HLIB Research

PP 9484/12/2012 (031413)

Rubber Gloves (NEUTRAL )

INDUSTRY INSIGHT 26 September 2013 Tan J Young jytan@hlib.hongleong.com.my (603) 2168 1082 Sia Ket Ee kesia@hlib.hongleong.com.my (603) 2168 1071 Kossans share price

Sensitivity of Stock Valuation to USD Fluctuation

Highlights

Catalysts

Risks

Forecasts Rating

Valuation

To a certain extent, recent movements in the share price of rubber glove stocks were highly correlated to the fluctuations of greenback against MYR (see Figure #1). While, the fluxes of USD exchange rate were greatly influenced by the US Feds decision on QE withdrawal. Since the emerging noise of possible tapering in June, USD strengthened to a high of RM3.33/USD, resulting in a rally in rubber glove stocks to reach their YTD high levels. However, the no taper stance in the recent FOMC caused the USD to soften almost instantaneously to RM3.15/USD before gradual recovery thereafter. We do not expect this will result in any change to macro outlook (i.e. growth, inflation, interest rate, etc.) besides that the depreciation pressure on MYR to subside and MYR to trade stronger in the range of RM3.20-RM3.25/USD. In order to gauge the sensitivity of rubber glove share prices to exchange rate movements, we simulated a simple regression model for the average rubber gloves PE by using USDMYR and latex price as explanatory variables. Using weekly readings as our samples (Jan-Sep 2013), the regression model yielded the best fitted statistical result with USDMYR rate at T+6 and latex price at current period. While keeping latex price constant based on yesterdays closing price of RM5.51/kg, we computed 6 scenarios of average rubber gloves PE by varying the expected USDMYR (see Figure #2). Notwithstanding the recent adjustment in MYR rate, valuation of rubber glove stocks surged further to a high of 17.3x. According to the sensitivity of the model, a MYR appreciation from RM3.33/USD to ~RM3.20/USD should cause a correction of sector valuation to 16.7x. As such, we believe that share prices could experience some short-term weakness due to the recent adjustment in macro scenario. Surge in demand in the event of a disease outbreak; more stringent requirements and increased spending in the healthcare sector; appreciation of USD against MYR and lower rubber prices to boost profitability. Uptick in natural and/or synthetic latex prices will inevitably erode profitability, depreciation of USD against MYR, natural gas price hike and price undercutting. Unchanged. Neutral () Positives: Latex prices have fallen significantly, production efficiency to continue improving and production shift to nitrile gloves from NR gloves will lead to better cost management. Negatives: Weakening of USD against MYR. We maintain our NEUTRAL stance on the sector with unchanged rating and TP for stocks under our coverage. Kossan remains our favourite due to its undemanding valuations relative to peers. Kossan (BUY, TP: RM7.30 based on 12.8x CY14 EPS). Hartalega (HOLD, TP: RM6.37 based on 17.5x CY14 EPS). Top Glove (HOLD, TP: RM6.09 based on 16.0x CY14 EPS).

Top Gloves share price

Hartalegas share price

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Figure #1
8.00 7.50 7.00 6.50 6.00 5.50 5.00 4.50 4.00 3.50 3.00 1/4/2013

Rubber Gloves Share Price ad USD/MYR Movements

3.40

3.30

3.20

3.10

3.00

2.90

2.80 2/4/2013 3/4/2013 4/4/2013 Kossan 5/4/2013 TOPG 6/4/2013 Harta 7/4/2013 8/4/2013 9/4/2013 USDMYR

Bloomberg

Figure #2
Scenario 1 2 3 4 5 6
HLIB

Regression Results
MYR/USD 3.15 3.20 3.22 3.25 3.30 3.33 Latex Price (RM/kg) 5.51 5.51 5.51 5.51 5.51 5.51 Average PE 14.92 15.16 15.27 15.40 15.63 15.77 Difference (multiple) -0.35 -0.11 0.00 +0.13 +0.36 +0.50

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Hong Leong Investment Bank Berhad (10209-W)

(Formerly known as MIMB Investment Bank Berhad) Level 8, Menara HLA No. 3, Jalan Kia Peng 50450 Kuala Lumpur Tel 603 2168 1168 / 603 2710 1168 Fax 603 2161 3880

Equity rating definitions

BUY TRADING BUY HOLD TRADING SELL SELL NOT RATED Positive recommendation of stock under coverage. Expected absolute return of more than +10% over 12-months, with low risk of sustained downside. Positive recommendation of stock not under coverage. Expected absolute return of more than +10% over 6-months. Situational or arbitrage trading opportunity. Neutral recommendation of stock under coverage. Expected absolute return between -10% and +10% over 12-months, with low risk of sustained downside. Negative recommendation of stock not under coverage. Expected absolute return of less than -10% over 6-months. Situational or arbitrage trading opportunity. Negative recommendation of stock under coverage. High risk of negative absolute return of more than -10% over 12-months. No research coverage, and report is intended purely for informational purposes.

Industry rating definitions

OVERWEIGHT NEUTRAL UNDERWEIGHT The sector, based on weighted market capitalization, is expected to have absolute return of more than +5% over 12-months. The sector, based on weighted market capitalization, is expected to have absolute return between 5% and +5% over 12-months. The sector, based on weighted market capitalization, is expected to have absolute return of less than 5% over 12-months.

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