ANP Reference

Industrial Goods and Services│Malaysia│Equity research│July 19, 2016
Sector Note │ Alpha series

▎Malaysia
Rubber Gloves
Neutral (previously Overweight) Loosening its grip
■ Increased capacity in NBR gloves could lead to a more intense pricing environment,
Highlighted companies which would in turn result in short-term margin compression for glove players.
Hartalega Holdings
REDUCE, TP RM4.00, RM4.30 close
■ Glove makers could find it tougher to pass on costs to its clients and may have to
absorb additional costs to remain competitive.
We downgrade the stock to Reduce given the
recent share price appreciation. Margins are ■ Short-term view: supply may outstrip demand; long-term view: supply-demand
at risk as the group’s ASPs will be negatively dynamics should iron out eventually as inelastic demand growth catches up.
impacted by the overall sector’s aggressive
capacity expansion in the NBR segment.. ■ Hence, we downgrade the sector to Neutral; we remain selective in our stock picks.
Kossan Rubber Industries
ADD, TP RM7.60, RM6.51 close
Higher nitrile capacity leads to pricing pressures
In light of the increased production capacity of nitrile butadiene rubber (NBR) gloves, we
Kossan plans to increase its production
capacity from 22bn gloves p.a. currently to
believe pricing pressure will intensify, which could lead to short-term margin
44bn by 2022. We expect higher margins due compression for the glove makers. While we expect glove makers to increase NBR
to improving operating efficiency via increased gloves prices in the upcoming quarter, we believe this is solely to pass on the extra
automation and better product mix. operating costs (weaker US$ and higher raw material prices). All in, we foresee margin
pressure impacting all glove makers, particularly those with larger production capacities.
Supermax Corp
ADD, TP RM2.70, RM2.04 close Passing on the costs just got a little tougher
An undervalue play. It is in the midst of adding Taking into account the heightened competition, we also believe that the ease of
capacity by 5.6bn gloves p.a. by end-FY16. passing through costs is diminishing. While glove makers were previously able to enjoy
We are turning optimistic on its earnings passing on costs effectively with only a minor time lag, we believe that the tides may
growth prospects, as it has finally resolved the
have turned, as supply grows ahead of demand. Glove makers would have to now
utilities issues faced by its long-delayed plants
10 and 11. potentially (to a certain extent) sacrifice margins to absorb some, if not all the additional
costs to remain competitive.
Summary valuation metrics Our case study shows a short-term oversupply…

P/E (x) Dec-16F Dec-17F Dec-18F Our case study on the dynamics of global glove supply and demand show that a supply
Hartalega Holdings 25.23 22.38 19.69 glut may occur in 2016-17 before demand eventually catches up in 2018. Our
Kossan Rubber Industries 18.34 16.36 13.65 calculations reveal a surplus of 0.3bn pieces/year in 2016 and 3.0bn pieces/year in
Supermax Corp 10.72 9.34 2017. Nonetheless, we expect the demand/supply dynamic to a slight deficit of 0.3bn
pieces/year in 2018 as demand catches up. Note that, this is under the assumption that
P/BV (x) Dec-16F Dec-17F Dec-18F
Hartalega Holdings 4.36 3.97 3.61
there are no delays in expansion plans and/or stronger-than-average demand growth.
Kossan Rubber Industries 3.73 3.32 2.96 …but sector’s long-term fundamentals remain intact
Supermax Corp 1.27 1.16
Even so, the glove sector’s long-term prospects remain intact, in our view. Glove
Dividend Yield Dec-16F Dec-17F Dec-18F makers may take counterintuitive measures in the current environment by slowing down
Hartalega Holdings 1.99% 2.23% 2.54% commercialisation of new capacity, revamp existing lines and/or shut down older plants.
Kossan Rubber Industries 2.18% 2.75% 3.66% In turn, this increases the overall efficiency of the Malaysian glove sector and reinforces
Supermax Corp 2.80% 3.21% its dominance globally. We also foresee Malaysia’s exports to grow at above-average
rates given its leading position and higher operating efficiencies vs. other countries.
Downgrading from Overweight to Neutral
All in, concerns of a prolonged competitive pricing environment have turned into a reality
check, as the incoming supply of gloves is currently pacing ahead of global demand
growth. Thus, we downgrade our call for the sector from Overweight to a Neutral. We
have also downgraded Hartalega from Hold to Reduce given the recent increase in
share price. The top picks of the sector are Kossan and Supermax. Upside risk include
sharp appreciation in US$/RM, while downside risk is a spike in raw material prices.
Analyst(s) Figure 1: Stock Recommendations
Market Cap Current Stock Previous Stock New Target Previous Target
Stocks
(RMbn) Recommendation Recommendation Price (RM) Price (RM)
Hartalega 7.06 Reduce Hold 4.00 4.00

Kossan Rubber 4.16 Add Add 7.60 7.90
Supermax 1.38 Add Add 2.70 2.90
Walter AW Top Glove 5.52 Reduce Reduce 4.05 4.05
T (60) 3 2261 9093 SOURCES: CIMB, COMPANY REPORTS
E walter.aw@cimb.com
[X]
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Figure 2: Sector Comparisons

Bloomberg Share price Target Price Market Cap Core P/E (x) 3-year EPS P/BV (x) Recurring ROE (%) EV/EBITDA (x) Dividend Yield (%)
Company Recom.
Ticker (local curr) (local curr) (US$ m) CY2016 CY2017 CAGR (%) CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017
Hartalega Holdings HART MK Reduce 4.28 4.00 1,751 32.4 22.2 12.2% 4.4 4.0 18.2% 18.6% 17.0 15.1 2.0% 2.2%
Kossan Rubber Industries KRI MK Add 6.53 7.60 1,041 18.3 16.4 13.9% 3.7 3.3 20.8% 21.5% 11.7 10.0 2.1% 2.8%
Supermax Corp SUCB MK Add 2.09 2.70 350 10.7 9.3 14.0% 1.3 1.2 12.2% 12.9% 7.6 7.1 2.8% 3.2%
Top Glove Corporation TOPG MK Reduce 4.42 4.05 1,380 15.2 16.3 3.3% 2.9 2.7 19.9% 17.2% 10.1 10.1 3.2% 3.1%
Malaysia Average 1130.5 19.1 16.0 10.8% 3.1 2.8 17.8% 17.5% 11.6 10.6 2.5% 2.8%
SOURCES: CIMB, COMPANY REPORTS
2
Loosening its grip

