Prone to ASP declines

■ We expect further downside risks to our ASP assumptions for SUCB, in view of the decline in overall global glove ASPs.
■ In addition, the current US CBP ban on SUCB products would require SUCB to sell its gloves in other markets, especially in countries with lower ASPs.
■ Maintain Hold, with a lower TP of RM1.30 (13.6x CY23F P/E).

Global glove ASPs to continue on a declining trend

We expect glove average selling prices (ASPs) to continue declining going forward, owing to aggressive expansion plans from both new and existing glove makers, ii) slower buying patterns from customers and iii) minimal spot orders. We estimate that current nitrile/natural latex ASPs (per 1k pieces) stand at US$28-30/US$23-25, compared to pre- Covid-19 levels of US$22-24 and US$18-20 per 1k pieces).

SUCB’s ASPs will be under more pressure vs. its peers

In our view, SUCB’s ASPs may decline at a faster rate compared to market ASPs as it has been a ‘trailblazer’ in hiking average selling prices (ASPs) during the peak of the Covid-19 pandemic, recording higher ASPs than peers. This was due to: i) a larger portion of sales coming from spot orders (25-30% in 2HFY6/21), and ii) a portion of sales being derived from its own-brand manufacturing (OBM) model, that allowed SUCB to enjoy trading and manufacturing margins. Yet, in a more balanced supply-demand environment in the glove sector, we think that SUCB’s OBM model does not provide higher margins compared to sales of OEM products.

US CBP has placed a WRO on SUCB

To recap, on 21 Oct 21, US Customs and Border Protection (CBP) announced a withhold release order on SUCB due to evidence of forced labour in its manufacturing operations. As a result, SUCB’s products are not allowed to enter the US (US sales made up 20% of SUCB’s FY21 sales). This was followed by the Canadian government putting a hold on glove purchases from SUCB (announced on 14 Nov 2021). As a result, SUCB will need to sell its gloves in other markets, especially in countries with lower ASPs.

Lowering our FY23-24 EPS by 24.5-42.6%

We cut our FY22-24 EPS by 1.0-42.6%, to account for: i) lower sales volume, ii) decline in ASPs and iii) lower economies of scale. We cut blended ASP assumptions for gloves in FY22-24 to US$43/US$27/US$26 (from US$45/US$29/US$28 previously).

Maintain Hold, with a lower TP of RM1.30

In tandem with our EPS cuts, TP is lowered to RM1.30, based on 13.6x CY23 P/E (at a 20% discount to the sector’s 5-year historical mean of 17x). The discount is to account for ESG concerns, especially over forced labour allegations. Despite weak near-term earnings and negative news flow, we keep our Hold call as we believe that current valuations (at 9.3% discount to SUCB’s 5-year mean of 15x and 32% discount to its NTA of RM1.91/share) have largely accounted for these factors.