossan Rubber Industries KRI MK MYR 4.29 13-Jun-2013 Neutral Not rated Supermax Corp Bhd SUCB MK MYR 1.89 13-Jun-2013 Neutral Not rated Top Glove Corp TOPG MK MYR 6.35 13-Jun-2013 Neutral Not rated

Hartalega Holdings (HART MK) MYR 6.32 (13-Jun-2013) Rating and target price chart (three year history)

Reduce (Sector rating: Not rated)

Date Rating Target price Closing price 09-Jan-13 Reduce 4.95 09-Jan-13 4.15 4.95

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our target price of MYR4.70 is pegged to a one-year forward P/E of 14.2x, on FY14F EPS of 33.04sen. Our 10-year DCF valuation, discounted back to June 2013 on a WACC of 7.6% and terminal growth of 2%, provides a fair value of MYR4.77. Risks that may impede the achievement of the target price Upside risks to our view include 1) new, significant capacity expansion plans which will continue to boost capacity and earnings, or innovative product types which could push up margins; 2) higher/lower-than-expected pass-on rates of cost inflation/savings; 3) faster-than-expected completion of its NGC expansion plans; and 4) further weakening of NBR raw material prices.


33

Kossan Rubber Industries (KRI MK) MYR 4.29 (13-Jun-2013) Rating and target price chart (three year history)

Neutral (Sector rating: Not rated)

Date Rating Target price Closing price 09-Jan-13 Neutral 3.48 09-Jan-13 3.80 3.48 21-May-12 Not Rated 3.09 13-Feb-12 Suspended 3.57 27-Sep-11 Neutral 2.65 27-Sep-11 2.51 2.65


Valuation Methodology We peg Kossans FY14F EPS of 43.36sen to target one-year forward P/E of 10.0x, which is the sector average since 2007, arriving at target price of MYR4.35. Our 10-year DCF valuation discounted back to June 2013, using WACC of 7.0% and terminal growth of 2%, gives us a fair value of MYR4.66. 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; 2) higher/lower-than-expected pass-on rates of cost inflation/savings; and 3) better-than-expected earnings contribution from TRP segment. Downside risks to our view include: 1) an unexpected surge in latex prices, and; 2) expansion hiccups which would affect penetration into higher-end segments and market share growth.

Supermax Corp Bhd (SUCB MK) MYR 1.89 (13-Jun-2013) Rating and target price chart (three year history)


Date Rating Target price Closing price 09-Jan-13 Reduce 2.03 09-Jan-13 1.90 2.03 21-May-12 Not Rated 1.67 13-Feb-12 Suspended 2.09 19-Nov-11 Neutral 1.845 19-Nov-11 4.00 1.845 27-Sep-11 2.88 1.215


Valuation Methodology We arrive at our target price of MYR2.15 by pegging FY14F EPS of 21.74sen to one-year forward P/E of 10.0x, which is the sector average since 2007. With a WACC of 9.0% and terminal growth of 2%, our 10-year DCF valuation discounted back to June 2013 provides a fair value of MYR2.07. 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; 2) increased hygiene awareness in emerging markets like Brazil which Supermax already has large exposure to; 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. Downside risks include 1) an unexpected surge in latex prices, whereby


34

cost inflation pass-on would likely see a lag; and 2) delays in its expansion plans which will stunt volume growth, resulting in flattish earnings growth.

Top Glove Corp (TOPG MK) MYR 6.35 (13-Jun-2013) Rating and target price chart (three year history)


Date Rating Target price Closing price 09-Jan-13 Neutral 5.57 09-Jan-13 5.65 5.57 21-May-12 Not Rated 4.10 13-Feb-12 Suspended 5.07 27-Sep-11 Reduce 4.07 27-Sep-11 3.42 4.07 09-Mar-11 5.00 4.89 13-Dec-10 Neutral 5.56 13-Dec-10 5.80 5.56 06-Oct-10 6.82 5.69


Valuation Methodology We peg our FY14F EPS of 40.92sen to a 15.2x target multiple, its 3-year average, to arrive at our target price of MYR6.20. Our 10-year DCF valuation discounted back to June 2013 is based on a WACC of 8.8% and terminal growth of 2% and implies a fair value of MYR6.26.

nomura rubber glove sector review june 2013

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