1. VALUATION AND RECOMMENDATION
Downgrading the sector to Neutral from Overweight
We believe that concerns on a prolonged competitive pricing environment have
turned into a reality check, as the supply of gloves is, in fact, pacing ahead of
demand growth. Thus, we are of view that this will lead to industry-wide pricing
pressure in the short term given the sector’s continuously rising capacity.
Glove manufacturers would have to turn to lowering their selling prices in order
to sell off their sizable incoming capacity as well as sacrificing margins (through
absorbing additional costs) in a bid to remain competitive and retain their
respective market share. This leads us to believe that the tide has turned, and
we now anticipate a persisting tougher operating environment, at least in the
near- to medium-term. We downgrade the sector from Overweight to Neutral in
view of the heightened downside risks.
Hence, we now peg all glove companies’ valuations (save for Kossan) to each
company’s respective 5-year historical mean P/E. While we expect the
operating environment to remain tough, we believe that the stocks under our
coverage do not deserve to trade lower than their historical mean P/E on the
basis of: 1) the glove sector’s growth prospects remain intact in Malaysia,
which we believe should lead to growing global market share, 2) Malaysia
glove companies remain at the forefront in terms of operating efficiency and
automation and; 3) each respective company’s consistent earnings track record.
We are, however, singing a different tune for Kossan (KRI MK, Add, TP:
RM7.60), as we believe that it deserves to still trade at 1 s.d. above its 5-year
mean historical valuation. This is given the group’s more diversified earnings
base as well as lower pricing pressure from minimal capacity added in the next
two years. Hence, we opine that valuations are undemanding at a CY17F P/E
of 16.4x backed by a 3-year earnings CAGR of 13.9%.
In addition, our Add call on Supermax (SUCB MK, Add, TP: RM2.70) is
premised on the fact that the group’s valuations are trading at 9.3x CY17PE, a
steep 41.5% discount to the overall sector and 22.5% discount to its 5-year
historical mean P/E.
Figure 3: Recommendations
Market Stock New Previous

Stocks Cap Recommen Target Target Valuation
(RMbn) dation Price (RM) Price (RM)
Hartalega 7.06 Reduce 4.00 4.00 22x (5-year historical mean)

Kossan Rubber 4.16 Add 7.60 7.90 19x (1 s.d. above 5-year historical mean)
Supermax 1.38 Add 2.70 2.90 12x (5-year historical mean)
Top Glove 5.52 Reduce 4.05 4.05 15x (5-year historical mean)
3
Overall sector at 5-year historical mean of 15.9x

Currently, the glove sector is trading at a 1-year forward P/E of 17.8x, while its
5-year historical mean P/E is 15.9x. This pales in comparison to the sector’s
performance back in 2H15, when the sector’s P/E multiple traded at more than
+2 s.d. of its 5-year historical mean. Moving forward, we expect the sector’s
P/E to trade closer to its 5-year historical mean of 15.9x given the unexciting
operating environment and intensified pricing competition.
Figure 4: Sector's 5-year historical mean
30.0
25.0
20.0
15.0
10.0
5.0
Sector PE Mean +1SD -1SD +2SD -2SD
Strategy for 2H16: a stock-selective approach

Despite our downgrade to Neutral for the sector, we still see value emerging
from specific individual glove counters in the sector. Hence, our approach to
2H16 will be cherry-picking winners from the sector with an emphasis on
undervalued stocks, in terms of valuations and fundamentally solid companies
with diversified earnings base and a key focus on product innovation.
Conversely, we are not keen on companies with an overly enlarged production
capacity and of which earnings performance are heavily correlated to the
external environment (i.e. forex movements and key raw material price trends).
Overall, we have Add calls on Kossan and Supermax, while we currently have
Reduce calls on both of the bigger-market cap stocks, Hartalega (HART MK,
Hold, TP: RM4.00) and Top Glove (TOPG MK, Reduce, TP: RM4.05).
Our Top Pick in the sector remains Kossan
Kossan remains our sector Top Pick. Among other glove makers, we like the
group’s more diversified earnings segment, in terms of major product segments
and its lesser dependence on large-scale contracts from any single key client,
which minimises concentration risk. Apart from the production of medical
gloves, the group has a strong market presence in the specialised gloves
segment. Moreover, the group will not be adding any new capacity in 2016.
We believe these points would be the vital factor to mitigate the impact of
stronger pricing competition in the NBR segment, which leads to our view that
Kossan would be least affected among all the glove players. We are also
positive on its recently announced nitrile-accelerator-free glove, as it is a
testament to the group’s emphasis on product innovation to set its products
apart from the mainstream nitrile glove market.
Hence, we maintain our Add call with a lower TP of RM7.60. This is after
trimming our FY16-18F earnings estimates by 1.9-2.5% to account for delays in
its expansion plans and reduced ASPs due to pricing competition. This is
based on a CY17F P/E of 19x, in line with +1 s.d. of its 5-year historical mean.
We believe that the group deserves to trade at +1 s.d. given its: 1) diversified
earnings portfolio base, 2) minimal capacity to be added in the next two years,
4
leading to less pricing pressure and 3) continuous emphasis on product

innovation to drive sales.
Supermax still an Add given its undemanding valuations
Historically, Supermax has traded at a 20-30% discount to its peers due to its
weaker execution abilities, which mainly stem from delivery setbacks from its
expansion plans, including the previously long-drawn-out delay of Plants 10
and 11 (+5.5bn pieces p.a.). However, we note that both plants have currently
been gradually commissioning new lines since 2H15 and full commercial
production is expected by end-2016.
This will result in the group having a larger product mix in the NBR segment,
with a product mix of 55 NBR:45 NR (natural rubber latex). Given the better
earnings visibility moving forward, we turn more optimistic about the group’s
growth prospects. Currently, the stock is trading at a CY17F P/E of 9.3x, which
is at a sharp 22.5% discount to its 5-year historical mean and 41.5% discount
to the sector’s 5-year historical mean. We believe that the company is set to
play catch-up as it begins to demonstrate better earnings delivery.
Hence, we maintain our Add call but with a lower TP of RM2.70. This is after
adjusting its CY17F P/E multiple lower to 12x (from 13x), pegging it to its 5-
year historical mean as well as 1 s.d. below the sector’s 5-year historical mean.
Downgrading Hartalega to Reduce with unchanged 12-month
TP of RM4.00
In terms of margins and operating efficiency, Hartalega has always been the
trailblazer of the pack. Traditionally, Hartalega’s products have been priced at a
premium given that it has spearheaded the industry in NBR glove capacity and
technological advancement over the past 20 years Nonetheless, we believe
that the group’s market leadership has come under threat given that the other
players are aggressively increasing production capacity in the NBR segment.
This leads to our belief that the group could lose its already eroding pricing
premium over the sector in order to secure orders for its new capacity. Note
that the group has expanded its overall production capacity by 70% yoy to
22.8bn pieces p.a. in FY03/16. It also plans to increase its production capacity
by 2bn pieces p.a. by end-2016, though it will do so progressively. Hence, we
are expecting net margin compression of 3-3.5% pts to 15-15.5% (from
previous net margins of 18-19%).
Due to recent share price appreciation, we downgrade the stock to a Reduce
call from Hold with an unchanged 12-month target price of RM4.00. This is
based on a CY17 P/E of 21x (in line with its 5-year historical mean).
Top Glove no longer the Top Gun
We recently downgraded Top Glove to a Reduce, with a TP of RM4.05, based
on a CY17F P/E 15x (in line with 5-year historical mean). The reason for our
downgrade was because we believe that the group will face difficulty repeating
its exceptional performance in 3QFY15-2QFY16 which was fuelled mainly by
supportive tailwinds, in terms of the sharp appreciation of US$/RM as well as
lower latex raw material prices. Moving forward, we believe that the group is
unlikely to repeat this performance, and expect a 12.3% yoy earnings decline in
FY17. Our Reduce call is premised on the fact that: 1) Top Glove’s market
position and earnings base is the most susceptible to intense pricing pressures
from an influx in the sector’s capacity; 2) a slowdown in its expansion plans; 3)
a less favourable product mix and clientele base; and 4) diminishing tailwinds
from the US$ vs. RM and raw material prices.
5
2. GLOVE SECTOR PERFORMANCE REVIEW

