Regional Industry Focus Glove Manufacturers...Riverstone Holdings 0.87 447 0.97 (4.4) (30.5) HOLD...

ed-CK / sa- BC, PY

2017: Easing pressure

• Supply-demand mismatch narrows as major

players push back capacity expansion plans

• ASP and margin pressures ease as demand

catches up to supply

• USD appreciation provides limited upside

potential as operation costs increase

• Valuation at fair level in the absence of catalysts

to re-rate the sector

Delay in expansion allows demand – which remains firm, to catch up to supply. The Malaysian Rubber Gloves Manufacturers Association (MARGMA) expects the demand for healthcare gloves to grow by 8-10% in 2017. This is backed by the better standards encapsulated in healthcare reforms and hygiene practices in emerging markets. Meanwhile, with larger glove players are now vowing to bring in capacity at a more gradual pace to better track demand growth to avoid oversupply conditions and price competition. We forecast glove output for glove players at 11%/12% for FY17/18F. In contrast, their volume growth in 2016 is estimated to have been c.14%, significantly above demand growth of c.10%. Pressures on average selling prices (ASPs) to ease. . . . As the supply-demand mismatch narrows, glove players’ bargaining power should improve. This was seen in recent months as glove players were able to raise ASPs to offset higher raw material costs. Margins to stabilise. . . . With demand catching up to supply and pressure on ASPs expected to ease, we see margins stabilising ahead as continuous efforts in increasing efficiency and automation can contribute to steady operating margins due to improving economies of scale. Margins would also get a boost from the recent USD appreciation but is unlikely to be sustained once such savings are pass on the customers with 1-2 months lag unless USD continues to strengthen further. Furthermore, rising raw material and other operating costs will also negate such savings. Lack of catalysts. . . . Share prices of glove makers have rallied on the back of a stronger USD since early Nov16 but with the sector’s CY17 PE valuation at 21.5x which is slightly above +1SD of its 5-year mean, such positive has largely been priced in. We have HOLD calls for all glove companies under our coverage but prefer Top Glove and Riverstone from a valuation perspective.

KLCIKLCIKLCIKLCI : : : : 1,675.491,675.491,675.491,675.49

Analyst Siti Ruzanna MOHD FARUK +603 2604 3965 [email protected] Paul YONG CFA +65 6682 3712 [email protected] Singapore Research Team

STOCKS

Source: AllianceDBS, Bloomberg Finance L.P.

Closing price as of 6 Jan 2017 Hartalega Holdings BerhadHartalega Holdings BerhadHartalega Holdings BerhadHartalega Holdings Berhad :::: Hartalega is a niche player in nitrile gloves (94% of sales volume). It has the largest nitrile glove capacity among the glove makers under our coverage.

Top Glove CorporationTop Glove CorporationTop Glove CorporationTop Glove Corporation :::: Top Glove is the world’s largest rubber glove manufacturer with an annual production capacity of 48.0bn gloves. Natural rubber gloves make up the lion’s share of its product mix (51%), while nitrile rubber gloves account for 35%. Vinyl and surgical gloves account for the rest.

Kossan Rubber IndustriesKossan Rubber IndustriesKossan Rubber IndustriesKossan Rubber Industries :::: Kossan manufactures latex, nitrile, cleanroom and surgical gloves. It also produces technical rubber products for the automotive, industrial and construction industry.

Supermax CorpSupermax CorpSupermax CorpSupermax Corp :::: Supermax is one of the five largest rubber glove makers in the world. The group positions itself as an own-brand manufacturer (OBM), compared to most of its competitors who operate as an original-equipment manufacturer (OEM) in the competitive glove industry.

Riverstone Holdings : Riverstone Holdings : Riverstone Holdings : Riverstone Holdings : Riverstone Holdings is a natural rubber and nitrile (synthetic rubber) glove manufacturer specialising in cleanroom and healthcare gloves. It is also engaged in the manufacture and distribution of other ancillary products such as finger cots, packaging bags and face masks.

Estimated capacity of the glove makers under our coverage

Source: AllianceDBS, DBS Bank, Companies

-

10

20

30

40

50

60

2009 2010 2011 2012 2013 2014 2015 2016F 2017F 2018F

Hartalega Top Glove Kossan Supermax Riverstone

bn gloves

DBS Group Research . Equity DBS Group Research . Equity DBS Group Research . Equity DBS Group Research . Equity

9 Jan 2017

Regional Industry Focus

Glove Manufacturers Refer to important disclosures at the end of this report

Price Price Price Price Mkt CapMkt CapMkt CapMkt Cap Target PriceTarget PriceTarget PriceTarget Price Performance (%)Performance (%)Performance (%)Performance (%)

LCLCLCLC US$mUS$mUS$mUS$m LCLCLCLC 3 mth3 mth3 mth3 mth 12 mth12 mth12 mth12 mth RatingRatingRatingRating

RMRMRMRM Hartalega Holdings Berhad

4.88 1,791 4.60 5.0 (19.3) HOLD Top Glove Corporation

5.33 1,493 4.80 10.1 (23.0) HOLD Kossan Rubber Industries

6.49 928 6.30 (5.9) (29.8) HOLD Supermax Corp 2.15 323 2.45 (1.8) (37.7) HOLD S$S$S$S$ Riverstone Holdings 0.87 447 0.97 (4.4) (30.5) HOLD

Industry Focus

Glove Manufacturers

Battle of the glove makers

The 3QCY16 results for glove makers came in lower compared

to last year, as the tailwinds of 2015 turned into headwinds for

2016. Among the five stocks under our coverage, three missed

expectations and two were in line.

3QCY16 below expectations 3QCY16 below expectations 3QCY16 below expectations 3QCY16 below expectations –––– Kossan, Supermax and Kossan, Supermax and Kossan, Supermax and Kossan, Supermax and

RiverstoneRiverstoneRiverstoneRiverstone. Kossan’s 3QCY16 earnings (-38% y-o-y; -17% q-o-

q) missed expectations as there was a drop in production output

due to revamp works as well as higher operating costs.

Supermax’s 3QCY16 earnings (-49% y-o-y; +188% q-o-q) also

came in below expectations on the back of higher operating

costs and additional costs for its contact lens business.

Similarly, Riverstone’s 3QCY16 earnings (-15.6% y-o-y; +9.2%

q-o-q) were slightly below as labour challenges hampered the

company’s ability to ramp-up on production as planned.

Meanwhile, 3QCY16 results for Hartalega and Top Glove were

in line with our expectations.

Manufacturers dedicating more resources to nitrile segment Manufacturers dedicating more resources to nitrile segment Manufacturers dedicating more resources to nitrile segment Manufacturers dedicating more resources to nitrile segment

ahead.ahead.ahead.ahead. The continuous global demand growth for gloves

prompted glove players to ramp up their capacity, especially for

nitrile gloves – as they sought to capitalise on better margins

and expected long-term demand in the nitrile segment.

Y-o-y output growth was healthy with an average of 6% for the

above players. In 3QCY16, Hartalega registered the highest

growth in glove output (+28% y-o-y; +7% q-o-q), followed by

Riverstone (+22% y-o-y; +3% q-o-q), Top Glove (+7% y-o-y;

+3% q-o-q) and Supermax (-1.3% y-o-y; +4% q-o-q), while

Kossan came in last (-4% y-o-y; 3% q-o-q).

In terms of unit profitability (EBIT/k gloves), most glove makers

recorded lower numbers in 3QCY16, except for Hartalega and

Top Glove which managed to increase their unit profitability by

9% and 20% q-o-q respectively.

Q-o-q sales volume growth by company

*Top Glove’s number is one month lag due to its different month end

(Aug FYE)

Source: AllianceDBS, DBS Bank

EBIT per thousand gloves by company


Capacity utilisation rate by company


Relative gloves capacity by companies


-20%

-15%

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-5%

0%

5%

10%

15%

Hartalega Top Glove* Kossan Supermax Riverstone

2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

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5.00

10.00

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45.00


2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

RM/k gloves

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

10% 11% 12% 13% 14% 15% 16%

50% 47% 47% 46% 46% 45% 40%

15% 14% 15% 16% 17% 17% 20%

23% 25% 23% 21% 20% 19% 19%

2% 3% 3% 4% 3% 4% 5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2009 2010 2011 2012 2013 2014 2015

Hartalega Top Glove Kossan Supermax Riverstone

Industry Focus

Glove Manufacturers

Outlook for 2017

Heading into CY2017, we expect to see improvements for glove

players as the narrowing of supply-demand mismatch supports

the easing of ASP and margin pressures.

Delay in expansion plans by major players allows demand Delay in expansion plans by major players allows demand Delay in expansion plans by major players allows demand Delay in expansion plans by major players allows demand ––––

which remains firm, to catch up to supply..which remains firm, to catch up to supply..which remains firm, to catch up to supply..which remains firm, to catch up to supply...... When competition

began to heat up in 2016, larger glove players (i.e. Top Glove

and Hartalega) pushed back capacity expansion plans and

vowed to bring in capacity at a more gradual pace to better

track demand growth and ultimately, avoid oversupply

conditions and price competition.

Installed capacity of the five glove makers under our coverage

stood at 110 bn gloves p.a as at end-2015. Ongoing expansion

among these glove players will bring total capacity to 149.5bn

gloves by end-2018, which implies a 3-year CAGR of 10.8% for

FY15-18F. As these new capacities are gradually commissioned,

we forecast a narrower combined glove output growth of

11%/12% for FY17F/18F – compared to an estimated 14%

output growth for 2016, which is significantly above demand

growth of c.10%.

Meanwhile, backed by better standards in healthcare reforms

and hygiene practices in emerging markets, MARGMA expects

demand for healthcare gloves to grow by 8-10% in 2017. Global demand vs production capacity

Source: AllianceDBS, DBS Bank, Companies, MARGMA

Pipeline of expansion projects

CompaniesCompaniesCompaniesCompanies Expansion ProjectsExpansion ProjectsExpansion ProjectsExpansion Projects

Annual Annual Annual Annual capacitycapacitycapacitycapacity

(bn pieces)(bn pieces)(bn pieces)(bn pieces)

Expected Expected Expected Expected Commercial Commercial Commercial Commercial ProductionProductionProductionProduction

RemarksRemarksRemarksRemarks

Top Glove

Factory #6 1.4 Dec 2016

Factory #30 4.8 April 2017

Factory #31 (Phase 1) 1.5 August 2017

Factory #31 (Phase 2) 4.5 May 2018

Supermax Glove City 24.6 First plant by

3Q17 The entire project will comprise four plants with an annual capacity

of 7.9bn pieces each; to be completed by end of 2020.

Kossan Plant #16, Meru 3.0 3Q 2017

Phase 1, Bestari Jaya 4.5 1Q 2018

Hartalega Next Generation Complex 28.2 2020 The production lines at Plant #3 and #4 will be commissioned

between Nov 2016 and Nov 2018, and Plant #5 and #6 between 2019 and 2020

Riverstone Phase 4

Phase 5

1.0

1.0

Dec 2017 Dec 2018

Source: Company, AllianceDBS, DBS Bank

6 8 9 11 13 14 18 22 25 29 31 33 36 39 42 43 44 46 50 55 9 10 11 14 16 16

21 22 24

28

15 18 18 18 18 18 21 23

26 30

1.11.8 2.4 3.1 3.1 4.2

5.26.2

7.28.2

140150 148

160171

180194

210227

245

(30)

10

50

90

130

170

210

250

2009 2010 2011 2012 2013 2014 2015 2016F 2017F 2018F

Hartalega Top Glove Kossan

Supermax Riverstone World demand

bn gloves

Industry Focus

Glove Manufacturers

While ASPs have fallen sharply in 2016While ASPs have fallen sharply in 2016While ASPs have fallen sharply in 2016While ASPs have fallen sharply in 2016… … … … While the intense

competition among glove players was chiefly responsible for

the sharp decline in ASPs over the course of 2016, these

factors also played a role:

(i) Time lag in passing on higher costs, and

Glove makers practise cost pass-throughs in the form of

periodic adjustments to ASPs - a mechanism which often helps

to mitigate increases in certain operating costs, such as higher

raw material prices, labour costs and natural gas tariffs.

However, pass-throughs may entail a lag of 1-2 months as

orders are typically placed three months ahead.

(ii) Gains from currency tailwinds to be passed down

Given additional capacity from glove players, pricing are more

competitive and pricing adjustments includes passing on gains

from the stronger USD. This will limit the degree to which

higher operating costs may be passed on. As such, we see

limited upside potential from USD appreciation as it is mostly

captured in the pricing formula and may be negated by the

rising operating costs.

While limited, cleanroom glove manufacturers could still

benefit from a USD rally as prices for these higher-end, niche

varieties are typically negotiated on a semi-annual basis (as

compared to monthly repricing for healthcare gloves).

USD/MYR movement

Source: Bloomberg

.. the narrowing of supply.. the narrowing of supply.. the narrowing of supply.. the narrowing of supply----demand mismatch should help easedemand mismatch should help easedemand mismatch should help easedemand mismatch should help ease

ASP ASP ASP ASP and margin pressure in 2017and margin pressure in 2017and margin pressure in 2017and margin pressure in 2017. Pricing pressure appears to

have diminished slightly as ASPs, which were on a downtrend for

three consecutive quarters in spite of rising costs, started to inch

up in 2QCY16 (on average).

Percentage change of average selling price by company

Source: AllianceDBS

With adjustments to the pricing already made in 2016, coupled

with revised capacity expansion plans that better track demand

growth, ASP pressures should further ease. We also see margins

stabilising ahead as ongoing efforts to improve efficiency and

increase automation can contribute to steady operating margins

as economies of scale at the operating level may help offset

pressures at the GP level.

EBIT per thousand gloves by company

Source: AllianceDBS

3.40

3.60

3.80

4.00

4.20

4.40

4.60USD/MYR

-30%

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-10%

0%

10%

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30%

2Q15 3Q15 4Q15 1Q16 2Q16 3Q16Hartalega Top Glove Kossan Supermax Riverstone

% change

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2Q15 3Q15 4Q15 1Q16 2Q16 3Q16


RM/k gloves

Industry Focus

Glove Manufacturers

Potential impact of recent developments

Volatility in latex and nitrile prices could weigh on shortVolatility in latex and nitrile prices could weigh on shortVolatility in latex and nitrile prices could weigh on shortVolatility in latex and nitrile prices could weigh on short----term term term term

profits.profits.profits.profits. The uptick in latex prices was largely driven by firmer

demand for rubber as tax breaks introduced by the Chinese

central government in 2016 (which effectively halved the 10%

purchase tax on vehicles with 1.6-litre or smaller engines)

spurred double-digit y-o-y vehicle sales growth in China.

Further incentives by the government could send natural

rubber prices higher. Separately, historical trends suggest that

the upcoming wintering season (Mar-May) will likely keep latex

prices elevated on the back of reduced supply – likewise for

nitrile prices, which tends to track latex prices closely.

As they are largely temporary in nature, manufacturers may

face difficulty in incorporating volatile raw material price

movements into their cost-plus mechanism during the monthly

price renegotiation and adjustment process, which could weigh

on margins and profitability in the short-term. Meanwhile,

assuming that there is no sudden influx of new glove

production capacity (which would then limit the bargaining

power of manufacturers), sustained price changes backed by

clear trends should largely be passed on to customers over

time.

