• We remain positive on UG Healthcare (SGX:41A) as the global shortage of gloves continues to drive an uptrend in average selling prices.
• We expect UG Healthcare to record stronger earnings in quarters ahead. For 1QFY21F, we forecast a 50x y-o-y jump in net profit to S$15.7m.
• Reiterate ADD with an unchanged target price. UG Healthcare remains our preferred pick among Singapore-listed glove companies.

Global Shortage of Gloves to Persist

• We believe the global glove shortage will persist till at least end-CY21F, given the gravity of the COVID-19 outbreak and limited new supply in the coming months.
• Our recent channel checks suggest that end demand remains strong as the pandemic appears to be accelerating worldwide, and European countries are preparing for a second wave of infections. Order lead times for glove manufacturers are further extending (currently till at least 1HCY21F), while inventory levels across supply chain (distributors, end-users) remain low.
• We expect glove demand to remain high in the medium term even with the eventual discovery of a vaccine, given
  1. current vaccine manufacturing and distribution constraints hampering mass availability,
  2. structural increase in glove demand given increasing hygiene awareness, and
  3. a need to restock inventory across supply chains.

Faster Pace of ASP Hikes

• UG Healthcare has recently seen an accelerated hike in selling prices. We estimate ASPs could rise by 10-15% monthly between Sep to Nov 2020, versus 10-12% monthly from May to Aug. We understand the recent hike in nitrile glove (c.40% of FY20 revenue contribution) prices was catalysed by raw material shortages.
• Meanwhile, latex glove (c.50% revenue contribution) prices are also on the rise as more end-users from developed countries are increasingly open to switching from nitrile to latex gloves given the long order lead time for nitrile.
• We forecast UG Healthcare to record ASP growth of +69% y-o-y in FY21F.

UG Healthcare's 1QFY21 Preview: 50x Jump in Net Profit

• UG Healthcare is set to release its quarterly business update in early Nov; we estimate a net profit of S$15.7m for 1QFY21F (50x jump y-o-y).
• We expect even stronger earnings in subsequent quarters, and forecast UG Healthcare to record S$70.5m net profit (+400% y-o-y) in FY21F, driven by:
  1. further ASP increase,
  2. higher sales volume (with +59% y-o-y production capacity expansion in FY21F), and
  3. higher economies of scale.

Maintain ADD on UG Healthcare

• We reiterate our ADD call with target price still pegged to 15.0x CY21F P/E.
• UG Healthcare remains our preferred pick among Singapore-listed rubber glove companies, due to its undemanding valuation (a 52% discount to the Malaysia-listed glove sector average CY21F P/E of 16.7x) and OBM business model, which allows it to garner stronger ASP upside potential vs. its peers.
• Potential re-rating catalysts include higher-than-expected increase in selling prices; downside risks include earlier-than-expected widespread availability of a vaccine for COVID-19.

Source: CGS-CIMB Research - 25 Sep 2020