2.1 Sector returns of more than 112% in 2015
The glove sector was effortlessly one of the best-performing sectors in Bursa
since early-2015. We upgraded our sector rating to Overweight from Neutral in
Jan 2015 on expectations of earnings growth underpinned by capacity
expansion and a favourable operating environment for glove makers. In 2015,
the sector’s combined market cap jumped 112% to RM26.5bn on the back of
exceptional earnings delivery from the glove companies. As a result, P/E
valuations of the glove companies under our coverage spiked to +2 s.d. of
each respective 5-year historical mean P/E.
Figure 5: Glove sector's performance in 2015
220.00%
200.00%
180.00%
160.00%
140.00%
120.00%
100.00%
80.00%
FBMKLCI Glove Sector under Coverage
Figure 6: Kossan’s 5-year P/E chart Figure 7: Hartalega’s 5-year P/E chart
40.0 40.0 Title:

Source:
35.0 35.0
Please fill in the values above to have them entered in your rep
30.0 30.0
25.0 25.0
20.0 20.0
15.0 15.0
10.0 10.0
5.0 5.0
Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
P/E Mean +1SD -1SD +2SD -2SD P/E Mean +1SD -1SD +2SD -2SD
SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS
Figure 8: Supermax’s 5-year P/E chart Figure 9: Top Glove’s 5-year P/E chart
21.0 26.0 Title:

24.0
Source:
19.0
22.0
17.0 Please fill in the values above to have them entered in your rep
20.0
15.0
18.0
13.0
16.0
11.0
14.0
9.0
12.0
7.0 10.0
5.0 8.0
Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16
P/E Mean +1SD -1SD +2SD -2SD P/E Mean +1SD -1SD +2SD -2SD
SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS
6
2.2 The stars were shining on the sector in 2015

With the closure of Kimberly Clark’s (a leading personal care corporation) glove
manufacturing plant back at end-2014 (production capacity: 3bn pieces p.a.),
the incoming glove capacity in Malaysia easily absorbed the additional freed up
demand.
As a result, pricing pressure eased as both supply and demand was in
equilibrium, in spite of the enlarged overall sector capacity (2015: +17.2bn
pieces p.a.). Additionally, the sector also enjoyed the benefits of lower raw
material prices as well as sharp appreciation of the US$ vs. RM. Meanwhile,
latex and nitrile prices dropped to a 7-year low given the concerns of an
oversupply and lacklustre demand situation, which lead to suppressed raw
material prices.
These positive external factors boosted the margins of many glove makers,
particularly Top Glove, given its greater exposure to the NR gloves segment.
Note that margins for NR gloves expanded more compared to NBR gloves due
to the lower competition (as a result of lesser capacity expansion) and less
price inelastic customers (in the sense that customers allow the company to
enjoy the benefits of a positive operating environment but are typically more
sensitive when additional costs are being passed on through higher selling
prices).
Figure 10: EBITDA margin trend for the four listed rubber gloves companies
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
1Q14 2Q2014 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15
Hartalega Kossan Rubber Supermax Top Glove
2.3 1Q16 results were below expectations…

Riding high from the expectations of a record-breaking 2015, 1Q16 results of
glove counters came in broadly below expectations as earnings normalise from
diminishing external tailwinds. Overall, the glove companies reported weaker
numbers, with average core earnings declining 21% qoq. This was mostly
attributed to: 1) the appreciation of RM against the US$ by 2.4% qoq to an
average of RM4.19 (vs. 4Q15: RM4.29), 2) the appreciation of latex prices by
14.2% qoq due to the season’s wintering period, 3) a more competitive pricing
landscape came into play, leading to a qoq decline of 3-5% in selling prices
and; 4) time lag in passing on the increase in operating costs (including a
+17% gas hike which came into effect in Jan 2016).
Among companies under our coverage, Top Glove recorded the sharpest
decline in earnings (-40.3% qoq) while Kossan’s earnings dropped the least, or
by 7.1% qoq (Kossan’s 1Q16 is seasonally weaker in terms of sales volume).
Hartalega’s earnings also declined by 15.2% qoq, prompted by a sharp drop (-
17.2% qoq) in selling prices as the group dropped its prices to secure
customers for its Plants 1 and 2 (+9.4bn pieces p.a.). On the other hand,
Supermax’s earnings were weaker by 49.3% qoq due to the lower production
7
output (from the revamp of a few of its older production lines in its older plants
in Perak).
Figure 11: 1QCY16 results recap

Company 1QCY16 Net profit (RMm) QoQ YoY Expectations
Hartalega 61.7 -15.2% 12.3% Below
Kossan Rubber 51.3 -7.1% 12.9% Below
Supermax 19.7 -50.8% -21.2% Below
Top Glove 62.5 -52.8% -13.6% Below
Average 48.8 -31.5% -2.4% Below
2.4 …leading to sector-wide EBITDA margins contraction

Thus, all the glove companies across the board reported an average decline of
2% in EBITDA margins. Even though all glove makers recorded a decline in
ASPs, margin contraction was most evident for Top Glove as margins dipped
to 13.8% (-8.0% pts qoq) from a softer US$ vs. RM and a spike in latex prices.
Hartalega also reported a sharp 3.2% pts qoq decline in EBITDA margin to
23% as the group was hit by a decline in NBR gloves ASPs and additional
overall expense arising from its Next Generation Integrated Glove
Manufacturing Complex (NGC) expansion plans.
Figure 12: 1QCY16: EBITDA Margin table

Company 1QCY16 EBITDA margin QoQ (ppts) YoY (ppts)
Hartalega 23.0% -4.2 -3.2
Kossan Rubber 20.7% -1.5 -0.2
Supermax 19.6% 4.4 7.5
Top Glove 13.8% -7.8 -4.4
Average 19.3% -2.3 -0.1
8
3. OVERALL GLOVE OUTLOOK

