Company Update RM6.68 @ 2 December 2020

Share price performance

1M 3M 12M Absolute (%) -20.4 -23.2 346.3 Rel KLCI (%) -27.0 -26.1 338.5

BUY HOLD SELL

Consensus 16 4 2 Source: Bloomberg

Stock Data

Sector Rubber Products

Issued shares (m) 8,029.1

Mkt cap (RMm)/(US$m) 53,634/13,155

Avg daily vol - 6mth (m) 70.3

52-wk range (RM) 1.44-9.77

Est free float 49.1%

Stock Beta 1.05

Net cash/(debt) (RMm) 2,327.93

ROE (CY21E) 73.7%

Derivatives No

Shariah Compliant Yes

Key Shareholders

Lim Wee Chai 33.0%

EPF 6.0%

Source: Affin Hwang, Bloomberg

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(RM)

Ng Chi Hoong

T (603) 2146 7470

E chihoong.ng@affinhwang.com

Earnings & Valuation Summary

FYE 31 Aug 2019 2020 2021E 2022E 2023E Revenue (RMm) 4,801.1 7,236.3 16,882.9 10,922.5 10,759.0 EBITDA (RMm) 700.9 2,591.2 9,584.7 2,894.0 2,383.8 Pretax profit (RMm) 423.6 2,301.4 9,359.2 2,726.5 2,288.2 Net profit (RMm) 364.7 1,867.0 7,413.7 2,080.3 1,711.2 EPS (sen) 4.5 23.1 90.7 25.4 20.9 PER (x) 147.6 28.9 7.4 26.3 31.9 Core net profit (RMm) 364.7 1,867.0 7,413.7 2,080.3 1,711.2 Core EPS (sen) 4.5 23.1 90.7 25.4 20.9 Core EPS growth (%) (73.3) 410.4 292.7 (71.9) (17.7) Core PER (x) 147.6 28.9 7.4 26.3 31.9 Net DPS (sen) 2.4 11.9 45.8 13.2 10.9 Dividend Yield (%) 0.4 1.8 6.9 2.0 1.6 EV/EBITDA 79.9 19.9 5.1 16.3 19.6 Chg in EPS (%) - - - Affin/Consensus (x) 0.9 0.6 0.7 Source: Company, Affin Hwang estimates

Top Glove (TOPG MK)

BUY (maintain) Price Target: RM15.45 Up/Downside: 130% Previous Target (Rating): RM15.45 (BUY)

Is it time to get back into Top Glove?

Top Glove’s share price has underperformed the market (and its peers) since

the start of November, as sentiment on the stock turned negative due to the

positive development of the vaccines and a COVID-19 outbreak at its factories.

We believe that the impact on the lockdown of its worker hostel is manageable

at around 5% of FY21E earnings, which is expected to end by 14 Dec 2020.

Similar to its peers, Top Glove is likely to deliver a strong set of results for

1QFY21E; as such we are keeping our BUY call and TP at RM15.45 unchanged.

Impact on earnings is manageable if quarantine is not extended again

Currently all of Top Glove’s (TOPG) production facilities (28 in total, 16 of them have been

shut since 17 November) in Klang are expected to be closed in phases, to allow the

testing of its workers due to the current outbreak. Apart from the closure of its production

facilities, its worker hostel located at Meru, Klang has also been placed under EMCO,

with more than 5,000 workers being placed under quarantine until 14 December 2020.

Although nearly 50% of its production facilities is idle, we believe that the impact is still

manageable. TOPG has rescheduled its other plants to prioritise high-margin products.

We estimate that for every 2 weeks of closure, the impact on FY21E earnings is around

2-3%.

The party has not ended

Given the positive development on the vaccines, investors’ sentiment on the sector has

turned less positive. However, we believe that it is still too early to look past CY21E

earnings yet, given that ASP is still rising as the number of new COVID-19 cases has

surged across the globe. Management also guided that the ASPs for November and

December have risen by 15-20% mom. Assuming TOPG maintains its 50% of net profit

dividend payout policy, the current 12-month forward dividend yield is c. 6.5%, with upside

risk. Apart from that, we are also expecting future demand growth to outpace its historical

growth rate of 8%, which could drive valuation higher for TOPG.

Maintaining BUY, with an unchanged TP of RM15.45

We are maintaining our BUY call at the moment, as we believe that Top Glove can

resume full production before end of 2020, and it would be fully compliant with the

regulations set by the government too. Hence, we think the impact on earnings is still

manageable. We have also kept our EPS forecasts and TP unchanged at RM15.45.

TOPG is expected to announce its 1QFY21 results on 9 December.