Latex and nitrile prices

Source: Bloomberg, AllianceDBS

Not overly concerned by natural gas tariff revisions. Not overly concerned by natural gas tariff revisions. Not overly concerned by natural gas tariff revisions. Not overly concerned by natural gas tariff revisions. We are not

overly concerned about the recent price hike for natural gas as

the government proceeds with its subsidy rationalisation

programme. This price revision will be done semi-annually.

Natural gas cost only makes up about 10-11% of total costs,

compared to latex cost which makes up 40-50% of total

production costs.

Furthermore, as the manufacturers continue to gain scale, they

could further explore alternative sources such as biomass, as

savings for biomass are only enjoyed when there is sufficient

mass.

Natural gas subsidy rationalization program

Source: Gas Malaysia, AllianceDBS

New policy on foreign worker levy could impact New policy on foreign worker levy could impact New policy on foreign worker levy could impact New policy on foreign worker levy could impact earnings by 1earnings by 1earnings by 1earnings by 1----

2%.2%.2%.2%. There are no surprises for Malaysia’s minimum wage policy

for now, as nothing was announced in Budget 2017. The

minimum monthly wage may continue to stay at RM1,000 until

the next revision in 2018. As for the new policy on foreign

worker levy enforced by the Employer Mandatory Commitment

(EMC), employers would be disallowed from deducting the levy

from the wages of their workers. This could be negative for the

glove players as the foreign worker levy is borne by the

employees initially. A levy of RM1,850 would increase cost and

impact earnings up to 1-2%.

The higher costs would impact earnings on a short term basis as

glove players take time to pass on higher costs. However, the

details of the announcement have not been ironed out and

hence we can assume that it is not implementable until details

are fully confirmed in writing.

New ruling by Bank Negara Malaysia will not impact earnings.New ruling by Bank Negara Malaysia will not impact earnings.New ruling by Bank Negara Malaysia will not impact earnings.New ruling by Bank Negara Malaysia will not impact earnings. In

view of the weak ringgit, Bank Negara Malaysia has enforced a

ruling whereby 75% of export proceeds have to be converted

into ringgit to improve the liquidity of onshore foreign exchange

market and stem the ringgit weakness. This will lead to the auto

conversion of export proceeds denominated in foreign currencies

within the day.

However, glove manufacturers are allowed to re-convert the

proceeds back to foreign currencies at the same exchange rate to

defray costs denominated in foreign currencies. Hence, apart

from additional administrative requirements, we do not foresee

any impact on earnings from this new ruling.

No major impact from FDA ban on powdered gloves eitherNo major impact from FDA ban on powdered gloves eitherNo major impact from FDA ban on powdered gloves eitherNo major impact from FDA ban on powdered gloves either.... As

the glove players under our coverage do not export powdered

gloves to the US, we do not expect the ban (which is effective

18 Jan 2017) to have any major impact on their operations.

While powdered gloves represent a large proportion of their

output – 32% and 28% for Top Glove and Supermax,

respectively, they are exported to developing markets instead of

US.

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Nitrile Latex

RM/k

2%

10%

17%

6%

-3%

7%

10%

3%2%

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RM/MMBtu (RHS) % change (LHS)

RM/MMBtu

Industry Focus

Glove Manufacturers

Valuation and Recommendation

Glove sector trading at Glove sector trading at Glove sector trading at Glove sector trading at +1SD of +1SD of +1SD of +1SD of 5555----year mean P/Eyear mean P/Eyear mean P/Eyear mean P/E. . . . The tailwinds

of a strong USD against the ringgit and cheaper raw material

prices turned into headwinds in 1HCY16. We may see some

recovery in the coming quarters as the USD strengthens against

the ringgit. However, we are still cautious about the rising

operational costs (gas tariff and raw material price hikes).

We expect the sector’s earnings to recover slowly in CY17,

before growing by 12% per annum in CY18 – mainly driven by

Kossan and Hartalega. The sector is presently trading at 21.5x

CY17 earnings, which is slightly above +1SD of its 5-year mean

PE.

Glove sector: 12-m rolling P/E

Sources: AllianceDBS

HOLD calls on all five manufacturers but prefer Top Glove and HOLD calls on all five manufacturers but prefer Top Glove and HOLD calls on all five manufacturers but prefer Top Glove and HOLD calls on all five manufacturers but prefer Top Glove and

Riverstone from a valuations perspective. Riverstone from a valuations perspective. Riverstone from a valuations perspective. Riverstone from a valuations perspective. Share prices of glove

makers have rallied on the back of a stronger USD since early

Nov16 but this has largely been priced in. As such, we have

HOLD calls for all glove companies under our coverage but prefer

Top GloveTop GloveTop GloveTop Glove and RiverstoneRiverstoneRiverstoneRiverstone from a valuation perspective.

1111) ) ) ) We prefer We prefer We prefer We prefer Top Glove (HOLD, TP: RM4.Top Glove (HOLD, TP: RM4.Top Glove (HOLD, TP: RM4.Top Glove (HOLD, TP: RM4.80808080))))…………

Our HOLD rating for Top Glove is intact, with a RM4.80 TP.

Our TP is based on 17x CY17F EPS which is +0.5SD of its 5-

year mean EPS. We believe near term earnings will be boosted

by the strong USD. However, we remain cautious as the

positive impact from the strong USD may be negated by rising

operating costs, as natural gas tariffs and raw material prices

could increase further.

2222) ) ) ) …………and also like Riverstone (HOLD, TP: S$0.97)and also like Riverstone (HOLD, TP: S$0.97)and also like Riverstone (HOLD, TP: S$0.97)and also like Riverstone (HOLD, TP: S$0.97)

While we have a HOLD call on Riverstone with a S$0.97 TP

(based on 16x CY17F EPS), we think the counter could be

attractive at current prices (stock currently trading <15x CY17F

PE) if the recent alleviation of ASP pressures – which plagued

the industry for most of 2016, is further improved and

sustained.

As competition in the healthcare glove space remains keen,

Riverstone’s advantage lies in its dual income channels from

both healthcare and cleanroom gloves, and clear leadership

position in the high-end (Class 10 and Class 100) nitrile

cleanroom glove segment.

Due to the level of customisation and stringent processes

involved in the development and production of cleanroom

gloves, they are typically less price-sensitive and enjoy higher

margins compared to healthcare varieties, which has enabled

Riverstone to better defend margins relative to larger peers

over the last few quarters in spite of pricing pressures.

3333) Hartalega () Hartalega () Hartalega () Hartalega (HOLDHOLDHOLDHOLD, TP: , TP: , TP: , TP: RM4.60RM4.60RM4.60RM4.60))))

We have a HOLD rating for Hartalega with a TP of RM4.60,

pegged to 27x CY17F EPS. This is the mid-point between its

average and +1SD of its 5-year mean PE. Recent data shows

that Hartalega is able to sell the additional output from Next

Generation Integrated Glove Manufacturing Complex (NGC)

(2Q sales volume rose 29% y-o-y), leading to lower earnings risk

for the stock.

Our optimism towards Hartalega is driven by: (1) its superior

operating structure with a breakeven point that is below its

competitors’, and (2) expansion of capacity in NGC. But we

expect its share price to consolidate at the current level as the

NGC’s earnings growth prospects have largely been priced in.

4444) Kossan () Kossan () Kossan () Kossan (HOLD, TP: RM6.30HOLD, TP: RM6.30HOLD, TP: RM6.30HOLD, TP: RM6.30))))

We have a HOLD rating for Kossan with a RM6.30 TP, pegged

to 18x CY17F EPS. This is equivalent to +0.5SD of its 5-year

mean PE valuation which reflects the medium-term growth

prospects of Kossan arising from its capacity ramp-up. We like

the stock for its clear expansion plan, but its share price has

largely priced in the near-term earnings prospects.

5555) Supermax (HOLD, TP: ) Supermax (HOLD, TP: ) Supermax (HOLD, TP: ) Supermax (HOLD, TP: RM2.45RM2.45RM2.45RM2.45))))

We have a HOLD rating for Supermax with a RM2.45 TP,

pegged to 13x CY17F EPS. Like the other glove makers, the

company is plagued by margin compression, with its EBIT/k

gloves falling 48% y-o-y in 3QFY14. Meanwhile, Supermax has

seen repeated delays in the commercial production of Plants

#10 and #11 at Meru, Klang.

5.00

10.00

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20.00

25.00

30.00

Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

+2sd:24.4x

+1sd:20.8x

-1sd:13.5x

-2sd:9.8x

Avg:17.1x

Industry Focus

Glove Manufacturers

Peer Comparison

Sources: AllianceDBS, DBS Bank

Closing price as of 6 Jan 2017

Glove stocks: 12-m rolling PE trends

Sources: AllianceDBS, DBS Bank

CY2017/2018

Recommend

ation

Target Price

(LC)

Current Price

(LC)

Market Cap

(USD m)CY2017 CY2018 CY2017 CY2018 CY2017 CY2018 CY2017 CY2018 CY2017 CY2018

Hartalega HOLD 4.60 4.88 1,791 28.5x 25.3x 11% 13% 1.7% 1.9% 4.6x 4.2x 17% 17%

Kossan HOLD 6.30 6.49 1,493 18.5x 16.2x 22% 15% 2.7% 3.1% 3.5x 3.2x 20% 21%

Supermax HOLD 2.45 2.15 928 11.4x 10.3x (3%) 10% 2.5% 2.7% 1.3x 1.2x 12% 12%

Top Glove HOLD 4.80 5.33 323 18.8x 17.3x 0% 9% 2.7% 2.9% 3.3x 3.0x 18% 18%

Riverstone HOLD 0.97 0.87 447 15.2x 14.1x 12% 8% 2.5% 2.7% 3.1x 2.8x 22% 21%

Weighted avg 21.5x 19.2x 9% 11% 2.3% 2.5% 3.7x 3.3x 18% 18%

Price/ BVPS ROAEP/E EPS Growth (YoY) Dividend Yield

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

40.00

45.00

Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Hartalega Kossan Supermax Top Glove Riverstone

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:BC, PY

HOLDHOLDHOLDHOLD Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Jan 20176 Jan 20176 Jan 20176 Jan 2017)))): : : : RM4.88 (KLCIKLCIKLCIKLCI : : : : 1,675.49) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth:::: RM4.60 (-6% downside) (Prev RM4.60)

Where we differWhere we differWhere we differWhere we differ:::: Our forecast is below consensus Analyst Siti Ruzanna MOHD FARUK +603 2604 3965 [email protected]

Price Relative

Forecasts and Valuation FY FY FY FY MarMarMarMar ((((RMRMRMRM m) m) m) m) 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Revenue 1,498 1,750 2,034 2,304 EBITDA 382 393 447 500 Pre-tax Profit 317 310 357 400 Net Profit 257 252 290 325 Net Pft (Pre Ex.) 252 252 290 325 Net Pft Gth (Pre-ex) (%) 26.5 (0.2) 15.0 12.1 EPS (sen) 15.7 15.4 17.7 19.8 EPS Pre Ex. (sen) 15.4 15.4 17.7 19.8 EPS Gth Pre Ex (%) 20 0 15 12 Diluted EPS (sen) 15.7 15.4 17.7 19.8 Net DPS (sen) 8.00 7.29 8.39 9.41 BV Per Share (sen) 91.5 99.0 109 120 PE (X) 31.1 31.8 27.6 24.6 PE Pre Ex. (X) 31.7 31.8 27.6 24.6 P/Cash Flow (X) 33.4 28.3 24.5 21.3 EV/EBITDA (X) 21.4 21.1 18.6 16.6 Net Div Yield (%) 1.6 1.5 1.7 1.9 P/Book Value (X) 5.3 4.9 4.5 4.1 Net Debt/Equity (X) 0.1 0.2 0.2 0.1 ROAE (%) 18.6 16.1 17.0 17.3 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 17.2 19.3 21.8 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 1 S: 5 H: 14

Source of all data on this page: Company, AllianceDBS, Bloomberg Finance L.P

Ratcheting up its volume Maintain HOLD, RM4.60 TP. Maintain HOLD, RM4.60 TP. Maintain HOLD, RM4.60 TP. Maintain HOLD, RM4.60 TP. We maintain HOLD on Hartalega with a TP of RM4.60, based on 27x CY17F EPS. We expect Hartalega to grow sales volume at 17% CAGR over FY16-19F, in line with capacity growth. However, earnings CAGR will be more muted at 8% as we expect unit profitability to drop by 18%/2%/1% in FY17/18/19F, driven by competition. Premier nitrile glove maker. Premier nitrile glove maker. Premier nitrile glove maker. Premier nitrile glove maker. Hartalega’s Next Generation Complex (NGC) is expected to cement the group’s position as the premier nitrile glove maker in the world, reinforcing its competitive advantages with better efficiency and sufficient capacity growth. Set on a 112-acre site in Sepang, Hartalega’s Next Generation Complex (NGC) comprises six nitrile glove plants with a total of 72 production lines capable of producing 28.2bn gloves p.a. Each production line is able to churn out 45k gloves/hour, translating into a record high productivity of 2.6 employees/m gloves/month (vs 3.9 currently, and industry average of 4.7). Hartalega’s NGC to drive growth ahead. Hartalega’s NGC to drive growth ahead. Hartalega’s NGC to drive growth ahead. Hartalega’s NGC to drive growth ahead. The NGC Plants #1 and #2 are fully commissioned in March 2016 with 24 production lines. The average output per line is 45,000 pcs/hr. This pumps up its total capacity to 20bn pieces p.a. Meanwhile, the group has started construction of NGC Plant #3 which is targeted for completion in Oct 2017. The construction of NGC Plant #4 has been extended and expected to complete by end-2018. Valuation:

Expect share price to consolidate at current levelExpect share price to consolidate at current levelExpect share price to consolidate at current levelExpect share price to consolidate at current level. The earnings

growth prospect from NGC has largely been priced in. Our TP

is based on 27x CY17 EPS.

Key Risks to Our View:

Increased competition could erode margins.Increased competition could erode margins.Increased competition could erode margins.Increased competition could erode margins. Hartalega could

face increased competition as other glove makers crowd into

the nitrile glove segment. This could reduce Hartalega’s

lucrative margins. At A Glance Issued Capital (m shrs) 1,641

Mkt. Cap (RMm/US$m) 8,010 / 1,791

Major Shareholders (%)

Hartalega Industries 49.3

Employees Provident Fund 7.5

Budi Tenggara 3.0

Free Float (%) 30.9

3m Avg. Daily Val (US$m) 1.1

ICB IndustryICB IndustryICB IndustryICB Industry : Health Care / Health Care Equipment & Services

DBS Group Research . Equity

9 Jan 2017

Malaysia Company Guide

Hartalega Holdings Version 6 | Bloomberg: HART MK | Reuters: HTHB.KL Refer to important disclosures at the end of this report

87

107

127

147

167

187

207

227

247

267

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Relative IndexRM

Hartalega Holdings (LHS) Relative KLCI (RHS)

ASIAN INSIGHTS VICKERS SECURITIES

Company Guide

Hartalega Holdings

CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

NGC expansion plan to drive capacity growth.NGC expansion plan to drive capacity growth.NGC expansion plan to drive capacity growth.NGC expansion plan to drive capacity growth. Set on a 112-

acre site in Sepang, Hartalega’s Next Generation Complex

(NGC) comprises six nitrile glove plants with a total of 72

production lines capable of producing 28.3bn gloves p.a. Each

production line is able to churn out 45k gloves/hour, translating

into a record high productivity of 2.6 employees/m

gloves/month (vs 3.9 currently, and industry average of 4.7). To

date, Hartalega has completed two NGC plants. It has also

started construction for Plant #3. All in, we expect Hartalega to

grow effective annual capacity by 16%/17%/13% in

FY17/18/19F.