3.1 NEAR-TERM OUTLOOK – EXPECT PRICING PRESSURE
3.1.1 Pricing pressure to persist in the near term but not
limited to NBR gloves
In light of the increased capacity expansion plans for NBR gloves, we believe
pricing pressure will intensified, leading to short-term margin erosion for the
glove makers. As opposed to the market’s expectations, we take the view that
selling prices for NR gloves would also be subjected to the industry-wide
pricing pressure. As both products are direct substitutes of the other, the
decline in selling prices for NBR gloves will prompt more switching from NR
gloves, as NBR gloves are typically perceived as the more “exclusive” product.
At this juncture, NBR gloves still command superior margins compared with NR
gloves. Note that this is under the assumption that there is no sudden spike in
price discrepancy between latex and nitrile raw material prices. NBR gloves
usually command GP margins of 18-20% while NR gloves hovers around 15-
16%. Our estimates imply that even when latex prices hit an average cost of
RM3.80/kg, NR glove GP margin would still be lower than that of NBR gloves
at 17-18%.
3.1.2 Case study: Is there really an oversupply situation in
the offing?
We conducted a simple case study to analyse the possibility of oversupply
occurring over the next three years, based on the following assumptions:
1. Global glove demand grows at a constant rate of 7%;
2. Top four glove manufacturers command an unchanged 38% of global
glove market demand (60% of Malaysia’s 63% market share) and;
3. Effective growth in production volume based on steady utilisation rates
of 65% for new capacity
Figure 13: Case study on demand and effective supply of global glove demand
Current
2016 2017 2018
Capacity Expansion (bn pieces/annum) Capacity
Hartalega 22.8 1.6 4.7 3.1
Topglove 44.6 3.4 4.4 0.0
Kossan 22.0 0.0 3.0 4.5
Supermax 19.8 3.4 1.0 1.0
Big Four's Total Capacity Expansion (bn 109.2 8.4 13.1 8.6
pieces/annum)
Actual Production of new capacity (65% utilisation rate) 5.5 8.5 5.6
Net increase in global glove demand (bn pieces/annum) 13.6 14.5 15.5
Net demand attributed to four companies (38% of global glove market

share) 5.1 5.5 5.9
Surplus/(Deficit) (bn pieces/annum) 0.3 3.0 -0.3
9
Figure 14: Net change in actual production vs. net increase in demand
bn pieces/annum
10.0
8.5
8.0
5.9
6.0 5.5 5.5 5.6
5.1
4.0
3.0
2.0
0.3
0.0
2016 2017 2018
(0.3)
-2.0
Net increase in demand Net Increase in Actual Production Surplus/ (Deficit)
Based on our case study on the dynamics of the demand and supply of global
glove demand, we think a supply glut may occur in 2016-17 before demand
catches up in the longer run. Our estimates reveal a slight surplus of 0.3bn
pieces p.a. in 2016 and a significant demand surplus of 3.0bn pieces p.a. in
2017. This is under the assumption that there are no delays in the companies’
expansion plans and/or a stronger-than-expected demand growth. Nonetheless,
we expect the demand and supply dynamic to improve in 2018 as we expect a
0.3bn pieces/annum deficit in 2018.
Figure 15: Indicated expansion plans (bn pieces p.a.)

bn pieces/annum
160
140
25.2
120 24.2
23.2
100 19.8 29.5
25.0
80 22.0
22.0
60 52.4
52.4
44.6 48.0
40
20
29.1 32.2
22.8 24.4
0
Current Capacity end-2016 end-2017 end-2018
Hartalega Topglove Kossan Supermax
SOURCES: CIMB
3.1.3 Gunning ahead with capacity expansion regardless of

muted operating environment
Notwithstanding our view of an oversupply situation, we note that glove makers
are still going ahead with their capacity expansion plans, albeit at a slower
pace. This would, in turn, result in a more competitive landscape in the industry,
in our view.
Even though we anticipate higher selling prices in the upcoming quarter, we
believe that this is solely to pass on the extra operating costs (weaker US$ and
higher raw material prices). Thus, we do not expect the higher prices to have a
significant impact on overall margins. All in, we envisage margin pressure to
10
impact all the glove players, predominately those with larger production
capacities, such as Hartalega and Top Glove.
In our view, Kossan is somewhat safeguarded from the intense pricing
competition as it had managed to lock in orders for its existing capacity in 2015
while expansion plans will only kick in by 3QCY17. As for Supermax, the
group’s OBM business and existing customer base should have no difficulties
in absorbing the additional capacity coming onboard given that it has not
expanded its capacity since 2013.
Figure 16: Net planned capacity increase

Current Capacity (bn
Company end-2016 end-2017 end-2018
pieces/annum)
Hartalega 22.8 1.6 4.7 3.1
Topglove 44.6 3.4 4.4 0.0
Kossan 22.0 0.0 3.0 4.5
Supermax 19.8 3.4 1.0 1.0
Total installed capacity 109.2

Msia
3.1.4 Passing on costs just got a little bit tougher

Taking into consideration the heightened competition, we believe that ease of
the pass-through mechanism is diminishing. Previously, glove makers could
pass on any additional costs effectively to their customers with only a minor
time lag, while margins remain largely unaffected. However, we believe this is
likely to change in the short term as pricing pressure intensifies. As supply
grows ahead of demand, we suspect that glove makers could possibly (to a
certain extent) sacrifice margins by absorbing the additional costs to remain
competitive.
Figure 17: Average cost breakdown

Depreciation
3%
Labour
11%
Fuel
9%
Raw Materials
Chemical 50%
10%
Packaging
7%
Overheads
10%
3.1.5 Margin compression from minimum wage hike and

higher natural gas charges
We believe that issues in passing on additional costs would most likely be
amplified as the recent cost hikes such as latest gas hike (effective 17 Jul 2016)
and the recent minimum wage hike came into play. Hence, we think that the
margins of glove manufacturers could remain flattish or decline yoy as these
glove makers would have no alternative but to absorb some, if not all of these
costs, to remain competitive among their peers.
11
Figure 18: Revised tariff schedule effective 17 Jul 2016

Revised Tarriff Effective
Tariff Existing Tariff
Annual Gas Consumption (MMBtu) 15 July 2016
Category (RM/MMBtu)
(RM/MMBtu)
A Residential 19.52 19.52
B 0-600 23.78 25.2
C 601-5,000 23.9 25.33
D 5,001-50,000 24.14 25.58
E 50,001-200,000 25.19 26.69
F 201,000-750,000 25.19 26.69
L Above 750,000 26.03 27.58
Average 25.53 27.05
SOURCES: CIMB, PETRONAS GAS
3.1.6 Sensitivity analysis on gas and electricity costs

Electricity and natural gas costs make up 3-5% and 7-8% of the companies’
total operating costs, respectively. Based on our analysis, a +/- 5% in electricity
and natural gas costs will impact the bottomline of the glove makers negatively
by +/- 1.3-3.0%. Top Glove will be impacted the most due to its lower operating
efficiency, while Hartalega will be impacted the least due to its better
manufacturing efficiencies.
Figure 19: Sensitivity analysis on electricity and gas cost (+5%)
0
Hartalega Kossan Supermax Top Glove
-0.2
-0.4
-0.6
-0.8
-1
-1.2
-1.4
-1.6
-1.8
%
Electricity Natural Gas
SOURCES: CIMB
3.1.7 Increased emphasis on automation and operating