3 December 2020

“For every 2 weeks of extension of the EMCO, TOPG’s FY21E

earnings will be reduced by 2-3%”

2

Capacity cap at around 50%

Due to the COVID-19 outbreak at TOPG’s worker dormitories in Meru, Klang, the

government has implemented Enhanced Movement Control Order (EMCO) at the

location, with more than 5,000 workers being tested and placed under quarantine for the

entire period, which has now been extended to 14 December 2020 (previously to end on

30 November). To better facilitate the testing of all its workers, 28 production facilities

located in Klang will be closed in stages too. Around 50% of TOPG production capacity

is located in the area. Although not all workers are placed under quarantine, TOPG is

only able to operate at 10-20% utilisation rate at the affected area.

The impact on earnings is still manageable for now

Due to the reduction in production capacity, management has rescheduled the production

output at its other facilities (located elsewhere in Perak, Negeri Sembilan and Thailand)

to focus on producing the higher-priced gloves first (mostly nitrile) to limit the loss of

revenue, as most of its glove production lines are interchangeable between nitrile and

natural latex. Management has also guided that since the surge in demand in the

beginning of the year, they have not signed any long-term supply contracts (apart from

surgical gloves), and hence they are not expecting any financial penalty for non-delivery.

However, we believe that the loss of income for Top Glove due to the current closure is

less than 5% of FY21E earnings, or 2-3% for every 2 weeks of closure.

Worker dormitories raise another problem

Due to the outbreak at TOPG worker dormitories, the Ministry of Human Resources

(MoHR) has opened 19 investigation papers against Top Glove, under the Worker’s

Minimum Standards of Housing and Amenities Act 1990 (Act 446), whereby the

amendment was passed in May 2020 and now covers all employment sectors.

If companies are found guilty of these offences, the employer is punishable with a fine of

up to RM50,000 per offence. The government had previously given a 3-month grace

period, which ended in August 31. However, some news media reported that the ministry

will be using an education approach till end of 2020 and employers would not be fined

during this period. Pending further details, it is hard to determine the potential financial

impact of the fine. Nevertheless, TOPG is committed to comply with the regulation by

year-end.

Still working on the CBP ban

Although TOPG had previously guided to resolve the US Customs and Border Protection

(CBP) import ban of its 2 subsidiaries by end-August, the problem has yet to be fully

resolved. TOPG’s management has guided that the delay is due to the external auditors’

inability to interview some of the workers that have been placed under quarantine.

Nevertheless, TOPG was still able to deliver strong earnings growth in 4QFY20 despite

the ban being initiated, indicating that the strong demand from other countries was

sufficient to compensate for the US market.

Fig 1: Despite the ban by CBP, Top Glove was still able to deliver a strong set of numbers

(net profit) for 4QFY20

Source: Company Data, Affin Hwang

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Demand to remain strong throughout 2021

Despite the positive development on the vaccine for COVID-19, which we believe will

start being made available to the public by end of 1H21, will still take at least 6-12 months

before the population can expect to reach herd immunity after its availability, in our view.

Although we are expecting more countries to authorise the use of a vaccine in the coming

months, there is the likelihood that the spread of COVID-19 could get worse after the

festive season, in our view. The weekly new cases of COVID-19 globally has already

surpassed the 4m mark recently. Manufacturers are guiding for ASPs to continue to

increase by 2-3% mom in 2021, and we believe there is upside risk to this, if the upward

trend for new cases continue.

Fig 2: The number of new COVID-19 cases globally have breached the 4m mark recently

Source: WHO, Affin Hwang

Too early to forgo 2021

Since the positive development of the vaccine, glove maker share prices have fallen by

7.5%-21.7% since early November 2020, mainly due to a change in investor sentiment

on the stocks. We believe that most investors are concerned about the earnings post

2021, given that ASP is unlikely to sustain at current levels. Although we have also

forecast ASP to decline in 2022, we still believe that growth in glove demand for 2022 will

remain positive. The demand growth post COVID-19 of 10-12% will outpace the historical

(10-year) growth rate of around 8-10%, which could lead to a higher valuation for the

glove manufacturers, including Top Glove, in our view.

Fig 3: The market cap of the “Big 4” have taken a hit since news on the development of

the vaccines started to gain momentum

Source: Bloomberg, Affin Hwang

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Weekly Cases wow chg % (RHS)

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Market Cap (RMbn)

4

As such, we believe that there is limited downside to the current share price, if we base

the fair value of Top Glove on 28.9x CY22E PER (+1 stdev of its historical average before

COVID-19); with the dividends for CY21E, this would give a fair value of around

RM7.35/share. There is also upside to the fair value, given that the ASP is still on the rise.

