Not spared by decline in global ASPs

■ We lower our ASP forecasts for Kossan, in tandem with industry-wide decline in ASPs (more balanced supply-demand dynamics in global glove sector).
■ Given the strong share price retracement, current valuations are appealing and backed by its strong net cash position (56% of current market cap).
■ Reiterate Add, with a lower TP of RM2.20 (17x CY23F P/E).

Glove ASPs to continue on a declining trend

In our view, the global glove average selling prices (ASPs) should continue to decline going forward. This is owing to: i) aggressive expansion plans from both new and existing glove producers), and ii) slower buying patterns from customers. We understand that global glove buyers are keeping low inventory levels in view of the declining ASPs (current both nitrile and latex ASPs stand at USS26-30 and US$22-25 per 1k pieces). In our view, nitrile and latex ASPs will continue to decline (estimated to be a 3-5% decline monthly) up until 1H22F, to more stabilised levels of US$26-28 and US$23-25per 1k pieces (still higher
than pre-Covid-19 levels of US$22-24 and US$18-20 per 1k pieces).

Kossan still has the least aggressive capacity expansion plans

While certain glove makers have highlighted plans to slow down their capacity expansion plans, Kossan Rubber Industries has not indicated plans to slow down as it has least aggressive expansion plans against its peers. By end-CY23F, we estimate that Kossan will grow its total annual glove production capacity by 26% (vs. total sector capacity growth of 32%). We do not discount any possibility that Kossan may face delays and/or could delay the commissioning of its new production lines, in the event that unfavourable -supply demand dynamics in the glove sector remain supply-led.

Kossan faces lower pricing pressure vs. peers

Among glove makers under our coverage, we believe that Kossan will likely face less pricing pressure compared to its peers. This is given that: i) it took a more conservative approach in raising ASPs during the Covid-19 pandemic, as most orders were committed to long-term recurring clients, ii) we estimate 20% of Kossan’s gloves sales (pre-Covid-19 pandemic) are made up of specialty gloves and/or for non-medical usage, and iii) it had lower spot sales (below 20% at peak of Covid-19 pandemic).

Reiterate Add, with a lower TP of RM2.20

We lower our FY21F/FY22F/FY23F EPS by 2.5%/60.9%/30%. This is to account for: i) lower ASP forecasts to US$27/US$26/US$26 per 1k pieces (from US$32/US$29/US$28 previously), ii) lower sales volume, and iii) lower economies of scale. In tandem with our EPS cuts, our TP is reduced to RM2.20, pegged to its 5-year mean P/E of 17x. Despite the weak earnings environment, we keep our Add rating for Kossan, backed by: i) its current valuations at a 20.5% discount to its 5-year mean of17x, and ii) its strong net cash position
(RM2.5bn, 98sen/share).