efficiencies to mitigate pressures
Having discussed the negative impacts of pricing and costs pressures affecting
the glove sector in the short term, we note that glove makers have also taken
counterintuitive measures by ramping up and upgrading their manufacturing
efficiencies to help alleviate the margin compression. Our channel checks with
glove companies revealed plans to maximise manufacturing efficiencies by
installing various computerised robotics such as an automated temperature
regulating systems to prevent heat wastage, robotic arms for efficient
packaging as well as an automated stripping and stacking processing line. We
believe that these measures are key to maintaining the glove companies’
competitiveness and reinforcing Malaysia’s dominance in the global glove
industry.
3.1.8 Capacity expansion delay keeps the oversupply away
Although our assumptions indicate that there is a prospective oversupply issue
at hand, there are several actions that can be undertaken by glove makers to
prevent or mitigate a prolonged oversupply condition. In the event of an
12
excessive supply of gloves, we understand that glove makers can scale back
their planned incoming capacity until the market’s supply-demand dynamics
improve.
Already, Hartalega has decided to delay the commissioning of the new
production lines in Plants 3 and 4 by two months to Aug 2016, and also to slow
installation work to two lines per 1.5 months (from two lines a month). Kossan
is also expected to face delays in construction works on its Bestari Jaya land,
which would lead to a delayed completion of its new plant (+4.5bn pieces p.a.)
in 1QCY18. We view these delays positively as they ensure slightly improved
supply-demand dynamics as well as lessen the pricing pressures.
3.1.9 Capacity coming onboard, but on a progressive basis
We would also like to highlight that any new incoming capacity is usually
ramped up progressively and is not expected to come onstream in at the same
time. Instead, a limited amount of new capacity can act as a buffer for glove
makers to refurbish and upgrade older lines, which guarantees no disruption in
the production volumes. Several of the glove manufacturers have also
expressed intentions to wind down some of their older lines in existing plants
given their lower operating efficiencies. These older lines will instead be
replaced or revamped to produce other specialised products at lower volumes
but higher margins.
13
3.2 LONG-TERM SECTOR OUTLOOK – GROWTH

PROSPECTS STILL INTACT
3.2.1 Global demand continues to expand at 8% p.a.
Even with the various economic uncertainties in 2015, Malaysian glove exports
rose more than 15.6%, backed by the robust demand and favourable external
environment. For 2016, we expect global glove demand to continue to grow by
7-8% yoy, in line with the Malaysian Rubber Glove Manufacturers Association's
(MARGMA) expectations.
We also foresee Malaysia’s glove exports continuing its above-average global
demand growth, as we believe that Malaysia will continue to gain market share
from other countries. Currently, Malaysia commands up to the 63% of the
global glove market. This is due to the country’s more aggressive capacity
expansion and better operating efficiencies compared with other glove-
producing countries.
Figure 20: Global examination glove demand (2001-2018F)

bn pieces/annum
245
250
227
210
200 194
180
171
160
150 148
150 140
122 124
110
102
100 92 94
84
68
50
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016F2017F2018F
SOURCES: CIMB
Figure 21: Malaysia rubber glove exports (value and quantity)

Mn
60,000
(Quantity) 52,405
15/14 : 15.6 % CAGR : 12.9 %
50,000
(Value) 45,344
15/14 : 10.7 % CAGR : 6.3 %
40,100
40,000
35,000
32,222
30,000
20,000
9,100 9,019 9,983

10,000 7,809 8,150
0
2011 2012 2013 2014 2015
Medical (RM m)-Value Medical (mn pieces) -Quantity
SOURCES: MREPC
3.2.2 Growth from developed markets may have reached

saturation point…
Developed markets such as the US and EU are considered to be the
bellwether of the glove industry. About 80% of the world’s glove consumption
was due to the high healthcare awareness and wide-scale glove penetration in
14
these markets. We foresee this trend continuing given the rising ageing
population and growing healthcare facilities of these nations. According to the
United Nation’s World Population Ageing Report 2015, more than 25% of the
population in Europe and Northern American are expected to be aged 60 years
and above by 2030. Furthermore, the study also highlights that projections
indicate that the proportion of population aged 60 years and above will
accelerate by 4% pts to 16.5% by 2030 (vs. 2.3% pts increase from 2010-2015).
This supports our view that developed markets will continue to provide inelastic
demand, as gloves are a high-volume replacement market. Nonetheless, we
believe that demand growth from these developed markets may have reached
its saturation point and only expect it to grow at low single-digits moving
forward.
Figure 22: Global glove consumption of EU28 and USA (%) Figure 23: Glove consumption according to region (2014)
Title:
Source:
USA, 30.6%
Please fill in the values aboveJapan,

to have them entered in your rep
5.3%
Rest of the World,

37.1% Latin America,
7.6%
Asia Ex Japan,
EU28 and USA, 10.4%
62.9%
EU, 32.3%
Rest of the World,
13.8%
SOURCES: MREPC SOURCES: INTERNATIONAL TRADE CENTRE AND COMPANY (ITCC)
3.2.3 …but emerging countries exhibit plenty of growth

potential given their low usage rates
Whilst we continue to believe that demand from developed markets such as the
US and EU will continue to support the overall glove market, we think that
glove demand from emerging countries has the potential to grow significantly
given the low penetration of glove usage in their healthcare industry. This is on
the back of better healthcare reforms, a progressive emphasis on hygiene
standards and rising affluence in these markets. Moreover, countries with high
population densities such as China and India currently hold very low glove
usage per capita, lagging behind developed countries.
Our analysis suggests that the annual per capita consumption of gloves was
only 5.3 in China and four in India in 2015, compared with 100 in the EU and
166 in the US. Note that the per capita consumption of gloves in China and
India was only 1.5 and 0.6 in 2013, respectively.
If we were to assume zero population growth and equal per capita glove
consumption as the US, we estimate that both China and India could
respectively contribute an additional 221.1bn and 212.4bn pieces of gloves a
year. Even though these assumptions were based on a blue-sky scenario basis
and glove demand will not significantly spike up to equal that of the US in the
near- to medium-term, we continue to believe that the long-term growth
prospects from these markets remain promising.
15
Figure 24: Glove usage per capita
Overall Asia 4.8
India 4.0
China 5.3
EU 100.0
USA 166.0
0.0 20.0 40.0 60.0 80.0 100.0 120.0 140.0 160.0 180.0
SOURCES: COMPANY REPORTS
3.2.4 Malaysia to continue its dominance in global glove

exports
In spite of earlier market fears of Malaysia losing its dominance to other glove
producing countries such as Thailand, Indonesia and China, we are of the view
that these fears are unfounded. Applying the US and EU as our base-case
markets, the latest industry data show that glove exports from Malaysia for
2015 grew substantially by 20.7% yoy while registering market share growth in
both the US and EU markets. On the other hand, all three rival countries
exporting to the US reported a decline in market share in 2015.
Meanwhile, 2015 exports to the top 10 export destinations have faltered slightly
yoy. This was attributable to two major factors:
1) the top 10 export destinations consist of countries which are mainly
replacement markets and will only see marginal growth yoy and;
2) increased demand for gloves in potential new emerging markets with
low glove usage per capita and low healthcare awareness.
In our view, these two points are in fact positive developments for the sector.
This shows that Malaysian glove makers are reducing their dependency on
certain major developed countries for demand on their products. Although
exports to these new potential emerging countries are still at a smaller
percentage vs. developed countries, we believe that glove manufacturers are
finally reaping the fruits of their efforts to penetrate new potential emerging
markets.
Figure 25: Malaysia's glove exports by product (2015)