As such, we are keeping our BUY call with an unchanged TP of RM15.45 (based on

22.4x CY21E PER).

Fig 4: Top Glove PE band chart (the average and std deviation are based on pre COVID-

19 historical data)

Source: Bloomberg, Affin Hwang

Risk to our investment thesis

The risk to our investment thesis includes i) longer-than-expected closure of its production

facilities, ii) the shortage of raw material (nitrile) and iii) unexpected hefty fines from the

government related to the workers’ problem.

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+1SD: 28.9x

Avg: 21.7x

-1SD: 14.4x

+2 SD: 36.1x

5

Financial Summary – Top Glove

Source: Company, Affin Hwang estimates

Profit & Loss Statement Key Financial Ratios and Margins

FYE 31 Aug (RMm) 2019A 2020A 2021E 2022E 2023E FYE 31 Aug (RMm) 2019A 2020A 2021E 2022E 2023E

Revenue 4,801.1 7,236.3 16,882.9 10,922.5 10,759.0 Growth

Operating expenses (4,100.2) (4,645.2) (7,298.1) (8,028.4) (8,375.3) Revenue (%) 13.9 50.7 133.3 (35.3) (1.5)

EBITDA 700.9 2,591.2 9,584.7 2,894.0 2,383.8 EBITDA (%) (1.1) 269.7 269.9 (69.8) (17.6)

Depreciation (195.0) (235.3) (240.7) (282.4) (315.0) Core net profit (%) (15.9) 412.0 297.1 (71.9) (17.7)

EBIT 505.9 2,355.9 9,344.0 2,611.6 2,068.8

Net interest income/(expense) (79.6) (53.1) 16.6 116.3 220.8 Profitability

Associates' contribution (2.7) (1.4) (1.4) (1.4) (1.4) EBITDA margin (%) 14.6 35.8 56.8 26.5 22.2

EI - - - - - PBT margin (%) 8.8 31.8 55.4 25.0 21.3

Pretax profit 423.6 2,301.4 9,359.2 2,726.5 2,288.2 Net profit margin (%) 7.7 26.3 44.3 19.7 16.6

Tax (56.0) (397.6) (1,871.8) (572.6) (503.4) Effective tax rate (%) 13.2 17.3 20.0 21.0 22.0

Minority interest (2.9) (36.8) (73.6) (73.6) (73.6) ROA (%) 6.5 21.5 58.2 14.8 11.4

Net profit 364.7 1,867.0 7,413.7 2,080.3 1,711.2 Core ROE (%) 14.9 29.6 73.7 18.7 14.2

ROCE (%) 7.3 26.6 68.9 17.6 13.4

Balance Sheet Statement Dividend payout ratio (%) 52.6 51.5 50.0 50.0 50.0

FYE 31 Aug (RMm) 2019A 2020A 2021E 2022E 2023E

PPE 2,463.5 3,215.5 3,225.7 3,490.2 3,714.0 Liquidity

Other non-current assets 1,651.7 1,195.9 1,229.8 1,229.0 1,228.2 Current ratio (x) 0.9 2.2 3.6 3.7 3.9

Total non-current assets 4,115.2 4,411.4 4,455.5 4,719.2 4,942.2 Op. cash flow (RMm) 509.0 3,171.3 6,697.3 3,139.4 2,127.8

Cash and equivalents 158.8 1,210.4 3,875.8 5,392.1 6,089.5 Free cashflow (RMm) (14.1) 2,410.8 5,853.2 2,593.3 1,589.9

Inventory 615.1 525.6 814.7 990.5 1,046.0 FCF/share (sen) (0.2) 29.9 72.6 32.2 19.7

Trade receivables 596.5 803.1 1,873.6 1,212.1 1,194.0

Other current assets 163.0 1,722.5 1,722.5 1,722.5 1,722.5 Asset management

Total current assets 1,533.5 4,261.6 8,286.6 9,317.1 10,052.0 Inventory turnover (days) 60.7 47.5 47.5 47.5 47.5

Trade payables 470.6 670.7 999.5 1,216.8 1,282.3 Receivables turnover (days) 45.3 40.5 40.5 40.5 40.5

Short term borrowings 1,041.8 323.3 323.3 323.3 323.3 Payables turnover (days) 46.5 60.6 60.6 60.6 60.6

Other current liabilities 158.1 984.8 984.8 984.8 984.8

Total current liabilities 1,670.5 1,978.8 2,307.7 2,524.9 2,590.4 Capital structure

Long term borrowings 1,378.8 220.4 220.4 220.4 220.4 Net Gearing (%) 0.9 cash cash cash cash

