• We remain positive on UG Healthcare as we expect a better showing in FY21F (another 5x net profit jump) with the prospects of higher ASPs.
• UG Healthcare plans to accelerate its capacity expansion to 4.6bn pcs/annum in FY6/21F (+59% y-o-y) to capture the strong global glove demand.
• Post-recent UG Healthcare share price correction, the stock is trading at 7.7x CY21F P/E (a 58% discount to Malaysian peers).
• Reiterate ADD on UG Healthcare, with a higher Target Price of S$4.80.

Expecting Another 5x Net Profit Jump in FY21F

• We believe UG Healthcare (SGX:41A) can record another 5x net profit jump in FY21F, on the back of strong global glove demand due to the COVID-19 pandemic, leading to:
  1. ASP increase (both at the manufacturing and distribution levels),
  2. higher sales volume (with +59% y-o-y production capacity expansion in FY21F), and
  3. higher economies of scale.

ASPs Still on An Uptrend

• We believe that the strong showing of a S$12.6m net profit in 2HFY20 did not capture the full COVID-19 impact as glove makers only started to hike ASPs in late-Apr 20. We understand that UG Healthcare continued to raise ASPs by 10%-12% monthly between Jul and Sep 2020; this could translate into a net profit of S$15.7m in 1QFY21F (50x jump y-o-y).
• Based on our channel checks, industry players remain upbeat on further price hikes till at least end-CY20F. Top Glove (SGX:BVA) also recently started giving customers the option to switch orders from nitrile to latex gloves, which has a shorter lead time. Should more end-users from developed countries shift from nitrile to latex gloves, we think this could catalyse further ASP upside for latex gloves (c.50% revenue contribution for UG Healthcare).

Industry Outlook for 2HCY20F Remains Positive

• The outlook for the glove sector remains positive, in our view. Post the stellar 1HCY20 results, we project an even stronger showing for glove players in 2HCY20F. We believe the 1HCY20 results did not fully capture the COVID-19 impact as glove makers only started to hike ASPs in late-Apr/early-May 20.
• We forecast a sequentially stronger showing in 2HCY20F on the back of:
  1. continued ASP hikes, and
  2. higher production capabilities by glove makers as their capacity expansion resumed post the partial lifting of Malaysia’s movement control order (MCO).
• Based on our channel checks, we noticed an increased urgency in glove demand in 3QCY20, and we expect selling prices of gloves to stay on an uptrend for the remainder of CY20F. Post the partial lifting of Malaysia's MCO, new production lines are also being commissioned, helping glove makers achieve capacity expansion. The new capacity is generally being sold at spot price, which is significantly higher.
• Post a 20% q-o-q ASP hike in 2QFY20, Riverstone (SGX:AP4) implemented a new 3-tier pricing for regular customers in Jul; this allowed the company to charge higher prices on incremental demand beyond each customer’s usual purchase volume. 15% of healthcare glove volume was being sold at spot price in Aug 20, and we estimate Riverstone’s healthcare glove ASP to climb at a faster pace of +25% q-o-q in 3QFY20F.
• On the back of a strong demand for cleanroom gloves YTD (1HFY20 sales volume: +30% y-o-y), Riverstone also plans to carry out its second price hike (c.10%) for this segment in Sep.
• Kossan has also guided for ASP hikes of 25%/45% q-o-q in 3Q/4QFY20F respectively, and thinks that ASP could continue on an uptrend in 1QCY21.
• Meanwhile, Top Glove (SGX:BVA) is expecting ASPs to increase by 20-30% on a m-o-m basis in Oct, followed by 10%/5% price hikes on a m-o-m basis in Nov/Dec respectively. Top Glove noted that its current lead time for nitrile gloves is 620 days, and it is giving customers the option to switch to natural rubber (latex) gloves, which have a shorter lead time. We see room for further ASP upside for latex gloves should more end-users from developed countries shift from nitrile to latex gloves.

Boosting Production Capacity to Capture Demand

• UG Healthcare is reaping the fruits of its prior investments in building up its downstream distribution and proprietary brand. Its downstream network currently has the capacity to handle more than its manufacturing output volume; and we estimate that 20% of FY20 sales volume was made up of outsourced gloves.
• To capture the surge in global glove demand, UG Healthcare plans to expedite its glove production capacity expansion to 4.6bn pcs/annum by end-Jun 2021 (+59% y-o-y), vs. previously announced 3.2bn pcs/annum.

Reiterate ADD on UG Healthcare With a Higher Target Price of S$4.80

• UG Healthcare remains our preferred pick among Singapore-listed rubber glove companies, due to its undemanding valuation (a 58% discount to the Malaysia-listed glove sector average CY21F P/E of 18.4x) and OBM business model, which allows it to garner stronger ASP upside potential vs. its peers, given the current strong surge in glove demand.
• We raised our FY21-22F EPS by 45.5%-84.3% on the back of higher ASP assumptions; our Target Price rises to S$4.80, still pegged to 15.0x CY21F P/E.
• Potential re-rating catalysts include higher-than-expected increase in selling prices.
• Downside risks include earlier-than-expected widespread availability of vaccine for COVID-19.

Source: CGS-CIMB Research - 7 Sep 2020