Household, 1% Industrial, 5% Food grade, 0%
Others, 0%
Cleanroom, 2%
High Risk, 0%
Surgical, 3%
Medical Examination,
89%
SOURCES: MREPC
16
Figure 26: Malaysia's top 10 exports destination (by volume)
20.0
17.5
18.0
16.0
14.5
14.0
14.0
12.0
10.0
8.0
6.0
6.0
4.2 4.0
3.5 3.4 3.4 3.2
4.0 2.8 3.0 2.8
2.5 2.5
2.0 2.0
1.5 1.8 1.2 1.4 1.5 1.5 1.8
2.0 0.9 1.0 1.0
0.5 0.8 0.8
0.0
USA Germany Japan UK Brazil Italy France China Belgium Australia
2013 2014 2015
SOURCES: MREPC
Figure 27: USA - Top four suppliers (%) Figure 28: EU - Top four suppliers (%)
70.0% 70.0% Title:

Source:
60.0% 60.0%
50.0% 50.0% Please fill in the values above to have them entered in your rep
40.0% 40.0%
30.0% 30.0%
20.0% 20.0%
10.0% 10.0%
0.0% 0.0%
Malaysia Thailand China Indonesia Malaysia Thailand China Indonesia
56.3% 27.6% 8.7% 5.6% 60.8% 14.5% 7.3% 4.7%
55.0% 27.0% 10.7% 5.7% 60.2% 18.3% 5.7% 4.9%
62.3% 20.1% 9.3% 6.5% 64.6% 13.4% 4.8% 4.7%
SOURCES: MREPC SOURCES: MREPC
3.2.5 NBR gloves will continue to outshine NR gloves

Since the mass introduction of lightweight NBR gloves in 2009, exports of NBR
gloves have continued to grow in strength and numbers. As at 9M15, 58% of
total glove exports from Malaysia were that of NBR gloves. This was a 9%
increase from 2014’s ratio of 51% NR and 49% NBR. This was mostly because
most of the glove makers’ product mix inclined towards NBR gloves given the
better margins and production efficiency. Additionally, most developed
countries also favour NBR gloves over NR gloves, in view of latex allergy
issues.
Currently, most emerging countries still prefer NR gloves due to the cheaper
selling prices. While NBR gloves are still presently pricier than NR gloves, we
believe that the mounting efficiencies and technological advancements
surrounding NBR gloves could eventually narrow the pricing between the two
types.
17
Figure 29: Glove exports by type (NR & NBR) Figure 30: Glove exports by product mix (%)
70.0 90%
83%
Title:
80%
78% Source:
60.0
69%
70% 64% Please fill in the values above to have them entered in your rep
50.0 60% 58% 58%
60% 56% 54%
50%50% 51%
40.0 33.4 49%
50% 46%
25.0 42%
21.5
30.0 17.5 40%
14.8
30%
20.0
20% 17%
22.0 23.0 24.1 24.5
10.0 20.6
10%
0.0 0%
2011 2012 2013 2014 2015 2008 2009 2010 2011 2012 2013 2014 2015
NR NBR NR NBR
SOURCES: MREPC SOURCES: MREPC
3.2.6 Ongoing expansion plans centred on NBR gloves

Given the better profitability of NBR gloves, glove manufacturers have outfitted
most of their expansion plans in this segment.
Based on our calculations, up to 97% of future expansion plans (which is an
average increase of 10.0bn pieces p.a. from CY16-18F) are focused on NBR
gloves. Most of the glove makers’ expansions are also built as interchangeable
production lines in the event of a sudden shift in consumer preference.
Notably, we think that the superior margins of NBR gloves should eventually
diminish over the longer term as capacity for this segment grows. This could be
detrimental for players such as Hartalega whose product mix centred on NBR
(90% of total production capacity). Nevertheless, we believe that margins for
NBR gloves will continue to remain above NR gloves.
Among the glove companies under our coverage, Hartalega and Kossan have
consistently increased their production capacity over the years. As for Top
Glove, the company is committed to increasing its production capacity until it
reaches its optimal target mix of 50% NR and 50% NBR. As a laggard in the
glove universe, Supermax has only started to ramp up production in its Plants 9
and 10 (+5.4bn pieces p.a.) in 2H15 after prolonged issues regarding its utility
supply were resolved.
18
4. MARKET DEVELOPMENTS
4.1 Sales of non-medical gloves picking up
Though from a lower base, sales of non-medical gloves increased significantly
in 2015. Based on the latest 9M15 industry data, sales in this segment
flourished, increasing by 32.1% yoy and growing at a 4-year CAGR of 11.9%.
This demonstrates that demand for non-medical gloves – including industrial
gloves, food-grade gloves and cleanroom gloves – has begun to gain more
traction. We expect more product offerings in this segment moving forward as
the R&D in developing new products picks up.
Figure 31: Sales of non-medical gloves
12,000
(Quantity)
15/14 : 47.7 % CAGR : 14.9 %
10,000
(Value)
15/14 : 17.5 % CAGR : 3.4 %
8,000
6,000
4,000
2,000
0
2011 2012 2013 2014 2015
Non-Medical (RMm)-Value Non- Medical (m pieces)-Quantity
SOURCES: MREPC
4.2 Glove companies to offer more non-medical glove

products
Bearing in mind the escalating competition in the medical gloves segment,
glove makers have started looking into adding other product offerings. We
understand that glove makers under our coverage have been placing more
emphasis in marketing non-medical glove products given the lower competition
and higher margins in this segment.
Hence, glove companies aim to increase the revenue contributions from other
product segments. They have divulged intentions to grow other product
segments such as cleanroom gloves, industrial gloves and food-grade gloves.
We believe that Kossan has an advantage in this aspect as it is currently the
industry leader in industrial gloves and also has a sizeable contribution from
the clean-room gloves segment. We understand that industrial gloves have far
greater margins than medical gloves but are only exported in small volumes.
Additionally, Hartalega's management has stated that the company is also
looking to grow its surgical gloves segment (FY16: ~1% of total revenue).
4.3 Latest US FDA ban on powdered latex gloves may drive
demand for nitrile gloves
The US Food and Drug Administration (FDA) recently announced a proposed
ban on powdered medical gloves due to harmful side effects such as medical
issues and allergic reactions. We were not surprised by this development as
the FDA had issued warnings about the harmful effects of using powdered
latex gloves since 1997. As more than 90% of glove exports to US are either
powder-free latex gloves or nitrile gloves, we believe that impact of this ban will
be minimal. However, if other countries were to follow suit and implement a
similar ban, this could prompt more customers to switch to nitrile gloves, given
the relatively inelastic demand for gloves. This could spell good news for glove
manufacturers, as it could fuel demand for NBR gloves while easing oversupply
fears.
19
4.4 Turning into a product differentiation game