Sales volume to grow at 19% CAGR.Sales volume to grow at 19% CAGR.Sales volume to grow at 19% CAGR.Sales volume to grow at 19% CAGR. We expect the group’s

utilisation to increase to 85% in FY17-19F. We assume that

Hartalega may close its older and less efficient plants once the

new NGC plants come online. Premised on this, we expect

Hartalega to grow its sales volume by 21%/17%/13% in

FY17/18/19F.

EBIT/k gloves is a better metric to assess profitability. EBIT/k gloves is a better metric to assess profitability. EBIT/k gloves is a better metric to assess profitability. EBIT/k gloves is a better metric to assess profitability. We assess

Hartalega’s profitability by looking at unit profitability (i.e. EBIT/k

gloves), rather than profit margins. This is because profit

margins can fluctuate even if there is no change in underlying

profitability, because of its cost pass-through pricing (which has

a 1-2 months’ lag). Under this pricing mechanism, profit

margins can rise when costs are falling (i.e. same level of profits

on lower ASP), and margins can drop when costs are rising (i.e.

same level of profits on higher ASP).

Lower EBIT/k gloves for FY17F.Lower EBIT/k gloves for FY17F.Lower EBIT/k gloves for FY17F.Lower EBIT/k gloves for FY17F. We project Hartalega’s EBIT/k

gloves to decline by 18% in FY17F due to higher operating

costs, i.e. raw material and natural gas price hikes. Profitability is

also under pressure because it would be difficult for Hartalega

to sustain its premium pricing as more glove makers expand

into nitrile gloves. As such, we forecast EBIT/k gloves will fall by

2%/1% in FY18/19F.

Primarily a nitrile gloves producer.Primarily a nitrile gloves producer.Primarily a nitrile gloves producer.Primarily a nitrile gloves producer. Driven by the Hartalega

NGC, we expect Hartalega’s sales mix to continue to tilt

towards nitrile gloves, from 95% in FY16 to 96% in FY18F.

Demand for nitrile gloves is expected to outpace latex gloves in

the coming years, but supply and demand dynamics will be

weak relative to latex gloves, because of rising incoming supply.

As such, we expect Hartalega’s premium pricing to erode over

time, leading to margin compression.

Capacity (m gloves)

Utilisation rate (%)

Output (m gloves)

EBIT/k gloves (RM)

Source: Company, AllianceDBS

14191

19387

22400

26100

29600

0.0

4270.9

8541.7

12812.6

17083.4

21354.3

25625.1

29896.0

2015A 2016A 2017F 2018F 2019F

88.2

8185 85 85

0.0

18.0

36.0

54.0

72.0

90.0

2015A 2016A 2017F 2018F 2019F

12516

15703

19040

22185

25160

0.00

5132.64

10265.28

15397.92

20530.56

25663.20

2015A 2016A 2017F 2018F 2019F

21.219.8

16.3 15.9 15.8

0.0

4.3

8.6

12.9

17.1

21.4

2015A 2016A 2017F 2018F 2019F


Company Guide

Hartalega Holdings

Balance Sheet:

Gearing up for expansion.Gearing up for expansion.Gearing up for expansion.Gearing up for expansion. Hartalega’s NGC plants are expected

to be rolled out over six years, but a significant part of the

RM2.2bn capex will be front-loaded because of the need to

build common infrastructure, and the rapid speed in

constructing Plants #1-4 (in FY14-17). As such, we expect

Hartalega to gear up to fund the expansion. We forecast

Hartalega will turn from net cash position in FY15 to net

gearing position of 0.1x in FY17F.

Share Price Drivers:

Supported by capacity and demand growth.Supported by capacity and demand growth.Supported by capacity and demand growth.Supported by capacity and demand growth. We expect

Hartalega’s sales volume to grow at double digits, given the

capacity growth and demand for nitrile gloves. Although our

expectations seem aggressive in percentage terms, the absolute

increase in output is reasonable vis-à-vis the additional demand

in global consumption. Unit profitability is influenced by the

competitive environment, productivity, and macroeconomic

factors (i.e. currency movements, raw material prices, etc.); the

competitive environment is expected to drag unit profitability

over the longer term.

Key Risks:

Increased Increased Increased Increased competition could erode margins.competition could erode margins.competition could erode margins.competition could erode margins. Hartalega could

face increased competition as other glove makers crowd into

the nitrile glove segment. This could reduce Hartalega’s

lucrative margins.

Potential challenge to sell additional Potential challenge to sell additional Potential challenge to sell additional Potential challenge to sell additional the output. the output. the output. the output. In view of

Hartalega’s aggressive expansion plan, the group could face

difficulty in securing buyers for its additional output. This could

pressure utilisation rates going forward.

Company Background

Hartalega is a niche player in nitrile gloves (92% of sales

volume). It has the largest nitrile glove capacity among the

glove makers under our coverage.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.7

0.8

0.8

0.9

0.9

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

2015A 2016A 2017F 2018F 2019F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

450.0

2015A 2016A 2017F 2018F 2019F

Capital Expenditure (-)

RMm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2015A 2016A 2017F 2018F 2019F

Avg: 25.9x

+1sd: 30.9x

+2sd: 35.8x

-1sd: 21x

-2sd: 16.1x

12.7

17.7

22.7

27.7

32.7

37.7

42.7

Jan-13 Jan-14 Jan-15 Jan-16

(x)

Avg: 3.37x

+1sd: 4.43x

+2sd: 5.49x

-1sd: 2.32x

-2sd: 1.26x1.1

2.1

3.1

4.1

5.1

6.1


(x)


Company Guide

Hartalega Holdings

Key Assumptions

FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Capacity (m gloves) 14,191 19,387 22,400 26,100 29,600

Utilisation rate (%) 88.2 81.0 85.0 85.0 85.0

Output (m gloves) 12,516 15,703 19,040 22,185 25,160

EBIT/k gloves (RM) 21.2 19.8 16.3 15.9 15.8 Income Statement (RMm)

FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Revenue 1,146 1,498 1,750 2,034 2,304

Cost of Goods Sold (805) (1,097) (1,331) (1,554) (1,765)

Gross ProfitGross ProfitGross ProfitGross Profit 341341341341 402402402402 419419419419 480480480480 539539539539 Other Opng (Exp)/Inc (75.8) (90.6) (109) (126) (142)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 266266266266 311311311311 310310310310 354354354354 397397397397 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0

Associates & JV Inc 0.0 0.0 0.0 0.0 0.0

Net Interest (Exp)/Inc 1.14 0.88 0.19 2.99 3.37

Exceptional Gain/(Loss) 10.2 4.94 0.0 0.0 0.0

PrePrePrePre----tax Profittax Profittax Profittax Profit 277277277277 317317317317 310310310310 357357357357 400400400400 Tax (66.7) (59.1) (57.9) (66.6) (74.6)

Minority Interest (0.5) (0.3) (0.3) (0.3) (0.3)

Preference Dividend 0.0 0.0 0.0 0.0 0.0

Net ProfitNet ProfitNet ProfitNet Profit 210210210210 257257257257 252252252252 290290290290 325325325325 Net Profit before Except. 200 252 252 290 325

EBITDA 311 382 393 447 500

Growth

Revenue Gth (%) 3.5 30.7 16.8 16.2 13.3

EBITDA Gth (%) (12.1) 22.6 2.9 13.8 12.0

Opg Profit Gth (%) (14.1) 17.1 (0.3) 14.1 12.1

Net Profit Gth (Pre-ex) (%) (14.7) 26.5 (0.2) 15.0 12.1

Margins & Ratio

Gross Margins (%) 29.8 26.8 23.9 23.6 23.4

Opg Profit Margin (%) 23.2 20.8 17.7 17.4 17.2

Net Profit Margin (%) 18.3 17.2 14.4 14.3 14.1

ROAE (%) 19.0 18.6 16.1 17.0 17.3

ROA (%) 16.3 15.1 11.5 11.4 11.8

ROCE (%) 17.1 16.1 12.5 12.5 12.9

Div Payout Ratio (%) 49.7 51.0 47.5 47.5 47.5

Net Interest Cover (x) NM NM NM NM NM



Company Guide

Hartalega Holdings

Quarterly / Interim Income Statement (RMm)

FY FY FY FY MarMarMarMar 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017 2Q2Q2Q2Q2017201720172017 Revenue 379 398 400 402 437

Cost of Goods Sold (286) (308) (348) (327) (349)

Gross ProfitGross ProfitGross ProfitGross Profit 93.893.893.893.8 90.390.390.390.3 52.452.452.452.4 74.974.974.974.9 87.887.887.887.8 Other Oper. (Exp)/Inc (24.5) 4.90 15.4 (3.9) (4.4)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 69.369.369.369.3 95.295.295.295.2 67.867.867.867.8 71.071.071.071.0 83.483.483.483.4 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0



Exceptional Gain/(Loss) 5.58 (4.0) 3.01 (3.0) 0.27

PrePrePrePre----tax Profittax Profittax Profittax Profit 75.175.175.175.1 91.291.291.291.2 71.071.071.071.0 68.168.168.168.1 83.883.883.883.8 Tax (14.5) (18.3) (9.4) (11.7) (12.6)

Minority Interest (0.1) (0.1) (0.1) (0.2) 0.04

Net ProfitNet ProfitNet ProfitNet Profit 60.460.460.460.4 72.872.872.872.8 61.561.561.561.5 56.256.256.256.2 71.271.271.271.2 Net profit bef Except. 54.8 76.8 58.5 59.2 70.9

EBITDA 85.9 113 88.9 88.1 100

Growth

Revenue Gth (%) 18.4 4.9 0.6 0.3 8.7

EBITDA Gth (%) (9.4) 31.5 (21.3) (0.9) 13.9

Opg Profit Gth (%) (13.0) 37.4 (28.8) 4.7 17.5

Net Profit Gth (Pre-ex) (%) (12.6) 40.0 (23.8) 1.3 19.8

Margins

Gross Margins (%) 24.7 22.7 13.1 18.6 20.1

Opg Profit Margins (%) 18.3 23.9 16.9 17.7 19.1

Net Profit Margins (%) 15.9 18.3 15.4 14.0 16.3 Balance Sheet (RMm)

FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Net Fixed Assets 1,044 1,402 1,571 1,700 1,819

Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0

Other LT Assets 24.8 20.5 18.2 15.8 13.5

Cash & ST Invts 70.5 84.4 289 317 326

Inventory 120 202 245 286 324

Debtors 198 239 279 324 368

Other Current Assets 0.20 14.1 14.1 14.1 14.1

Total AssetsTotal AssetsTotal AssetsTotal Assets 1,4571,4571,4571,457 1,9611,9611,9611,961 2,4162,4162,4162,416 2,6572,6572,6572,657 2,8642,8642,8642,864

ST Debt

6.08 42.4 42.4 42.4 42.4

Creditor 108 147 179 209 237

Other Current Liab 12.6 0.82 0.82 0.82 0.82

LT Debt 0.33 206 506 556 556

Other LT Liabilities 59.5 60.8 60.8 60.8 60.8

Shareholder’s Equity 1,269 1,502 1,625 1,786 1,965

Minority Interests 1.66 2.08 2.42 2.75 3.08

Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 1,4571,4571,4571,457 1,9611,9611,9611,961 2,4162,4162,4162,416 2,6572,6572,6572,657 2,8642,8642,8642,864

Non-Cash Wkg. Capital 197 306 358 414 468

Net Cash/(Debt) 64.1 (164) (259) (281) (272)

Debtors Turn (avg days) 55.3 53.2 54.0 54.2 54.8

Creditors Turn (avg days) 48.8 45.5 47.7 48.4 49.0

Inventory Turn (avg days) 52.5 57.2 65.2 66.2 67.0

Asset Turnover (x) 0.9 0.9 0.8 0.8 0.8

Current Ratio (x) 3.1 2.8 3.7 3.7 3.7

Quick Ratio (x) 2.1 1.7 2.6 2.5 2.5

Net Debt/Equity (X) CASH 0.1 0.2 0.2 0.1

Net Debt/Equity ex MI (X) CASH 0.1 0.2 0.2 0.1

Capex to Debt (%) 6,592.2 171.7 45.6 36.8 36.8

Z-Score (X) 26.6 12.6 8.1 7.7 7.6



Company Guide

Hartalega Holdings

Cash Flow Statement (RMm)

FY FY FY FY MarMarMarMar 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Pre-Tax Profit 277 317 310 357 400

Dep. & Amort. 45.9 70.6 82.6 93.2 104

Tax Paid (69.7) (64.7) (57.9) (66.6) (74.6)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. (47.3) (79.8) (51.7) (56.3) (53.5)

Other Operating CF (3.5) (3.5) 0.0 0.0 0.0

Net Operating CFNet Operating CFNet Operating CFNet Operating CF 202202202202 240240240240 283283283283 327327327327 376376376376 Capital Exp.(net) (422) (426) (250) (220) (220)

Other Invts.(net) 4.31 2.59 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF 4.63 (0.1) 0.0 0.0 0.0

Net Investing CFNet Investing CFNet Investing CFNet Investing CF (413)(413)(413)(413) (423)(423)(423)(423) (250)(250)(250)(250) (220)(220)(220)(220) (220)(220)(220)(220) Div Paid (105) (123) (129) (129) (146)

Chg in Gross Debt 1.59 243 300 50.0 0.0

Capital Issues 220 78.8 0.0 0.0 0.0

Other Financing CF (0.1) (1.3) 0.0 0.0 0.0

Net Financing CFNet Financing CFNet Financing CFNet Financing CF 117117117117 197197197197 171171171171 (79.2)(79.2)(79.2)(79.2) (146)(146)(146)(146)

Currency Adjustments (0.8) 0.56 0.0 0.0 0.0

Chg in Cash (95.4) 13.8 205 27.8 9.14

Opg CFPS (sen) 16.1 19.5 20.4 23.4 26.1

Free CFPS (sen) (14.2) (11.4) 2.03 6.52 9.48


Target Price & Ratings History

Source: AllianceDBS

Analyst: Siti Ruzanna MOHD FARUK

S.No.S.No.S.No.S.No.Date of Date of Date of Date of

ReportReportReportReport

Closing Closing Closing Closing

PricePricePricePrice

12-mth 12-mth 12-mth 12-mth

Target Target Target Target


Rat ing Rat ing Rat ing Rat ing

1: 11 Feb 16 5.04 5.00 HOLD

2: 17 Feb 16 5.05 5.00 HOLD

3: 04 May 16 4.10 4.10 HOLD

4: 03 Aug 16 4.08 4.20 HOLD

5: 09 Nov 16 4.74 4.60 HOLD

6: 20 Dec 16 4.75 4.60 HOLD

7: 29 Dec 16 4.76 4.60 HOLD

Note Note Note Note : Share price and Target price are adjusted for corporate actions.