Other long term liabilities 156.2 164.0 160.6 160.6 160.6 Interest Cover (x) 6.4 44.4 na na na

Total long term liabilities 1,535.0 384.5 381.1 381.1 381.1

Quarterly Profit & Loss

Shareholders' Funds 2,426.2 4,988.9 8,658.9 9,662.2 10,481.0 FYE 31 Aug (RMm) 4QFY19 1QFY20 2QFY20 3QFY20 4QFY20

Revenue 1,189.0 1,209.1 1,229.8 1,688.3 3,109.1

Cash Flow Statement Op costs (1,043.0) (1,013.1) (1,024.2) (1,199.2) (1,416.1)

FYE 31 Aug (RMm) 2019A 2020A 2021E 2022E 2023E EBITDA 145.9 196.0 205.6 489.1 1,693.1

PAT 367.5 1,903.8 7,487.3 2,153.9 1,784.8 Depn and amort (49.3) (54.4) (56.2) (59.2) (65.4)

Depreciation & amortisation (195.0) (235.3) (240.7) (282.4) (315.0) EBIT 96.6 141.6 149.4 429.9 1,627.6

Working capital changes (73.3) (73.3) (1,030.8) 703.0 28.1 Net int income/(exp) 21.0 18.7 18.2 5.8 3.0

Others 409.9 1,576.1 481.5 564.9 629.9 EI - - - - -

Cashflow from operations 509.0 3,171.3 6,697.3 3,139.4 2,127.8 Inc/(loss) from affiliates (1.6) 2.6 (0.8) (2.1) (1.1)

Capex (632.2) (765.2) (844.1) (546.1) (538.0) Pretax profit 74.0 125.5 130.4 422.0 1,623.6

Others 129.8 (1,317.8) - - - Tax 0.0 (13.7) (14.4) (72.0) (297.5)

Cash flow from investing (502.4) (2,083.0) (844.1) (546.1) (538.0) MI 0.2 (0.3) (0.3) (2.1) (34.0)

Debt raised/(repaid) 192.3 1,300.0 - - - Net profit 74.2 111.4 115.7 347.9 1,292.0

Equity raised/(repaid) 0.6 178.1 - - - Core net profit 74.2 111.4 115.7 347.9 1,292.0

Dividends paid (217.4) (371.8) (3,743.7) (1,077.0) (892.4)

Others (11.5) 1,150.0 - - - Margins (%)

Cash flow from financing (13.0) (43.7) (3,743.7) (1,077.0) (892.4) EBITDA 12.3 16.2 16.7 29.0 54.5

PBT 6.2 10.4 10.6 25.0 52.2

Free Cash Flow (14.1) 2,410.8 5,853.2 2,593.3 1,589.9 PAT 6.2 9.2 9.4 20.6 41.6

6

Important Disclosures and Disclaimer

Equity Rating Structure and Definitions

BUY Total return is expected to exceed +10% over a 12-month period

HOLD Total return is expected to be between -5% and +10% over a 12-month period

SELL Total return is expected to be below -5% over a 12-month period

NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation

The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months.

OVERWEIGHT Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months

NEUTRAL Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months

UNDERWEIGHT Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months

This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (“the Company”) based on sources believed to be reliable and is not to be taken in substitution for the exercise of your judgment. You should obtain independent financial, legal, tax or such other professional advice, when making your independent appraisal, assessment, review and evaluation of the company/entity covered in this report, and the extent of the risk involved in doing so, before investing or participating in any of the securities or investment strategies or transactions discussed in this report. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (expressed or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, estimates, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel and the same are subject to change without notice. Reports issued by the Company, are prepared in accordance with the Company’s policies for managing conflicts of interest. Under no circumstances shall the Company, be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company its directors, its employees and their respective associates may have positions or financial interest in the securities mentioned therein. The Company, its directors, its employees and their respective associates may further act as market maker, may have assumed an underwriting commitment, deal with such securities, may also perform or seek to perform investment banking services, advisory and other services relating to the subject company/entity, and may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. The Company, its directors, its employees and their respective associates, may provide, or have provided in the past 12 months investment banking, corporate finance or other services and may receive, or may have received compensation for the services provided from the subject company/entity covered in this report. No part of the research analyst’s compensation or benefit was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Employees of the Company may serve as a board member of the subject company/entity covered in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. This report, or any portion thereof may not be reprinted, sold or redistributed without the written consent of the Company. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) A Participating Organisation of Bursa Malaysia Securities Berhad 22nd Floor, Menara Boustead, 69, Jalan Raja Chulan, 50200 Kuala Lumpur, Malaysia. T : + 603 2142 3700 F : + 603 2146 7630 research@affinhwang.com www.affinhwang.com