Though the glove players have until now participated in a capacity-expansion
driven game to achieve higher production volumes and earnings growth, we
think that this strategy may no longer be optimal. Instead, we believe that glove
companies have also begin to see value emerging from product innovation and
differentiation via product enhancements or improved product features. We
opine that these efforts are positive in the bid to differentiate the products and
should, in turn, drive sales volumes.
We note that several glove makers have already made strides in this area. For
example, Kossan is focusing its capacity expansion on producing its latest
nitrile accelerator-free gloves while Hartalega is also focusing on developing
coating variations to add value to its products.
Although we do not expect these products to revolutionise the glove industry in
the near term, we believe that these added features will spur stronger demand
for the typical mainstream medical gloves as well as help them command a
slight premium in pricing. Hence, we believe that it is essential for glove
companies to focus their efforts towards this direction as opposed to solely
depending on expansion and operating efficiencies to drive earnings growth.
4.5 Expansion still essential but must be driven by market
segment
Hence, we believe that capacity expansion plans for all glove manufacturers
should be market segment driven. Rather than undertaking capacity expansion
solely to increase capacity, it is essential that glove makers focus their
expansion in the right market direction to ease competition in the mainstream
medical glove segment. Although volumes for more specialized products are
low, we understand that margins for these types of gloves can reach 20-30%
higher, as competition is scarce.
20
5. MACRO OUTLOOK
5.1 Expect stable raw material prices in 2016
After hitting their lows in 2015, latex and nitrile prices have rebounded to a
peak RM5.12/kg and US$0.99/kg, respectively, in the earlier part of 2016 due
to the seasonal wintering period and also due to a slight rebound in demand for
latex from the automotive sector in China (the largest consumer of latex).
However, recent prices for latex and nitrile have soften to RM4.25/kg and
US$0.95/kg, respectively. We expect latex and nitrile raw material prices to
remain soft and stabilise at the ranges of RM3.75-4.25/kg and US$1.00-1.10/kg,
respectively.
Figure 32: Raw material prices (nitrile (RHS) and latex (LHS))
RM/kg US$/kg
11.50 2.5
10.50
9.50 2
8.50
1.5
7.50
6.50
1
5.50
4.50 0.5
3.50
2.50 0
May-11
May-16
May-12
May-13
May-14
May-15
Feb-13
Feb-14
Feb-15
Feb-16
Feb-11
Feb-12
Aug-11
Aug-15
Aug-12
Aug-13
Aug-14
Nov-10
Nov-11
Nov-12
Nov-13
Nov-14
Nov-15
Latex (RM/kg) Nitrile price (US$/kg)
SOURCES: BLOOMBERG, COMPANY REPORTS
5.2 Latex prices should be range-bound

From Mar 2016, the world’s three main rubber producers – Thailand, Indonesia
and Malaysia – committed to cut latex exports by 0.62m tonnes for six months.
However, we remain wary on the impact of the cutback on rubber prices given
that similar efforts were enforced previously and rubber prices still remained
relatively muted.
Furthermore, the minimal export cut is unlikely to curtail the supply glut owing
to the weaker overall demand on the back of economic uncertainties and lower
imports from China. Notably, the extensive number of rubber trees in Thailand
and Vietnam that were planted during the spike in latex prices back in 2008 to
2012 are expected to surge into the market by 2016 to 2019, as rubber trees
typically takes seven years to mature. These combined factors will continue to
weigh on latex prices, in our view, and thus, moving forward, we expect rubber
prices to hover around RM3.75-4.25/kg, still favourable for the glove
manufacturers.
21
Figure 33: Natural Rubber (NR) Production vs Consumption

MT
4.0
3.4 3.5
3.5 3.3
3.1 3.1 3.1 3.2 3.1
3.0 2.9 3.0
3.0 2.9 2.9 2.9
2.6 2.6
2.5
2.0
1.5
1.0
0.6
0.5 0.4
0.2
0.1 0.0
0.0
1Q14 2Q14 3Q14 4Q14 1Q15(0.1) 2Q15 3Q15 4Q15
-0.5
(0.5) (0.5)
-1.0
Natural Rubber (NR) Production Natural Rubber (NR) Consumption Net (Surplus/Deficit)
SOURCES: IRSG
5.3 Nitrile price actually heavily correlated with latex price

Even though market theories point to the fact that nitrile butadiene prices are
strongly correlated with crude oil prices, our research has indicated otherwise.
Based on Bloomberg data, the 10-year correlation coefficient between latex
and butadiene prices is even higher at 0.83x than that of crude oil prices and
butadiene prices at 0.67x. We believe that is because both materials are direct
substitutes for one another for making tyres (which uses about 70% of the
world’s natural rubber). We understand that tyre manufacturers are able to
adjust the percentage of both synthetic and natural rubber in a tyre based on
preferences. Hence, tyre manufacturers can increase or decrease the
percentage of the material in a tyre depending on whichever raw material price
is cheaper as long as it is within the product requirement percentile range.
5.4 Nitrile prices to stay subdued
Hence, we also expect nitrile butadiene prices to remain subdued in tandem
with latex prices. Meanwhile, the global supply of nitrile butadiene (which is a
byproduct of crude oil) will most likely increase in the near term, as
petrochemical plants were ramped up from 2010 to 2014 and this has led to
higher production levels and oversupply. These inventory build-ups are
untimely given that demand for both NR and NBR remain weak, as projected
by global vehicle sales.
Figure 34: World butadiene supply and demand

mMT
11.5
10.9 10.95
11 10.8
10.55
10.4 10.45
10.5
10.2 10.2 10.2
10
10
9.6 9.55
9.5
8.5
2010 2011 2012 2013 2014 2015
Production Demand
SOURCES: CIMB, HIS
22
5.5 Is the stronger US$ really beneficial?

Given that the glove sector is an export-orientated industry where more than
95% of sales receipts are conducted in dollar terms, we note that a stronger
US$/RM is favourable. As previously mentioned, glove companies’ earnings
grew while margins expanded during the sharp spike in currency last year.
However, we highlight that the benefits from a favourable currency are only
material in the event of a sharp appreciation of the US$, leading to arbitrage
opportunities.
This is consistent with the margin expansion observed in 2HCY15 from a spike
in US$. Hence, we conclude that a steady currency of RM4.00-4.20 will most
likely not push earnings to previous highs unless the appreciation is sharp in a
short period of time. Even in the event a similar situation occurs, we believe
that the potential for share price upside is capped due to priced-in expectations
and limited forex upside. Nonetheless, we note that the operating environment
remains conducive for glove makers when the US$/RM is above the RM4.00
levels. Based on our sensitivity analysis, for every 10 cent depreciation against
the US$, our FY16-FY18F earnings forecasts could appreciate by 3-6%.
Figure 35: US$/RM exchange rate

RM/US$
4.5
4.3
4.1
3.9
3.7
3.5
3.3
3.1
2.9
2.7
2.5
SOURCES: BLOOMBERG
5.6 Any tailwind emerging from the resurgence of US$

expected to be muffled
We highlight that the recently renewed optimism over a rate hike by the US Fed
Reserve in 2H16 would lead to a strengthening of the greenback. Additionally,
another interest rate cut in Malaysia (on top of the recent 25bp cut in Jul 2016),
could also further exert pressure on the RM, which could lead to a potential
weakening against the US$. If this leads to a sharp appreciation of the US$ vs.
RM, it would spell good news for glove makers under our coverage, as it would
translate into currency gain. Nonetheless, we anticipate that any impact on
earnings (in terms of currency) to be muted this time round given the limited
upside to the US$ as well as the already priced-in expectations of currency
gain on earnings.
23
6. RISKS
6.1 Sharp appreciation of US$/RM
Minor currency fluctuations will have minimal impact on the profitability of the
companies, in our view, as glove companies adjust ASPs with their customer
on a constant basis while short-term volatility are stifled through hedging of
majority of forex exposures. However, in the event that the US$ appreciates
sharply in a short period of time, this would be positive for companies’ earnings.
On the other hand, if the RM appreciates against the US$ more significantly
against the currency of other glove-producing countries such as Thailand and
Indonesia, this could lead to lower demand for gloves from Malaysian-based
rubber glove manufacturers.
Figure 36: Performance of regional currencies vs. US$
1.3
1.25
1.2
1.15
1.1
1.05
0.95
0.9
USDMYR Curncy USDIDR Curncy USDTHB Curncy
SOURCES: BLOOMBERG
6.2 Sudden spike in raw material and operating costs