1

2

3

4

5

6

7

3.66

4.16

4.66

5.16

5.66

6.16

Jan-16 May-16 Sep-16

RMRMRMRM

ASIAN INSIGHTS VICKERS SECURITIES ed: CK/ sa:BC, PY

HOLDHOLDHOLDHOLD

Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Jan 20176 Jan 20176 Jan 20176 Jan 2017)))): : : : RM5.33 (KLCIKLCIKLCIKLCI : : : : 1,675.49) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth:::: RM4.80 (-10% downside) (Prev RM4.80)


Price Relative

Forecasts and Valuation FY FY FY FY AugAugAugAug ((((RMRMRMRM m) m) m) m) 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Revenue 2,889 3,306 3,574 3,760 EBITDA 525 510 556 590 Pre-tax Profit 442 423 462 501 Net Profit 361 345 377 409 Net Pft (Pre Ex.) 361 345 377 409 Net Pft Gth (Pre-ex) (%) 28.9 (4.3) 9.1 8.6 EPS (sen) 28.7 27.5 30.0 32.6 EPS Pre Ex. (sen) 28.7 27.5 30.0 32.6 EPS Gth Pre Ex (%) 28 (4) 9 9 Diluted EPS (sen) 28.7 27.5 30.0 32.6 Net DPS (sen) 14.5 13.9 15.1 16.4 BV Per Share (sen) 145 157 173 190 PE (X) 18.5 19.4 17.8 16.4 PE Pre Ex. (X) 18.5 19.4 17.8 16.4 P/Cash Flow (X) 15.4 15.6 13.8 12.4 EV/EBITDA (X) 12.2 12.5 11.2 10.3 Net Div Yield (%) 2.7 2.6 2.8 3.1 P/Book Value (X) 3.7 3.4 3.1 2.8 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 21.1 18.2 18.2 17.9 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 28.8 30.7 31.5 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 8 S: 4 H: 11


A happy new year Maintain HOLD. Maintain HOLD. Maintain HOLD. Maintain HOLD. We maintain our HOLD call for Top Glove with a higher TP RM4.80. We believe near term earnings will be boosted by the strong USD. However, we are remain cautious as the positive impact from the strong USD may be negated by rising operating costs, as natural gas tariffs and raw material prices could increase further. Expansion still ongoingExpansion still ongoingExpansion still ongoingExpansion still ongoing. Top Glove is gearing up to increase its nitrile glove segment by increasing its capacity in this segment. The expansion plans are underway such as Factory 30 in Klang (April 2017) and Factory 31 in Klang (Phase 1 in August 2017, Phase 2 in May 2018), and will raise total production capacity to 56.8bn gloves p.a. (+18% from current capacity of 48.0bn p.a.). Profitability to normalise in FY17/18FProfitability to normalise in FY17/18FProfitability to normalise in FY17/18FProfitability to normalise in FY17/18F. We forecast EBIT/k gloves to decrease in FY17F, as we factor in higher operating costs as well as USD gains. We believe the exceptional 1H16 showing will not be replicated given the unfavourable conditions. Our EBIT/k glove assumptions are conservative vis-à-vis the record-breaking level in FY16, as we expect EBIT/k gloves to normalise in FY18-19F. Valuation:

Maintain HOLDMaintain HOLDMaintain HOLDMaintain HOLD. We maintain our HOLD recommendation with

a TP of RM4.80. Our TP is based on 17x CY17F EPS (previously

16x CY17EPS) which is +0.5SD of its 5-year mean EPS. Our PE

multiple reflects it’s near term earnings growth.


Rising competition could erode margins.Rising competition could erode margins.Rising competition could erode margins.Rising competition could erode margins. Competition is

heating up in the glove sector with several glove makers

expanding aggressively. This could results in higher pressure on

margins. At A Glance Issued Capital (m shrs) 1,253

Mkt. Cap (RMm/US$m) 6,678 / 1,493


Wee Chai Lim 29.4

Kumpulan Wang Persaraan (KWAP) 9.0

Firstway United 5.1

Free Float (%) 51.4


ICB IndustryICB IndustryICB IndustryICB Industry : Health Care / Health Care Equipment & Servic


9 Jan 2017


Top Glove Corporation Version | Bloomberg: TOPG MK | Reuters: TPGC.KL Refer to important disclosures at the end of this report

65

115

165

215

265

1.9

2.9

3.9

4.9

5.9

6.9


Relative IndexRM

Top Glove Corporation (LHS) Relative KLCI (RHS)


Company Guide

Top Glove Corporation


Earnings Drivers:

Top Glove currently operates 25 glove factories with the

capacity to produce 48.0bn gloves p.a. including the latest

expansion in Factory 6 Phuket. It is planning a factory (F30) in

Klang, Malaysia. They have also acquired a factory in Klang

(F31) which is estimated to produce 4.4bn gloves p.a. Together,

these expansion projects comprising more than 80 production

lines will raise the group’s annual capacity to 56.8bn gloves.

Premised on the expected completion dates provided by the

management, we expect Top Glove to grow its effective annual

capacity by 9%/11%/5% in FY17/18/19F.

Sales volume to Sales volume to Sales volume to Sales volume to grow at 8% CAGRgrow at 8% CAGRgrow at 8% CAGRgrow at 8% CAGR. We expect the group’s

utilisation rate to be flat in FY17F and decline marginally by

2.0/2.0ppts in FY18/19F. The expected downtrend in FY18F

would come from the incoming capacity of 5.3bn gloves p.a.

Premised on this, we expect Top Glove to grow its sales volume

by 9%/8%/5% in FY17/18/19F. This translates into a 3-year

CAGR of 7%, which is in line with expected consumption

growth of 6-8% p.a.


Top Glove’s profitability by looking at unit profitability (i.e.

EBIT/k gloves), rather than profit margins. This is because profit

margins can fluctuate even if there is no change in underlying

profitability, because of its cost pass-through pricing (which lags

by 1-2 months). Under the pricing mechanism, profit margins

can rise when costs are falling (i.e. same level of profits on

lower ASP), and margins can drop when costs are rising (i.e.

same level of profits on higher ASP), with no impact on the

bottomline.

EBIT/k gloves to normalise. EBIT/k gloves to normalise. EBIT/k gloves to normalise. EBIT/k gloves to normalise. EBIT/k gloves increased by 9% in

FY16 backed by the strengthening of the USD coupled with the

cheaper raw material prices. However, we expect EBIT/k gloves

to decline by 14% to RM9.76 in FY17F as a result of increasing

competition among glove players especially in the nitrile

segment, and rising operating costs from natural gas hike and

raw material prices. Thereafter, we conservatively assume Top

Glove’s EBIT/k gloves to normalise and remain flat in FY18/19F.

Gain from inGain from inGain from inGain from incoming nitrile. coming nitrile. coming nitrile. coming nitrile. The recent capacity expansion has

been geared towards nitrile gloves as they believe there will be

stronger demand for nitrile gloves. Current product mix stands

at 65:35 (natural rubber : nitrile). This could move towards

60:40 once incoming capacity kicks in. We expect Top Glove

earnings to improve from its expansion in nitrile glove as it

offers better margins.

Capacity (bn gloves)


Sales Volume (bn gloves)

EBIT/k gloves (RM)


43.9 44.648.7

5456.8

0.0

8.2

16.4

24.6

32.8

41.0

49.2

57.4

2015A 2016A 2017F 2018F 2019F

75.2

82.3 82 80 80

0.0

16.8

33.6

50.3

67.1

83.9

2015A 2016A 2017F 2018F 2019F

33.1

36.740

43.245.4

0.00

9.27

18.54

27.81

37.08

46.35

2015A 2016A 2017F 2018F 2019F

10.4

11.4

9.76 9.78 9.76

0.0

2.3

4.6

6.9

9.2

11.5

2015A 2016A 2017F 2018F 2019F


Company Guide


Balance Sheet:

Solid balance sheet. Solid balance sheet. Solid balance sheet. Solid balance sheet. Top Glove is a strong cash generator, and

we expect the group to remain in net cash position in FY17-19F.

Backed by rising operating cash flow of RM431m-530m amid

limited capex of RM200m p.a. over FY17-19F, we expect the

cash pile to rise from RM224m in FY16 to RM518m by FY19F.

In addition, the group has significant short-term investments

(RM480m in FY16) which can be liquidated when required. The

large cash pile should be sufficient to fund Top Glove’s dividend

payments and any M&A opportunities that may arise. . . .


Increased Increased Increased Increased market volatility.market volatility.market volatility.market volatility. Malaysian-listed glove makers have

been generally regarded as defensive and a safe haven by

investors, given their resilient earnings outlook backed by: (1)

the cost pass-through mechanism, (2) stable demand for

medical glove products, and (3) exposure to global markets (not

dependent on a single geographical region). As such, share

prices in the sector tend to react favourably during periods of

increasing market volatility.

Earnings outlook.Earnings outlook.Earnings outlook.Earnings outlook. Top Glove’s earnings are a function of two

variables: (1) sales volume, and (2) unit profitability (EBIT/k

gloves). We do not expect Top Glove’s sales volume growth to

exceed 6-8% p.a., except during periods of abnormal demand

(i.e. pandemic outbreaks). Unit profitability is influenced by the

competitive environment, productivity, and macroeconomic

factors (i.e. currency movements, raw material prices, etc.)

Key Risks:

Rising competition could erode marginsRising competition could erode marginsRising competition could erode marginsRising competition could erode margins. Competition is

heating up in the glove sector with several glove makers

undertaking aggressive expansion plans, which could see unit

profitability (EBIT/k gloves) suffer going forward. However, Top

Glove will be relatively better off than its peers, as its core

natural rubber glove products will see relatively less

competition than nitrile gloves, because of better supply-

demand dynamics.

Company Background

Top Glove is the world’s largest rubber glove manufacturer

with an annual production capacity of 48.0bn gloves. Natural

rubber gloves make up the lion’s share of its product mix

(63%), while nitrile rubber gloves account for 30%. Vinyl and

surgical gloves account for the rest. Currently, the group’s

manufacturing facilities are located in Malaysia, Thailand, and

Indonesia.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


1.0

1.1

1.1

1.2

1.2

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

0.45

2015A 2016A 2017F 2018F 2019F


190.0

195.0

200.0

205.0

210.0

215.0

220.0

2015A 2016A 2017F 2018F 2019F


RMm

0.0%

5.0%

10.0%

15.0%

20.0%

2015A 2016A 2017F 2018F 2019F

Avg: 15.5x

+1sd: 19.5x

+2sd: 23.5x

-1sd: 11.6x

-2sd: 7.6x6.8

11.8

16.8

21.8

26.8


(x)

Avg: 2.85x

+1sd: 3.55x

+2sd: 4.24x

-1sd: 2.16x

-2sd: 1.46x1.3

1.8

2.3

2.8

3.3

3.8

4.3

4.8

5.3


(x)


Company Guide


Key Assumptions

FY FY FY FY AugAugAugAug 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Capacity (bn gloves) 43.9 44.6 48.7 54.0 56.8


Sales Volume (bn gloves) 33.1 36.7 40.0 43.2 45.4


FY FY FY FY AugAugAugAug 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Revenue 2,511 2,889 3,306 3,574 3,760

Cost of Goods Sold (1,956) (2,293) (2,723) (2,947) (3,107)

Gross ProfitGross ProfitGross ProfitGross Profit 555555555555 596596596596 584584584584 627627627627 653653653653 Other Opng (Exp)/Inc (200) (180) (195) (206) (211)


Associates & JV Inc (11.7) 1.28 1.28 1.28 1.28







EBITDA 440 525 510 556 590

Growth

Revenue Gth (%) 10.3 15.1 14.5 8.1 5.2

EBITDA Gth (%) 43.9 19.2 (2.8) 9.0 6.2

Opg Profit Gth (%) 68.0 17.2 (6.4) 8.4 5.0

Net Profit Gth (Pre-ex) (%) 51.5 28.9 (4.3) 9.1 8.6

Margins & Ratio

Gross Margins (%) 22.1 20.6 17.7 17.5 17.4



ROAE (%) 18.6 21.1 18.2 18.2 17.9

ROA (%) 12.1 13.5 12.5 12.6 12.7

ROCE (%) 15.3 16.9 16.1 16.4 17.0

Div Payout Ratio (%) 51.3 50.4 50.4 50.4 50.4




Company Guide



FY FY FY FY AugAugAugAug 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017 Revenue 800 694 672 722 786


Gross ProfitGross ProfitGross ProfitGross Profit 207207207207 174174174174 115115115115 115115115115 138138138138 Other Oper. (Exp)/Inc (51.0) (49.5) (48.1) (45.1) (52.2)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 156156156156 125125125125 66.666.666.666.6 69.969.969.969.9 86.186.186.186.1 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0

Associates & JV Inc 0.04 0.09 0.62 0.52 (0.9)



PrePrePrePre----tax Profittax Profittax Profittax Profit 161161161161 132132132132 73.773.773.773.7 75.875.875.875.8 89.889.889.889.8 Tax (32.4) (26.6) (11.0) (9.9) (16.1)


Net ProfitNet ProfitNet ProfitNet Profit 128128128128 105105105105 62.562.562.562.5 65.665.665.665.6 73.373.373.373.3 Net profit bef Except. 128 105 62.5 65.6 73.3

EBITDA 183 152 93.7 97.4 111

Growth

Revenue Gth (%) 12.8 (13.3) (3.1) 7.4 8.8

EBITDA Gth (%) 19.5 (17.2) (38.3) 4.0 14.4

Opg Profit Gth (%) 16.8 (19.9) (46.6) 4.9 23.2

Net Profit Gth (Pre-ex) (%) 24.5 (18.5) (40.3) 5.1 11.7

Margins

Gross Margins (%) 25.8 25.1 17.1 15.9 17.6



FY FY FY FY AugAugAugAug 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Net Fixed Assets 1,067 1,196 1,276 1,343 1,396


Other LT Assets 143 112 112 112 112

Cash & ST Invts 816 703 737 848 997

Inventory 252 264 313 339 357

Debtors 381 346 396 428 450



ST Debt

530 318 318 318 318

Creditor 326 332 394 427 450


LT Debt 106 81.6 81.6 81.6 81.6


Shareholder’s Equity 1,608 1,818 1,969 2,171 2,390




Net Cash/(Debt) 180 304 338 449 597




Asset Turnover (x) 1.1 1.1 1.2 1.2 1.2

Current Ratio (x) 1.6 1.9 2.0 2.1 2.3

Quick Ratio (x) 1.3 1.5 1.5 1.6 1.8

Net Debt/Equity (X) CASH CASH CASH CASH CASH

Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH

Capex to Debt (%) 31.4 54.3 50.1 50.1 50.1

Z-Score (X) 5.9 7.4 7.2 7.1 7.0



Company Guide



FY FY FY FY AugAugAugAug 2015201520152015AAAA 2016201620162016AAAA 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Pre-Tax Profit 364 442 423 462 501

