ASP downtrend to continue
Challenging ASP outlook; D/G to SELL
We believe Kossan’s strong 1H21 earnings performance will not be sustainable as ASP has been trending down since May 2021 on rising competition, especially in the nitrile glove segment. We lower our FY21-
23 earnings forecasts by -1% to -76% on lower utilisation rates and ASP assumptions. We downgrade Kossan to SELL with a new TP of MYR1.86 (from MYR3.16) on a lower 17.7x CY23 PER or -1SD of historical mean (from -0.5SD of mean), in line with our valuation basis for Top Glove and Hartalega.
ASP expected to return to pre-Covid level in 2022
Industry players have been guiding for a weaker ASP outlook since 2Q21. ASP is expected to decline -8% to -10% MoM (peak: USD130-140/k pcs in early 2021 vs. c.USD40/k pcs in Sep 21) and could return to pre-Covid levels of USD23-24/k pcs by mid-2022, representing a 42% decline from the current level, in our view. Elsewhere, the sector is also facing other challenges such as lower utilization rates and additional operating costs on stricter SOPs as well as the labour shortage.
Strong competition from the Chinese glove makers
Aggressive capacity expansion by the Chinese glove makers would likely lead to oversupply by 2023. To seize market share, the Chinese glove makers are pricing their gloves competitively in Europe. According to industry players, the Chinese glove makers are expected to contribute to 23% of the world’s glove supply by 2022 (from 16% now) while Malaysia’s market share is expected to shrink to 60% in 2022, from 67%.
We lower our FY22/23/24 earnings forecasts by -1.3%/-75.8%/-33.4% to factor in: (i) lower utilisation rate of 70% (from 80%) for 4Q21, 80% for FY22 and FY23 (from 85% and 93%, respectively) and (ii) lower FY22/23 blended ASP assumptions to USD26.4/22.7 (from USD47.8/28.7) per k pcs. Post-earnings downgrade, our TP is lowered to MYR1.86 (from MYR3.16) on a lower 17.7x CY23 PER (-1SD to historical mean).