Dep. & Amort. 97.3 108 120 133 147

Tax Paid (55.6) (98.5) (76.4) (83.3) (90.4)

Assoc. & JV Inc/(loss) 11.7 (1.3) (1.3) (1.3) (1.3)

Chg in Wkg.Cap. (67.2) 25.6 (37.2) (25.4) (17.4)

Other Operating CF (15.8) (42.2) 0.0 0.0 0.0

Net Operating CFNet Operating CFNet Operating CFNet Operating CF 334334334334 434434434434 428428428428 485485485485 539539539539 Capital Exp.(net) (200) (217) (200) (200) (200)

Other Invts.(net) (524) 149 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 3.98 2.26 0.0 0.0 0.0

Other Investing CF 77.8 31.3 0.0 0.0 0.0

Net Investing CFNet Investing CFNet Investing CFNet Investing CF (642)(642)(642)(642) (34.4)(34.4)(34.4)(34.4) (200)(200)(200)(200) (200)(200)(200)(200) (200)(200)(200)(200) Div Paid (105) (169) (195) (174) (190)

Chg in Gross Debt 364 (198) 0.0 0.0 0.0

Capital Issues 2.92 38.9 0.0 0.0 0.0

Other Financing CF 0.0 0.0 0.0 0.0 0.0

Net Financing CFNet Financing CFNet Financing CFNet Financing CF 262262262262 (328)(328)(328)(328) (195)(195)(195)(195) (174)(174)(174)(174) (190)(190)(190)(190)

Currency Adjustments 2.98 6.62 0.0 0.0 0.0

Chg in Cash (42.5) 77.9 33.9 111 149

Opg CFPS (sen) 32.1 32.5 37.1 40.7 44.3

Free CFPS (sen) 10.8 17.3 18.2 22.7 27.0



Source: AllianceDBS


S.No.S.No.S.No.S.No. Date of Date of Date of Date of




12121212----mth mth mth mth


PricePricePricePrice Rating Rating Rating Rating

1: 11 Feb 16 5.63 7.10 BUY

2: 17 Mar 16 5.26 7.10 BUY

3: 16 Jun 16 4.70 7.10 BUY

4: 23 Jun 16 4.67 6.00 BUY

5: 13 Oct 16 5.01 6.00 BUY

6: 19 Oct 16 5.00 4.30 HOLD

7: 07 Nov 16 4.80 4.30 HOLD

8: 16 Dec 16 5.12 4.30 HOLD

9: 20 Dec 16 5.23 4.30 HOLD

10: 06 Jan 17

5.33

4.80

HOLD

NoteNoteNoteNote : Share price and Target price are adjusted for corporate actions.

1 2

3

45

6

7

8

9

10

3.99

4.49

4.99

5.49

5.99

6.49

6.99


RMRMRMRM


HOLDHOLDHOLDHOLD Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Jan 20176 Jan 20176 Jan 20176 Jan 2017)))): : : : RM6.49 (KLCIKLCIKLCIKLCI : : : : 1,675.49) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth:::: RM6.30 (-3% downside) (Prev RM6.30)


Price Relative

Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRM m) m) m) m) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Revenue 1,640 1,838 2,019 2,382 EBITDA 343 320 371 413 Pre-tax Profit 269 245 296 339 Net Profit 203 184 224 257 Net Pft (Pre Ex.) 203 184 224 257 Net Pft Gth (Pre-ex) (%) 39.1 (9.0) 21.5 14.7 EPS (sen) 31.7 28.8 35.0 40.2 EPS Pre Ex. (sen) 31.7 28.8 35.0 40.2 EPS Gth Pre Ex (%) 39 (9) 22 15 Diluted EPS (sen) 31.7 28.8 35.0 40.2 Net DPS (sen) 12.0 14.4 17.5 20.1 BV Per Share (sen) 149 164 183 204 PE (X) 20.5 22.5 18.5 16.2 PE Pre Ex. (X) 20.5 22.5 18.5 16.2 P/Cash Flow (X) 15.8 19.4 16.1 16.4 EV/EBITDA (X) 12.3 13.2 11.2 10.0 Net Div Yield (%) 1.8 2.2 2.7 3.1 P/Book Value (X) 4.4 4.0 3.5 3.2 Net Debt/Equity (X) 0.1 0.0 CASH CASH ROAE (%) 23.0 18.4 20.2 20.7 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 29.6 35.7 41.4 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 6 S: 2 H: 10


Revamp works in progress Maintain HOLD. Maintain HOLD. Maintain HOLD. Maintain HOLD. We maintain our HOLD rating and RM6.30 TP for Kossan Rubber Industries (Kossan). We like the stock for its clear expansion plan, but the share price has largely priced in the near-term earnings prospects. To build two new plants each year.To build two new plants each year.To build two new plants each year.To build two new plants each year. Kossan has recently commissioned its three new glove plants #13, #14, and #15, taking its annual capacity to 22bn gloves. Going forward, it targets to build two new plants each year over the next five years, bringing its total capacity to 43.5bn gloves p.a. (+98% from current capacity). There are two plants on the way with 7.5bn gloves p.a. capacity expected to be completed from 3Q17 onwards. The revamp and modification of old plants will also add onto capacity and improve efficiency. Adjusted earnings to reflect higher USD and lower ASP.Adjusted earnings to reflect higher USD and lower ASP.Adjusted earnings to reflect higher USD and lower ASP.Adjusted earnings to reflect higher USD and lower ASP. We adjust our FY16/17/18F earnings by -14%/-3%/-10%, as we increase our USD assumptions from RM4.10 previously to RM4.10 - 4.22. We are reducing our ASP from USD21.64 previously to USD21.19 for FY16F/17F/18F, as we believe the intense competition may cap ASP moving forward. Valuation:

Maintain HOLD.Maintain HOLD.Maintain HOLD.Maintain HOLD. We retain our HOLD rating for the stock with

a revised TP of RM6.30 following the earnings cut. Our TP is

based on 18x FY17F PE. Our target PE multiple of 18x which is

+0.5SD of its 5-year mean reflects the medium-term growth

prospects of Kossan arising from capacity ramp-up.


Rising competition could erode margins.Rising competition could erode margins.Rising competition could erode margins.Rising competition could erode margins. Kossan is facing rising

competition as the other glove makers are crowding into the

nitrile glove segment. This could pressure Kossan’s unit

profitability going forward. At A Glance Issued Capital (m shrs) 639

Mkt. Cap (RMm/US$m) 4,150 / 928


Kossan Holdings 51.9

Kumpulan Wang Persaraan (Diperbadankan) KWAP

7.6

Free Float (%) 40.5


ICB IndustryICB IndustryICB IndustryICB Industry : Health Care / Health Care Equipment & Servic


9 Jan 2017


Kossan Rubber Industries Version 6 | Bloomberg: KRI MK | Reuters: KRIB.KL Refer to important disclosures at the end of this report

90

190

290

390

490

590

1.5

2.5

3.5

4.5

5.5

6.5

7.5

8.5

9.5

10.5


Relative IndexRM

Kossan Rubber Industries (LHS) Relative KLCI (RHS)


Company Guide

Kossan Rubber Industries


Earnings Drivers:

85 acres of landbank ready for development.85 acres of landbank ready for development.85 acres of landbank ready for development.85 acres of landbank ready for development. Kossan has

recently commissioned its three new nitrile glove plants - #13,

#14 and #15 – taking its annual production capacity to 22bn

gloves p.a. Over the next five years, it plans to build two new

plants each year, which will add 4-4.5bn gloves capacity p.a.

Also, there are plans to revamp the existing older lines to

improve efficiency. Based on this, we forecast Kossan’s capacity

will grow by 3%/7%/19% in FY16/17/18F.

Sales volume to grow at 13% CAGRSales volume to grow at 13% CAGRSales volume to grow at 13% CAGRSales volume to grow at 13% CAGR. We expect group

utilisation rate to increase to 85% in FY16F and drop to 83% in

FY17/18F because of new capacity from upcoming plants.

Hence, we expect Kossan to grow its sales volume by

13%/7%/19% in FY16/17/18F.


Kossan’s profitability by looking at unit profitability (i.e. EBIT/k

gloves), rather than profit margins. This is because profit

margins can fluctuate wildly even if there is no change in

underlying profitability, as Kossan has a cost pass-through

pricing strategy (which has a lag of 1-2 months). Under this

pricing mechanism, profit margins can rise even when costs are

falling (i.e. same level of profit on lower ASP), and margins can

drop when costs are rising (i.e. same level of profit on higher

ASP), with no impact on the bottom line.

Efficiency gains to boost unit profitability.Efficiency gains to boost unit profitability.Efficiency gains to boost unit profitability.Efficiency gains to boost unit profitability. Since the USD-MYR

has been volatile, Kossan has to rely on efficiency gains to

improve its profitability. The group will continue to focus on its

enhancement initiatives and introduce its patented accelerator-

free nitrile gloves and other special gloves in order to minimise

the impact from pricing competition. We project Kossan’s EBIT/k

gloves to decline by 22% in FY16F, and +14%/-4% in

FY17/18F. Our forecasts assume average USDMYR forex rate of

RM4.10 /4.22/4.22 in FY16/17/18F, which is in line with DBS

economics team’s forecast.

IncreasIncreasIncreasIncreasingly a nitrileingly a nitrileingly a nitrileingly a nitrile----focused glove maker.focused glove maker.focused glove maker.focused glove maker. Kossan’s incoming

production lines are capable of producing both latex and nitrile

gloves, but it plans to use them to produce nitrile gloves, given

the stronger demand for nitrile gloves. As such, Kossan’s sales

mix is expected to increasingly tilt towards nitrile gloves, from

70% in FY15 to 80%/80% in FY16/17F.

Capacity (m gloves)


Output (m gloves)

EBIT/k gloves (RM)


16400

21450 2200023500

28000

0.0

4040.0

8080.0

12120.0

16160.0

20200.0

24240.0

28280.0

2014A 2015A 2016F 2017F 2018F

78.275.3

83 83 83

0.0

16.9

33.9

50.8

67.7

84.7

2014A 2015A 2016F 2017F 2018F

12821

16155

1826019505

23240

0.00

4740.96

9481.92

14222.88

18963.84

23704.80

2014A 2015A 2016F 2017F 2018F

13.8

16.1

12.4

14.113.5

0.0

3.3

6.5

9.8

13.0

16.3

2014A 2015A 2016F 2017F 2018F


Company Guide


Balance Sheet:

Solid balance sheet.Solid balance sheet.Solid balance sheet.Solid balance sheet. Kossan is a strong cash generator, and we

expect the group’s net gearing to decline from 0.06x in FY15,

to 0.01x in FY16F, before turning net cash in FY17/18F. This

should provide Kossan with sufficient headroom to fund both

its dividend payments and expansion plans. In our forecasts, we

assume Kossan will pay 50% of net profit as dividends, and

annual capex would be RM100m in FY16-18F.


Increasing market volatility.Increasing market volatility.Increasing market volatility.Increasing market volatility. Malaysian-listed glove makers are

generally regarded as defensive and a safe haven by investors,

given their resilient earnings outlook backed by: (1) the cost

pass-through pricing mechanism, (2) stable demand for medical

glove products, and (3) exposure to a global market (not

dependent on a single geographical region). As such, the share

prices of stocks in the sector tend to react favourably during

periods of increasing market volatility.

Earnings outlook.Earnings outlook.Earnings outlook.Earnings outlook. Kossan’s earnings are a function of two


gloves). We expect Kossan’s sales volume to surge in

FY16/17/18F, from the incoming capacity. Unit profitability is

influenced by the competitive environment, productivity, and

macroeconomic factors (i.e. currency movements, raw material

prices, etc.).

Key Risks:

Rising competition could erode margins. Rising competition could erode margins. Rising competition could erode margins. Rising competition could erode margins. Kossan is facing rising

competition as the other glove makers are crowding into the

nitrile glove segment. This could pressure Kossan’s unit

profitability going forward, as it is increasingly becoming a

nitrile-focused glove maker.

Delay in its expansion plans. Delay in its expansion plans. Delay in its expansion plans. Delay in its expansion plans. A delay in Kossan’s expansion

plans will adversely affect earnings growth, considering that

profitability could be undermined by stiff competition. Delays

typically occur during the commissioning of the production

lines.

Company Background

Kossan manufactures latex, nitrile, cleanroom and surgical

gloves. It also produces technical rubber products for the

automotive, industrial and construction sectors.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


1.0

1.1

1.1

1.2

1.2

1.3

1.3

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

2014A 2015A 2016F 2017F 2018F


0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

2014A 2015A 2016F 2017F 2018F


RMm

0.0%

5.0%

10.0%

15.0%

20.0%

2014A 2015A 2016F 2017F 2018F

Avg: 17.8x

+1sd: 23.3x

+2sd: 28.7x

-1sd: 12.4x

-2sd: 7x6.3

11.3

16.3

21.3

26.3

31.3


(x)

Avg: 3.84x

+1sd: 4.87x

+2sd: 5.9x

-1sd: 2.81x

-2sd: 1.78x1.5

2.5

3.5

4.5

5.5

6.5


(x)


Company Guide


Key Assumptions

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF



Output (m gloves) 12,821 16,155 18,260 19,505 23,240

EBIT/k gloves (RM) 13.8 16.1 12.4 14.1 13.5 Segmental Breakdown

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Revenues (RMm)

Gloves 1,097 1,411 1,588 1,744 2,078

Technical Rubber 162 160 168 177 185 Cleanroom products division

42.8 68.2 81.9 98.3 118

Others 0.0 0.0 0.0 0.0 0.0

Others 0.0 0.0 0.0 0.0 0.0

TotalTotalTotalTotal 1,3021,3021,3021,302 1,6401,6401,6401,640 1,8381,8381,8381,838 2,0192,0192,0192,019 2,3822,3822,3822,382

EBIT (RMm) Gloves 177 260 226 275 314

Technical Rubber 14.6 12.2 16.8 17.7 18.6 Cleanroom products division

1.83 5.15 6.55 7.86 9.43

Others (0.6) (1.1) (1.1) (1.1) (1.1)

Others 0.0 0.0 0.0 0.0 0.0

TotalTotalTotalTotal 192192192192 277277277277 248248248248 299299299299 341341341341

EBIT Margins (%) Gloves 16.1 18.4 14.2 15.8 15.1

Technical Rubber 9.0 7.6 10.0 10.0 10.0 Cleanroom products division

4.3 7.6 8.0 8.0 8.0

Others N/A N/A N/A N/A N/A

Others N/A N/A N/A N/A N/A

TotalTotalTotalTotal 14.814.814.814.8 16.916.916.916.9 13.513.513.513.5 14.814.814.814.8 14.314.314.314.3

Income Statement (RMm)

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Revenue 1,302 1,640 1,838 2,019 2,382

Cost of Goods Sold (1,010) (1,279) (1,501) (1,632) (1,952)

Gross ProfitGross ProfitGross ProfitGross Profit 291291291291 361361361361 336336336336 388388388388 429429429429 Other Opng (Exp)/Inc (98.7) (84.2) (84.2) (84.2) (84.2)



Net Interest (Exp)/Inc (5.8) (8.0) (7.4) (6.9) (5.9)


PrePrePrePre----tax Profittax Profittax Profittax Profit 187187187187 269269269269 245245245245 296296296296 339339339339

Tax (37.9) (62.3) (56.7) (68.7) (78.6)




EBITDA 249 343 320 371 413

Growth

Revenue Gth (%) (0.4) 25.9 12.1 9.9 18.0

EBITDA Gth (%) 5.6 38.2 (7.0) 16.1 11.4

Opg Profit Gth (%) 4.5 43.6 (8.8) 20.3 13.8


Margins & Ratio

Gross Margins (%) 22.4 22.0 18.3 19.2 18.0



ROAE (%) 19.3 23.0 18.4 20.2 20.7

ROA (%) 12.2 14.6 11.9 13.3 13.9

ROCE (%) 15.0 17.9 14.7 16.2 16.9

Div Payout Ratio (%) 35.1 37.9 50.0 50.0 50.0

Net Interest Cover (x) 33.0 34.6 34.0 43.7 58.6



Company Guide



FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 Revenue 442 439 412 404 414


Gross ProfitGross ProfitGross ProfitGross Profit 72.572.572.572.5 79.779.779.779.7 67.467.467.467.4 53.053.053.053.0 43.843.843.843.8 Other Oper. (Exp)/Inc 0.44 0.67 0.54 0.03 0.80








EBITDA 90.4 97.3 85.3 70.3 62.3

Growth

Revenue Gth (%) 14.5 (0.6) (6.1) (2.1) 2.5

EBITDA Gth (%) 15.5 7.7 (12.4) (17.5) (11.5)

Opg Profit Gth (%) 17.1 10.2 (15.6) (21.9) (15.8)

Net Profit Gth (Pre-ex) (%) 16.3 0.1 (7.1) (20.1) (17.0)

Margins

Gross Margins (%) 16.4 18.2 16.3 13.1 10.6



FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Net Fixed Assets 725 771 804 836 868


Other LT Assets 5.05 10.3 10.3 10.3 10.3

Cash & ST Invts 72.0 168 194 250 284

Inventory 194 206 241 262 314

Debtors 287 319 357 392 463



ST Debt

143 120 120 120 120

Creditor 170 186 218 237 284


LT Debt 63.4 103 103 103 103


Shareholder’s Equity 807 951 1,048 1,169 1,306




Net Cash/(Debt) (134) (54.9) (29.0) 27.2 60.5




Asset Turnover (x) 1.1 1.2 1.2 1.2 1.3

Current Ratio (x) 1.7 2.1 2.2 2.4 2.5

Quick Ratio (x) 1.1 1.5 1.5 1.7 1.8

Net Debt/Equity (X) 0.2 0.1 0.0 CASH CASH

Net Debt/Equity ex MI (X) 0.2 0.1 0.0 CASH CASH

Capex to Debt (%) 67.9 43.1 44.8 44.8 44.8

Z-Score (X) 8.2 8.1 7.9 7.8 7.6



Company Guide



FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Pre-Tax Profit 187 269 245 296 339

Dep. & Amort. 55.9 66.9 67.4 67.8 68.3

Tax Paid (38.4) (38.0) (56.7) (68.7) (78.6)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. (43.4) (36.2) (41.9) (37.2) (75.3)

Other Operating CF 3.91 1.57 0.0 0.0 0.0

Net Operating CFNet Operating CFNet Operating CFNet Operating CF 164164164164 263263263263 214214214214 258258258258 253253253253 Capital Exp.(net) (140) (96.3) (100.0) (100.0) (100.0)

Other Invts.(net) (8.1) 8.17 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0


Net Investing CFNet Investing CFNet Investing CFNet Investing CF (148)(148)(148)(148) (88.0)(88.0)(88.0)(88.0) (100.0)(100.0)(100.0)(100.0) (100.0)(100.0)(100.0)(100.0) (100.0)(100.0)(100.0)(100.0) Div Paid (44.8) (64.5) (87.6) (102) (120)

Chg in Gross Debt (4.2) 1.24 0.0 0.0 0.0

Capital Issues 0.0 0.0 0.0 0.0 0.0


Net Financing CFNet Financing CFNet Financing CFNet Financing CF (53.9)(53.9)(53.9)(53.9) (69.2)(69.2)(69.2)(69.2) (87.6)(87.6)(87.6)(87.6) (102)(102)(102)(102) (120)(120)(120)(120)


Chg in Cash (37.4) 108 25.9 56.2 33.3

Opg CFPS (sen) 32.5 46.8 39.9 46.2 51.4

Free CFPS (sen) 3.81 26.0 17.8 24.7 24.0



Source: AllianceDBS










1: 11 Feb 16 6.84 9.00 HOLD

2: 24 Feb 16 6.75 6.60 HOLD

3: 25 May 16 6.80 6.50 HOLD

4: 26 May 16 6.65 6.50 HOLD

5: 24 Aug 16 6.21 6.50 HOLD

6: 23 Nov 16 6.60 6.30 HOLD

7: 20 Dec 16 6.35 6.30 HOLD

8: 29 Dec 16 6.49 6.30 HOLD


1

2

3

4

5

6

7

8

5.66

6.16

6.66

7.16

7.66

8.16

8.66

9.16


RMRMRMRM


HOLDHOLDHOLDHOLD Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Jan 20176 Jan 20176 Jan 20176 Jan 2017)))): : : : RM2.15 (KLCIKLCIKLCIKLCI : : : : 1,675.49) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth:::: RM2.45 (14% upside) (Prev RM2.45)


Price Relative

Forecasts and Valuation FY FY FY FY JunJunJunJun ((((RMRMRMRM m) m) m) m) 2016201620162016AAAA**** 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF

Revenue 1,550 1,245 1,369 1,506 EBITDA 271 214 231 249 Pre-tax Profit 207 157 173 190 Net Profit 144 122 135 148 Net Pft (Pre Ex.) 144 122 135 148 Net Pft Gth (Pre-ex) (%) 50.5 (15.1) 10.3 10.0 EPS (sen) 21.2 18.0 19.8 21.8 EPS Pre Ex. (sen) 21.2 18.0 19.8 21.8 EPS Gth Pre Ex (%) 51 (15) 10 10 Diluted EPS (sen) 21.2 18.0 19.8 21.8 Net DPS (sen) 5.92 5.03 5.55 6.10 BV Per Share (sen) 150 162 177 193 PE (X) 10.2 12.0 10.8 9.9 PE Pre Ex. (X) 10.2 12.0 10.8 9.9 P/Cash Flow (X) 5.8 7.3 9.6 9.0 EV/EBITDA (X) 6.3 7.7 7.1 6.5 Net Div Yield (%) 2.8 2.3 2.6 2.8 P/Book Value (X) 1.4 1.3 1.2 1.1 Net Debt/Equity (X) 0.3 0.2 0.2 0.1 ROAE (%) 14.8 11.5 11.7 11.8 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (sensensensen):::: 19.0 19.6 20.9 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 3 S: 2 H: 9 * Change of FYE from December to June (effectively 18 months)


Earnings capped Retain Retain Retain Retain HOLD rating.HOLD rating.HOLD rating.HOLD rating. Our RM2.45 TP is based on 13x CY17F PE. We cut FY17-19F net profit by 21% each, following the group’s disappointing 1QFY17 results. Supermax has an ambitious expansion plan, with multiple projects planned over the next decade. However, poor access to proper infrastructure, i.e. water, electricity and gas supply, has been holding back its expansion plans. Plants #10 and #11 have a better outlook now that 10 out of Plants #10 and #11 have a better outlook now that 10 out of Plants #10 and #11 have a better outlook now that 10 out of Plants #10 and #11 have a better outlook now that 10 out of 20 lines are fully commissioned.20 lines are fully commissioned.20 lines are fully commissioned.20 lines are fully commissioned. The remaining 10 lines are scheduled for commissioning by end-2016. The group’s utilisation rate dropped marginally by 1.7ppts y-o-y to 81.6% in FY16, as plants #10 and #11 came online, and this is expected to recover to 83% in FY17F. We expect the additional capacity from Bukit Kapar to drag its utilisation rate down again in FY18F. As such, we expect sales volume to grow by 10%/10%/10% in FY17/18/19F. EBIT/k gloves to recover. EBIT/k gloves to recover. EBIT/k gloves to recover. EBIT/k gloves to recover. We project EBIT/k gloves to be under pressure in FY17, backed by: (1) higher operating costs, and (2) higher raw material price. We conservatively assume EBIT/k gloves to be flattish in FY18/19F. Valuation:

Valuation capped.Valuation capped.Valuation capped.Valuation capped. We maintain our target PE of 13x, based on

the stock’s 5-year mean. Following our earnings cut, our TP is

reduced to RM2.45 from RM2.70 previously.


Delays in expansion plan.Delays in expansion plan.Delays in expansion plan.Delays in expansion plan. Supermax has seen repeated delays

in rolling out its new production lines because of poor access

to proper infrastructure. Further delays in the commissioning

of the remaining lines in plants #10 and #11 could adversely

affect our growth forecast. Currently, these two plants are

expected to reach full commercial production by end of 2016. At A Glance Issued Capital (m shrs) 671

Mkt. Cap (RMm/US$m) 1,443 / 323


Dato’ Seri Stanley Thai 20.7

Datin Seri Tan Bee Geok, Cheryl 10.4

Free Float (%) 91.1




9 Jan 2017


Supermax Corp Version 5 | Bloomberg: SUCB MK | Reuters: SUPM.KL Refer to important disclosures at the end of this report

72

92

112

132

152

172

192

212

1.4

1.9

2.4

2.9

3.4


Relative IndexRM

Supermax Corp (LHS) Relative KLCI (RHS)


Company Guide

Supermax Corp


Earnings Drivers:

Plants #10 and #11 finally on track. Plants #10 and #11 finally on track. Plants #10 and #11 finally on track. Plants #10 and #11 finally on track. Supermax has an ambitious

expansion plan, with multiple projects planned over the next

decade. However, poor access to proper infrastructure, i.e.

water, electricity and gas supply, has been holding back its

expansion plans. The outlook for Plants #10 and #11 is better

now that 10 out of 20 lines are fully commissioned. The

remainder of the 10 lines with a capacity of 3.4bn gloves will be

commissioned by the end of 2016.

Sales volume to grow for FY17/18/19F.Sales volume to grow for FY17/18/19F.Sales volume to grow for FY17/18/19F.Sales volume to grow for FY17/18/19F. The utilisation rate had

dropped marginally by 1.7ppts y-o-y to 81.6% in FY16, as

plants #10 and #11 came online, and this is expected to recover

to 83% in FY17F. The additional capacity from Bukit Kapar will

see its utilisation rate drop again in FY18F. Premised on this, we

expect sales volume to grow by 10% p.a. in FY17/18/19F.

EBIT/k gloves is a better profitability metric than profit marginsEBIT/k gloves is a better profitability metric than profit marginsEBIT/k gloves is a better profitability metric than profit marginsEBIT/k gloves is a better profitability metric than profit margins.

This is because its profit margins can fluctuate even if there is

no change to unit profitability, as Supermax practises cost pass-

through pricing (which has a time lag of 1-2 months). Under

this pricing mechanism, profit margins can rise when costs drop

(i.e. the same level of profits on lower ASP), and margins can

drop when costs rise (i.e. the same level of profits on higher

ASP), with no impact on the bottomline.

EBIT/k gloves to drop.EBIT/k gloves to drop.EBIT/k gloves to drop.EBIT/k gloves to drop. We project EBIT/k gloves to decline in

FY17F, backed by: (1) higher operating costs, and (2) higher raw

material price. We conservatively assume EBIT/k gloves will be

flattish in FY18/19F.

Equal sales contribution from naEqual sales contribution from naEqual sales contribution from naEqual sales contribution from natural rubber and nitrile tural rubber and nitrile tural rubber and nitrile tural rubber and nitrile

products.products.products.products. We expect this trend to remain, pending the

completion of the new plants. Plants #10 and #11 are expected

to take the natural rubber:nitrile mix to 45:55.

Capacity (m gloves)


Output (m gloves)

EBIT/k gloves (RM)


17675

29700

23600

27600

31600

0.0

4559.4

9118.9

13678.3

18237.7

22797.1

27356.6

31916.0

2015A 2016A 2017F 2018F 2019F

83.3 81.6 82.777.8

74.8

0.0

17.0

34.0

51.0

68.0

85.0

2015A 2016A 2017F 2018F 2019F

14725

24249

19527

21480

23628

0.00

4946.80

9893.59

14840.39

19787.18

2015A 2016A 2017F 2018F 2019F

9.929.17

8.47 8.46 8.46

0.0

2.0

4.0

6.0

8.0

10.0

2015A 2016A 2017F 2018F 2019F


Company Guide

Supermax Corp

Balance Sheet:

Healthy balance sheet.Healthy balance sheet.Healthy balance sheet.Healthy balance sheet. We expect Supermax’s net gearing to

hover at 0.2-0.3x in FY17-18F. Backed by steady free cash flow

amid stable capex investment of c.RM100m p.a., we expect the

group’s cash pile to increase from RM125m in FY16 to

RM378m in FY19F. The healthy balance sheet suggests room to

gear up for its expansion plan once the infrastructure issues are

resolved.


Increased market volatility.Increased market volatility.Increased market volatility.Increased market volatility. Malaysian-listed glove makers are

generally considered defensive and a safe haven by investors,

given their resilient earnings are backed by: (1) the cost pass-

through mechanism, (2) stable demand for medical glove

products, and (3) exposure to the global market (not to a single

geographical region). As such, share prices in the sector tend to

react favourably during periods of increasing market volatility.

Earnings outlookEarnings outlookEarnings outlookEarnings outlook. Supermax’s earnings are a function of two


gloves). Assuming the successful commissioning of plants #10

and #11, sales volume could surge in FY16-17F, but its longer-

term growth visibility remain clouded by the poor access to

proper infrastructure. Unit profitability is influenced by the

competitive environment, productivity and macroeconomic

factors (i.e. currency movements, raw material prices, etc.)

Currently, Supermax has yet to benefit from the stronger US$

and cheaper raw materials.

Key Risks:

Rising competition Rising competition Rising competition Rising competition will erode margins.will erode margins.will erode margins.will erode margins. The nitrile segment is

seeing increasing competition as glove makers are crowding

into the segment. Most of the capacity expansion in the

industry is currently geared towards the nitrile segment. This

will be a key challenge for Supermax in executing its nitrile-

focused expansion plan.

Delay in expansion plan.Delay in expansion plan.Delay in expansion plan.Delay in expansion plan. Supermax has seen repeated delays

in rolling out its new production lines at Plants #10 and #11

because of poor access to proper infrastructure. The group’s

longer-term expansion plan may be derailed, if it fails to

resolve these infrastructure issues.

Company Background

Supermax is one of the five largest rubber glove makers in the

world. The group positions itself as an own-brand

manufacturer (OBM), compared to most of its competitors that

operate as original-equipment manufacturers (OEM).


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.7

0.8

0.8

0.9

0.9

1.0

1.0

1.1

1.1

0.00

0.10

0.20

0.30

0.40

0.50

2015A 2016A 2017F 2018F 2019F


0.0

50.0

100.0

150.0

200.0

250.0

2015A 2016A 2017F 2018F 2019F


RMm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2015A 2016A 2017F 2018F 2019F

Avg: 13.9x

+1sd: 17x

+2sd: 20.1x

-1sd: 10.8x

-2sd: 7.7x6.9

8.9

10.9

12.9

14.9

16.9

18.9

20.9

22.9


(x)

Avg: 1.67x

+1sd: 1.92x

+2sd: 2.18x

-1sd: 1.42x

-2sd: 1.16x

1.0

1.2

1.4

1.6

1.8

2.0

2.2

2.4

2.6


(x)


Company Guide

Supermax Corp

Key Assumptions

FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA**** 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF



Output (m gloves) 14,725 24,249 19,527 21,480 23,628


FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA**** 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Revenue 1,004 1,550 1,245 1,369 1,506

Cost of Goods Sold (794) (1,135) (885) (994) (1,114)

Gross ProfitGross ProfitGross ProfitGross Profit 210210210210 414414414414 360360360360 375375375375 392392392392 Other Opng (Exp)/Inc (83.8) (208) (208) (208) (208)






Minority Interest 0.45 (0.1) (0.1) (0.1) (0.1)


Net ProfitNet ProfitNet ProfitNet Profit 95.695.695.695.6 144144144144 122122122122 135135135135 148148148148 Net Profit before Except. 95.6 144 122 135 148

EBITDA 164 271 214 231 249

Growth

Revenue Gth (%) 0.0 54.3 (19.7) 10.0 10.0

EBITDA Gth (%) 0.0 65.0 (21.0) 7.6 7.9

Opg Profit Gth (%) 0.0 62.9 (26.1) 9.8 10.0


Margins & Ratio

Gross Margins (%) 21.0 26.7 28.9 27.4 26.0



ROAE (%) 10.4 14.8 11.5 11.7 11.8

ROA (%) 6.7 9.4 7.2 7.4 7.4

ROCE (%) 7.3 10.5 7.9 7.9 8.0

Div Payout Ratio (%) 35.4 28.0 28.0 28.0 28.0

Net Interest Cover (x) 15.5 13.7 17.8 19.5 19.3 * Change of FYE from December to June (effectively 18 months)



Company Guide

Supermax Corp


FY FY FY FY JunJunJunJun 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 4Q4Q4Q4Q2016201620162016 1Q1Q1Q1Q2017201720172017 Revenue 310 291 225 267 269

Cost of Goods Sold 0.0 0.0 0.0 0.0 0.0

Gross ProfitGross ProfitGross ProfitGross Profit 310310310310 291291291291 225225225225 267267267267 269269269269 Other Oper. (Exp)/Inc (262) (247) (190) (231) (243)






Minority Interest 0.11 0.54 (0.6) (0.1) (0.3)


EBITDA 51.0 47.5 36.4 37.3 28.9

Growth

Revenue Gth (%) 35.1 (6.2) (22.6) 18.5 0.9

EBITDA Gth (%) 61.9 (7.0) (23.2) 2.3 (22.6)

Opg Profit Gth (%) 66.2 (7.5) (20.3) 0.6 (27.4)

Net Profit Gth (Pre-ex) (%) 55.4 0.9 (49.3) (65.5) 187.8

Margins

Gross Margins (%) 100.0 100.0 100.0 100.0 100.0



FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA**** 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Net Fixed Assets 597 813 864 915 966

Invts in Associates & JVs 213 218 231 245 261

Other LT Assets 36.1 30.7 30.7 30.7 30.7

Cash & ST Invts 150 125 236 304 379

Inventory 172 162 126 142 159

Debtors 162 234 188 206 227



ST Debt

201 257 257 257 257

Creditor 110 176 138 154 173


LT Debt 137 128 178 228 278


Shareholder’s Equity 922 1,019 1,101 1,201 1,312

Minority Interests (1.0) (1.1) (1.0) (1.0) (0.9)



Net Cash/(Debt) (188) (260) (199) (181) (156)




Asset Turnover (x) 0.7 1.0 0.7 0.8 0.8

Current Ratio (x) 1.7 1.3 1.5 1.6 1.8

Quick Ratio (x) 0.9 0.8 1.0 1.2 1.3

Net Debt/Equity (X) 0.2 0.3 0.2 0.2 0.1

Net Debt/Equity ex MI (X) 0.2 0.3 0.2 0.2 0.1

Capex to Debt (%) 41.3 50.4 23.0 20.6 18.7

Z-Score (X) 4.0 3.5 3.6 3.5 3.5 * Change of FYE from December to June (effectively 18 months)



Company Guide

Supermax Corp


FY FY FY FY JunJunJunJun 2015201520152015AAAA 2016201620162016AAAA**** 2017201720172017FFFF 2018201820182018FFFF 2019201920192019FFFF Pre-Tax Profit 138 207 157 173 190

Dep. & Amort. 27.3 48.9 49.0 49.0 49.0

Tax Paid (28.7) (54.1) (34.5) (38.1) (41.9)

Assoc. & JV Inc/(loss) (13.3) (16.1) (12.9) (14.2) (15.7)

Chg in Wkg.Cap. 20.8 9.20 42.7 (17.3) (19.1)

Other Operating CF 2.29 55.5 0.0 0.0 0.0

Net Operating CFNet Operating CFNet Operating CFNet Operating CF 147147147147 251251251251 201201201201 152152152152 163163163163 Capital Exp.(net) (140) (194) (100.0) (100.0) (100.0)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0

Other Investing CF (0.2) 0.0 0.0 0.0 0.0

Net Investing CFNet Investing CFNet Investing CFNet Investing CF (140)(140)(140)(140) (194)(194)(194)(194) (100.0)(100.0)(100.0)(100.0) (100.0)(100.0)(100.0)(100.0) (100.0)(100.0)(100.0)(100.0) Div Paid (34.0) (60.7) (40.3) (34.2) (37.7)

Chg in Gross Debt 35.1 12.7 50.0 50.0 50.0

Capital Issues (2.3) (11.8) 0.0 0.0 0.0


Net Financing CFNet Financing CFNet Financing CFNet Financing CF (5.3)(5.3)(5.3)(5.3) (74.5)(74.5)(74.5)(74.5) 9.729.729.729.72 15.815.815.815.8 12.312.312.312.3


Chg in Cash 4.29 (7.0) 111 68.2 74.9

Opg CFPS (sen) 18.5 35.5 23.3 24.9 26.7

Free CFPS (sen) 1.04 8.35 14.9 7.70 9.20 * Change of FYE from December to June (effectively 18 months)



Source: AllianceDBS










1: 11 Feb 16 2.91 2.55 HOLD

2: 29 Feb 16 2.87 2.55 HOLD

3: 04 Mar 16 2.77 3.00 HOLD

4: 30 Aug 16 2.03 2.70 HOLD

5: 30 Nov 16 2.18 2.45 HOLD

6: 20 Dec 16 2.10 2.45 HOLD

7: 29 Dec 16 2.12 2.45 HOLD


1

2

3

4

5

6

71.92

2.12

2.32

2.52

2.72

2.92

3.12

3.32

3.52


RMRMRMRM

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa:YM, PY

HOLDHOLDHOLDHOLD Last Traded PriceLast Traded PriceLast Traded PriceLast Traded Price (((( 6 Jan 20176 Jan 20176 Jan 20176 Jan 2017)))): : : : S$0.87 (STISTISTISTI : : : : 2,962.63) Price Target Price Target Price Target Price Target 12121212----mthmthmthmth:::: S$0.97 (12% upside) (Prev S$0.97)

Potential Catalyst: Potential Catalyst: Potential Catalyst: Potential Catalyst: Capacity growth and earnings execution

Where we differWhere we differWhere we differWhere we differ:::: We are below consensus for FY16F

Analyst Paul YONG CFA +65 6682 3712 [email protected] Singapore Research Team [email protected]

Price Relative

Forecasts and Valuation FY FY FY FY DecDecDecDec ((((RMRMRMRM m) m) m) m) 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Revenue 560 647 717 774 EBITDA 169 169 194 212 Pre-tax Profit 144 133 150 162 Net Profit 127 117 132 142 Net Pft (Pre Ex.) 127 117 132 142 Net Pft Gth (Pre-ex) (%) 78.4 (7.3) 12.1 7.7 EPS (S cts) 5.48 5.09 5.70 6.14 EPS Pre Ex. (S cts) 5.48 5.09 5.70 6.14 EPS Gth Pre Ex (%) 78 (7) 12 8 Diluted EPS (S cts) 5.48 5.09 5.70 6.14 Net DPS (S cts) 2.08 1.92 2.16 2.32 BV Per Share (S cts) 20.9 24.0 27.6 31.4 PE (X) 15.8 17.0 15.2 14.1 PE Pre Ex. (X) 15.8 17.0 15.2 14.1 P/Cash Flow (X) 16.3 17.3 13.0 11.0 EV/EBITDA (X) 11.0 11.1 9.6 8.6 Net Div Yield (%) 2.4 2.2 2.5 2.7 P/Book Value (X) 4.1 3.6 3.1 2.8 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 29.7 22.7 22.1 20.8 Earnings Rev (%):Earnings Rev (%):Earnings Rev (%):Earnings Rev (%): 0 0 0 Consensus EPS Consensus EPS Consensus EPS Consensus EPS (S ctsS ctsS ctsS cts):::: 5.08 5.53 6.18 Other Broker Recs:Other Broker Recs:Other Broker Recs:Other Broker Recs: B: 0 S: 0 H: 5

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

Shrouded by near-term challenges

Maintain HOLDMaintain HOLDMaintain HOLDMaintain HOLD with with with with TP TP TP TP ofofofof $0.97; $0.97; $0.97; $0.97; nnnnearearearear----term prospectterm prospectterm prospectterm prospectssss still still still still shrouded by shrouded by shrouded by shrouded by persistent headwinds. persistent headwinds. persistent headwinds. persistent headwinds. With the reversal of USD/MYR trends and heightened volatility in raw material prices, the tailwinds of 2015 – which led to an exceptional year for Riverstone (and the glove industry at large), now serve as headwinds to the company’s near-term prospects.

Despite an improved performance in 3Q, near-term concerns over ASPs and other persistent headwinds should continue to weigh. This will likely be exacerbated by the recent spike in Butadiene prices, which could potentially raise raw material costs and mitigate contributions from the commissioning of remaining lines in 4Q16. We now assume a slightly higher healthcare glove mix ahead and lower our gross margin assumptions by 1%/0.5% for FY16F/17F, which translates to a 6.1%/4.6% reduction in FY16F/17F earnings respectively.

Capacity expansion to underpin longCapacity expansion to underpin longCapacity expansion to underpin longCapacity expansion to underpin long----term growth... term growth... term growth... term growth... Riverstone plans to double its annual capacity from 4.2bn in 2014 to at least 8.2bn gloves by 2018 to support growth in both its cleanroom and healthcare glove segments.

Phase 3 expansion plans are on track, and the gradual commissioning of new production lines from July 2016 onwards should grow Riverstone’s annual production capacity by 19.2% y-o-y to 6.2bn by end-FY16. With strong expected demand, especially in the healthcare segment, earnings could nearly double from RM71m in FY14 to RM142m by FY18F.

Separately, while some peers are scaling back on expansion plans, we note that Riverstone’s additional capacity of 1bn p.a. by end-2016 has already been fully committed – mainly from its new markets of US and Japan. We thus believe that the company could potentially accelerate expansion plans to leverage on the strong demand.

Valuation: Maintain HOLD Maintain HOLD Maintain HOLD Maintain HOLD with TP of S$0.97with TP of S$0.97with TP of S$0.97with TP of S$0.97.... After rolling forward our earnings base to FY17F post 3Q16 results, we arrived at a TP of S$0.97 (based on 16x PE, or a c.20% discount to larger peers).

Key Risks to Our View: Global economic slowdown.Global economic slowdown.Global economic slowdown.Global economic slowdown. While margins for cleanroom gloves tend to be resilient, demand for these gloves – which made up about half of 3Q16 revenue – could be threatened in the event of a slowdown in the global economy.

At A Glance Issued Capital (m shrs) 741

Mkt. Cap (S$m/US$m) 641 / 445


Ringlet Investment Limited 50.8

Wai Keong Lee 11.7

Free Float (%) 33.5




9 Jan 2017

Singapore Company Guide

Riverstone Holdings Version 7 | Bloomberg: RSTON SP | Reuters: RVHL.SI Refer to important disclosures at the end of this report

87

187

287

387

487

587

687

0.2

0.4

0.6

0.8

1.0

1.2

1.4


Relative IndexS$

Riverstone Holdings (LHS) Relative STI (RHS)


Company Guide

Riverstone Holdings


Earnings Drivers:

Growth in global demand for healthcare gloves, at least in near Growth in global demand for healthcare gloves, at least in near Growth in global demand for healthcare gloves, at least in near Growth in global demand for healthcare gloves, at least in near

to medium term.to medium term.to medium term.to medium term. The Malaysian Rubber Glove Manufacturers

Association (MARGMA) estimates that demand for healthcare

gloves is likely to grow at 8-12% p.a. between 2014 and 2020.

As a relatively new entrant in the healthcare glove industry and

with ambitions to grow revenue from this segment quickly to

drive its earnings, we project a ramp-up in Riverstone’s

healthcare glove production at a 31.2% CAGR between FY14

and FY18F.

LongLongLongLong----term trends also indicate favourable demand prospects.term trends also indicate favourable demand prospects.term trends also indicate favourable demand prospects.term trends also indicate favourable demand prospects.

According to MARGMA, the global demand ratio of natural

rubber and synthetic (nitrile) rubber gloves shifted from 74:26 in

2009 to 53:47 in 2014. On the back of rising awareness of latex

allergies in emerging economies and the synthetic variety's low

cost, we expect the ratio to shift away from natural rubber

gloves in the long run. Riverstone could be a beneficiary of the

long-run substitution of rubber gloves by nitrile gloves as it is

principally engaged in the production of the latter.

Capacity expansion to underpin groCapacity expansion to underpin groCapacity expansion to underpin groCapacity expansion to underpin growth.wth.wth.wth. To capitalise on the

favourable demand growth outlook in both the short and long

term, Riverstone will continue to expand its manufacturing

capacity to a minimum of 8.2bn gloves by 2018. We expect

new production capacities to propel top-line growth at a CAGR

of 18% between FY14 and FY18F, as they gradually come on

stream.

Beneficiary of strong US dollar vs Ringgit.Beneficiary of strong US dollar vs Ringgit.Beneficiary of strong US dollar vs Ringgit.Beneficiary of strong US dollar vs Ringgit. Riverstone generates

a surplus in US dollars as it receives c.90% of its revenues in US

dollars, while c.35% of its costs are incurred in US dollars, and

will benefit from a strong US dollar versus the Ringgit. All else

being constant, strengthening of the US dollar by 1% could

boost net profit in Ringgit terms by c.1.2%.

Greater efficiency from higher automation and lGreater efficiency from higher automation and lGreater efficiency from higher automation and lGreater efficiency from higher automation and larger scale arger scale arger scale arger scale

should help to maintain margins.should help to maintain margins.should help to maintain margins.should help to maintain margins. As Riverstone scales up on its

production and further automation efforts, we expect net

margins to be maintained around 18% for FY16F-18F, which

should support stable growth in net profit from RM71m in FY14

to RM142m in FY18F.

Capital Expenditure (RM$m)

Production Capacity (m gloves)

Cleanroom Gloves (m gloves)

Healthcare Gloves (m gloves)

Utilization Rate (%)

Source: Company, DBS Bank

94.1

50

76

97 97

0.0

14.0

28.0

42.0

56.0

70.0

84.0

98.0

2014A 2015A 2016F 2017F 2018F

2873

3942

5252

6340

7406

0.0

1510.8

3021.6

4532.5

6043.3

2014A 2015A 2016F 2017F 2018F

804

985 1014

1173

1296

0.00

264.39

528.79

793.18

1057.58

1321.97

2014A 2015A 2016F 2017F 2018F

2068

2956

4238

5167

6110

0.0

1234.2

2468.4

3702.6

4936.8

6171.0

2014A 2015A 2016F 2017F 2018F

90 88.892 92 92

0.0

18.6

37.2

55.8

74.3

92.9

2014A 2015A 2016F 2017F 2018F


Company Guide

Riverstone Holdings

Balance Sheet:

Healthy balance sheet.Healthy balance sheet.Healthy balance sheet.Healthy balance sheet. Riverstone has been in a net cash

position over the observed period. Our projections show that

Riverstone should be able to internally fund capital expenditures

from 2016-2018.

Forecast net fixed asset growth at a CAGR of c.14.7% between Forecast net fixed asset growth at a CAGR of c.14.7% between Forecast net fixed asset growth at a CAGR of c.14.7% between Forecast net fixed asset growth at a CAGR of c.14.7% between

2014 and 2017.2014 and 2017.2014 and 2017.2014 and 2017. With capacity expected to nearly double in

2018 from 2014 levels, we project the group’s net fixed assets

to jump by >80% from RM228m in 2014 to RM417m in 2018.


Opportunities for inorganic growth.Opportunities for inorganic growth.Opportunities for inorganic growth.Opportunities for inorganic growth. Due to the stringent

requirements for the establishment of cleanroom facilities,

Riverstone does not rule out the possibility of acquiring quality

cleanroom glove manufacturing companies in the future.

Cultivation of new markets for cleanroom products.Cultivation of new markets for cleanroom products.Cultivation of new markets for cleanroom products.Cultivation of new markets for cleanroom products. As

cleanroom products are manufactured in controlled

environments and are subject to stringent requirements, they

are able to deliver much higher margins relative to healthcare

gloves. The ability to cultivate new markets for cleanroom

products, similar to what Riverstone recently achieved with its

diversification into the consumer electronics sector, should help

to boost earnings.

Key Risks:

Global economic slowdown could impact cleanroom sales.Global economic slowdown could impact cleanroom sales.Global economic slowdown could impact cleanroom sales.Global economic slowdown could impact cleanroom sales. A

slowdown in the general economy could lead to declines in

discretionary spending and manufacturing activity in the HDD

industry. Although Riverstone has been gradually reducing its

exposure to HDDs, down from historical highs of up to 70%,

they still make up c.50% of the company's cleanroom portfolio

today.

Intensifying competiIntensifying competiIntensifying competiIntensifying competition could erode profitability.tion could erode profitability.tion could erode profitability.tion could erode profitability. While we

believe that oversupply over the next few years is unlikely, the

influx of healthcare gloves beyond 2017 could threaten

Riverstone’s market share and pricing power if it fails to

advance on the technological front.

Company Background

Riverstone Holdings (RSTON SP) is a natural rubber and nitrile

(synthetic rubber) glove manufacturer specialising in cleanroom

and healthcare gloves. It is also engaged in the manufacture

and distribution of other ancillary products such as finger cots,

packaging bags and face masks.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


0.9

1.0

1.0

1.1

1.1

0.00

0.01

0.01

0.02

0.02

0.03

0.03

0.04

0.04

0.05

0.05

2014A 2015A 2016F 2017F 2018F


0.0

20.0

40.0

60.0

80.0

100.0

120.0

2014A 2015A 2016F 2017F 2018F


RMm

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2014A 2015A 2016F 2017F 2018F

Avg: 12x

+1sd: 16.4x

+2sd: 20.9x

-1sd: 7.5x

-2sd: 3.1x2.7

7.7

12.7

17.7

22.7


(x)

Avg: 3.03x

+1sd: 4.15x

+2sd: 5.27x

-1sd: 1.92x

-2sd: 0.8x0.7

1.7

2.7

3.7

4.7

5.7

6.7


(x)


Company Guide

Riverstone Holdings

Key Assumptions

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF

Capital Expenditure (RM$m)

94.1 50.0 76.0 97.0 97.0 Production Capacity (m gloves)

2,873 3,942 5,252 6,340 7,406 Cleanroom Gloves (m gloves)

804 985 1,014 1,173 1,296 Healthcare Gloves (m gloves)

2,068 2,956 4,238 5,167 6,110

Utilization Rate (%) 90.0 88.8 92.0 92.0 92.0 Segmental Breakdown

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Revenues (RMm)

Cleanroom Gloves 198 274 281 315 338

HealthcareGloves 191 274 355 389 423 Other Cleanroom Products

10.3 11.3 11.9 12.5 13.1


Gross Profit (RMm) Cleanroom Gloves 75.4 106 105 120 128

HealthcareGloves 33.4 69.1 63.8 70.0 76.2 Other Cleanroom Products

0.12 0.13 0.14 0.14 0.15


Gross Profit Margins (%) Cleanroom Gloves 38.0 38.5 37.5 38.0 38.0

HealthcareGloves 17.5 25.2 18.0 18.0 18.0 Other Cleanroom Products

1.1 1.1 1.1 1.1 1.1

TotalTotalTotalTotal 27.327.327.327.3 31.231.231.231.2 26.126.126.126.1 26.526.526.526.5 26.426.426.426.4

Income Statement (RMm)

FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Revenue 399 560 647 717 774


Gross ProfitGross ProfitGross ProfitGross Profit 109109109109 175175175175 169169169169 190190190190 205205205205

Other Opng (Exp)/Inc (27.8) (30.5) (35.8) (39.5) (42.7)

Operating ProfitOperating ProfitOperating ProfitOperating Profit 81.181.181.181.1 144144144144 133133133133 150150150150 162162162162 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0




PrePrePrePre----tax Profittax Profittax Profittax Profit 81.181.181.181.1 144144144144 133133133133 150150150150 162162162162 Tax (10.2) (17.8) (16.0) (18.8) (20.2)

Minority Interest 0.0 0.0 0.0 0.0 0.0


Net ProfitNet ProfitNet ProfitNet Profit 71.071.071.071.0 127127127127 117117117117 132132132132 142142142142 Net Profit before Except. 71.0 127 117 132 142

EBITDA 100 169 169 194 212

Growth

Revenue Gth (%) 11.6 40.3 15.5 10.7 8.0

EBITDA Gth (%) 9.7 68.4 0.1 14.3 9.7

Opg Profit Gth (%) 11.7 78.0 (7.6) 12.8 7.7


Margins & Ratio

Gross Margins (%) 27.3 31.2 26.1 26.5 26.4



ROAE (%) 20.4 29.7 22.7 22.1 20.8

ROA (%) 17.3 24.7 19.4 19.7 18.7

ROCE (%) 19.7 28.8 22.2 21.7 20.5

Div Payout Ratio (%) 36.1 37.8 37.8 37.8 37.8



Cleanroom gloves tend to enjoy higher, more resilient margins as compared to healthcare gloves.


Company Guide

Riverstone Holdings


FY FY FY FY DecDecDecDec 3Q3Q3Q3Q2015201520152015 4Q4Q4Q4Q2015201520152015 1Q1Q1Q1Q2016201620162016 2Q2Q2Q2Q2016201620162016 3Q3Q3Q3Q2016201620162016 Revenue 151 153 148 157 167


Gross ProfitGross ProfitGross ProfitGross Profit 48.048.048.048.0 48.048.048.048.0 43.143.143.143.1 38.238.238.238.2 43.643.643.643.6 Other Oper. (Exp)/Inc (7.9) (8.7) (11.4) (6.6) (9.5)






Minority Interest 0.0 0.0 0.0 0.0 0.0


EBITDA 47.1 46.8 39.7 39.7 41.6

Growth

Revenue Gth (%) 16.8 1.9 (3.5) 5.8 6.5

EBITDA Gth (%) 21.8 (0.7) (15.0) (0.1) 4.8

Opg Profit Gth (%) 24.6 (2.2) (19.2) (0.1) 7.6


Margins

Gross Margins (%) 31.9 31.3 29.1 24.4 26.1



FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Net Fixed Assets 228 277 317 371 417


Other LT Assets 3.11 9.61 9.61 9.61 9.61

Cash & ST Invts 79.4 129 123 130 160

Inventory 42.1 61.2 46.0 53.0 56.9

Debtors 86.7 103 124 143 155


Total AssetsTotal AssetsTotal AssetsTotal Assets 441441441441 585585585585 626626626626 713713713713 805805805805

ST Debt

0.0 0.0 0.0 0.0 0.0

Creditor 50.4 84.4 52.1 57.0 61.1


LT Debt 0.0 0.0 0.0 0.0 0.0


Shareholder’s Equity 372 482 554 636 724


Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab.Total Cap. & Liab. 441441441441 585585585585 626626626626 713713713713 805805805805

Non-Cash Wkg. Capital 74.5 78.2 116 138 149

Net Cash/(Debt) 79.4 129 123 130 160




Asset Turnover (x) 1.0 1.1 1.1 1.1 1.0

Current Ratio (x) 3.7 3.2 5.0 5.1 5.5

Quick Ratio (x) 3.0 2.5 4.1 4.2 4.6

Net Debt/Equity (X) CASH CASH CASH CASH CASH

Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH

Capex to Debt (%) N/A N/A N/A N/A N/A

Z-Score (X) 20.7 15.0 20.6 19.5 18.6


Tax claims (capital allowances, etc) are typically made progressively, but finalised in 4Q when the company has better visibility of earnings.


Company Guide

Riverstone Holdings


FY FY FY FY DecDecDecDec 2014201420142014AAAA 2015201520152015AAAA 2016201620162016FFFF 2017201720172017FFFF 2018201820182018FFFF Pre-Tax Profit 81.1 144 133 150 162

Dep. & Amort. 19.4 24.8 35.9 43.2 50.4

Tax Paid (14.8) (18.5) (16.0) (18.8) (20.2)

Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0

Chg in Wkg.Cap. (25.2) (26.3) (38.2) (21.3) (11.2)

Other Operating CF 2.32 (2.3) 0.0 0.0 0.0

Net Operating CFNet Operating CFNet Operating CFNet Operating CF 62.862.862.862.8 122122122122 115115115115 153153153153 181181181181 Capital Exp.(net) (75.4) (54.2) (76.0) (97.0) (97.0)

Other Invts.(net) 0.0 0.0 0.0 0.0 0.0

Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0

Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0


Net Investing CFNet Investing CFNet Investing CFNet Investing CF (75.4)(75.4)(75.4)(75.4) (54.2)(54.2)(54.2)(54.2) (76.0)(76.0)(76.0)(76.0) (97.0)(97.0)(97.0)(97.0) (97.0)(97.0)(97.0)(97.0) Div Paid (25.4) (25.8) (44.4) (49.8) (53.6)

Chg in Gross Debt 0.0 0.0 0.0 0.0 0.0

Capital Issues 0.0 0.0 0.0 0.0 0.0

Other Financing CF 1.00 0.0 0.0 0.0 0.0

Net Financing CFNet Financing CFNet Financing CFNet Financing CF (24.4)(24.4)(24.4)(24.4) (25.8)(25.8)(25.8)(25.8) (44.4)(44.4)(44.4)(44.4) (49.8)(49.8)(49.8)(49.8) (53.6)(53.6)(53.6)(53.6)


Chg in Cash (34.6) 49.3 (5.3) 6.68 30.3

Opg CFPS (S cts) 3.81 6.43 6.64 7.57 8.33

Free CFPS (S cts) (0.5) 2.94 1.69 2.45 3.64



Source: DBS Bank

Analyst: Paul YONG CFA

Singapore Research Team






T arget T arget T arget T arget



1: 25 Feb 16 1.00 1.30 BUY

2: 09 May 16 0.89 1.00 HOLD

3: 04 Jul 16 0.91 1.00 HOLD

4: 12 Aug 16 0.88 0.96 HOLD

5: 11 Oct 16 0.91 0.96 HOLD

6: 10 Nov 16 0.90 0.97 HOLD


1

2

3

4

5

6

0.78

0.83

0.88

0.93

0.98

1.03

1.08

1.13

1.18

1.23

1.28


S$S$S$S$

We expect future dividends to remain close to current levels, or payout ratio of c.38%.

Industry Focus

Glove Manufacturers

AllianceDBS recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUYSTRONG BUYSTRONG BUYSTRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY BUY BUY BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLDHOLDHOLDHOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUEDFULLY VALUEDFULLY VALUEDFULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL SELL SELL SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

Completed Date: 7 Jan 2017 08:29:19 (MYT) Dissemination Date: 9 Jan 2017 08:26:38 (MYT)

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This report is prepared by This report is prepared by This report is prepared by This report is prepared by AllianceDBS Research Sdn BhdAllianceDBS Research Sdn BhdAllianceDBS Research Sdn BhdAllianceDBS Research Sdn Bhd. . . . This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities

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The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS

Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively,

the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to

change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard

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document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or

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The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and

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which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual

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UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:

(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and

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assessments stated therein.

Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.

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mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the

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DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research

department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction

in the past twelve months and does not engage in market-making.

Industry Focus

Glove Manufacturers

ANALYST CERTIFICATIONANALYST CERTIFICATIONANALYST CERTIFICATIONANALYST CERTIFICATION

The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the

companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her

compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in the report. The DBS Group has

procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of

research reports. As of 9 Jan 2017, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold

interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). The research analyst(s)

responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and

procedures are in place to ensure that confidential information held by either the research or investment banking function is handled

appropriately.

COMPANYCOMPANYCOMPANYCOMPANY----SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates do not have a proprietary

position in the securities recommended in this report as of 30 Nov 2016.

Compensation foCompensation foCompensation foCompensation for investment banking services: r investment banking services: r investment banking services: r investment banking services:

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Industry Focus

Glove Manufacturers

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Regional Industry Focus Glove Manufacturers...Riverstone Holdings 0.87 447 0.97 (4.4) (30.5) HOLD...

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Transcript of Regional Industry Focus Glove Manufacturers...Riverstone Holdings 0.87 447 0.97 (4.4) (30.5) HOLD...