As latex and nitrile costs form the majority of production costs, any spike in
latex and nitrile prices will pressure earnings. While glove makers are usually
able to pass on additional raw material cost, there is usually a lag of one or two
months before ASPs are adjusted. Therefore, margins during this period would
be negatively affected. This would lead to potentially stronger margin erosion
given that there is already an intensified pricing competition. However, we do
not anticipate latex and nitrile prices to be volatile but instead to remain at
these still conducive levels over the medium term.
6.3 Demand shifts from nitrile back to latex gloves
In the event that there is a technological breakthrough in the NR glove segment,
we do not discount that there would be a major switch in demand to NR gloves
from NBR gloves. Currently, manufacturing NBR gloves are more profitable on
average due to the lower raw material content vs. NR gloves. However, if ASPs
of NR gloves can be lowered significantly, at above 20% discount to NBR
glove’s ASPs this might see a surge in demand in NR gloves at the expense of
NBR gloves. However, we doubt that this is likely in the near term.
6.4 Stiffer-than-expected price competition

In the event that rubber glove players do not manage their expansion plans in a
better manner, there will be a risk of capacity expansion running well ahead of
global glove demand growth. As highlighted earlier, this could lead to an
oversupply in the market and trigger a price war. However, we are convinced
that the glove makers’ current efforts to manage their expansion progressively
should prevent such a situation from occurring.
24
Rubber Gloves│Malaysia│Equity research│July 19, 2016
Company Note
▎Malaysia
Hartalega Holdings
REDUCE (downgrade) Margins at great risk
Consensus ratings*: Buy 3 Hold 11 Sell 5
■ We project a somber 1QFY17 performance as earnings growth was most likely
Current price: RM4.30 hindered by higher gestation costs from NGC and pricing pressure.
Target price: RM4.00 ■ With most of the sector’s capacity expansion in the NBR segment, Hartalega’s
Previous target: RM4.00 margins are at risk given the group’s higher exposure (90% NBR: 10% NR).
Up/downside: -7.0%
■ Hence, the group will be focusing on driving sales volume to offset margin declines.
CIMB / Consensus: -5.9%
■ The group will also be slowing down its expansion plans in view of competition.
Reuters: HTHB.KL
Bloomberg: HART MK
■ Downgrade to Reduce, with an unchanged target price of RM4.00.
Market cap: US$1,774m
RM7,057m
1QFY17 preview – Not out of the woods
The group will be releasing its 1QFY17 results in early-Aug 2016. Although we believe
Average daily turnover: US$1.59m
results recovered qoq, we estimate that earnings were bogged down by higher operating
RM6.37m expenses and gestation costs from both Phase 1 and 2 of its next-generation complex
Current shares o/s: 1,640m (NGC). Furthermore, increased pricing competition in the nitrile butadiene (NBR)
Free float: 30.2% segment could hamper margins. Hence, we believe the stock’s financial performance
* Source: Bloomberg
was muted in 1QFY17 but expect it to pick up in later quarters.
Key changes in this note Margins to be impacted by sector capacity influx in NBR segment
Downgrade to Reduce. Given that the bulk of the sector’s capacity expansion is in the NBR segment, we believe
that Hartalega’s margins face the greatest risk given that the group’s product mix is
Price Close Relative to FBMKLCI (RHS) highly skewed towards this segment. As a result, we believe that the downtrend in
6.60 150.0
margins will persist due to intensifying pricing competition and we expect net margins to
5.60 130.0 hover around 15.0-15.7%. Nonetheless, any further decline from our expectations is
4.60 110.0
unlikely owing to improving cost efficiencies from the NGC.
3.60
60
90.0 Focusing on a higher-volume, lower-margin game plan
40 However, we note that management had earlier anticipated the decline in margins and is
looking to increase its sales volume to offset it. With more capacity coming onboard from
Vol m
20
both Phase 1 and 2, the group’s enlarged sales volume is expected to drive earnings
Jul-15 Oct-15 Jan-16 Apr-16
growth. To achieve this target, the group is aiming to grow its presence in Southern
Source: Bloomberg
European countries (currently less than 1% of revenue) while doubling its sales
Price performance 1M 3M 12M workforce to 40 people to cover a wider market.
Absolute (%) 4.4 -8.5 0 Stepping on the brakes
Relative (%) 1.5 -5.8 3.2
In view of a more competitive environment, the group is delaying the installation of new
Major shareholders % held lines in Plants 3 and 4. The group initially intended to install two lines every month but
Kuan family 55.1 slowed this down to two lines every 1.5 months, with installations due to begin in Aug
EPF 7.9 2016. Hence, we only project full-year contributions from Plants 3 and 4 by end-FY18.
BNP Paribas 6.8 We are positive on the delay as it reduces pressure on the group to sell incoming
capacity and allows it to wait for a better supply-demand equilibrium.
Downgrade to Reduce with unchanged target price of RM4.00
We make no changes to our estimates. In view of recent share price appreciation, we
downgrade the stock to a Reduce while keeping its target price unchanged at RM4.00,
still based on 21x CY17 P/E (in line with its 5-year historical mean). Although the group’s
fundamentals remain solid, we believe that its earnings growth is likely to be dragged
down by higher expenses from its NGC as well as lower margins. Upside risks: weaker-
than-expected pricing competition and sharp decline in raw material prices.
[X]
Financial Summary Mar-15A Mar-16A Mar-17F Mar-18F Mar-19F

Revenue (RMm) 1,146 1,498 1,824 2,153 2,530
Operating EBITDA (RMm) 324.8 387.1 437.1 502.5 578.2
Net Profit (RMm) 209.7 257.6 284.3 323.3 367.4
Core EPS (RM) 0.13 0.16 0.17 0.20 0.22
Analyst(s)
Core EPS Growth (8.2%) 21.1% 10.4% 13.7% 13.7%
FD Core P/E (x) 33.17 27.38 24.81 21.81 19.19
DPS (RM) 0.06 0.08 0.09 0.10 0.11
Dividend Yield 1.42% 1.86% 2.02% 2.29% 2.61%
EV/EBITDA (x) 21.52 18.65 16.85 14.93 13.15
P/FCFE (x) NA 323.9 46.3 40.7 30.4
Net Gearing (5.0%) 10.9% 18.8% 24.7% 27.6%
P/BV (x) 5.56 4.69 4.29 3.91 3.54
ROE 19.2% 18.6% 18.1% 18.7% 19.4%
Walter AW
% Change In Core EPS Estimates 0% 0% 0%
T (60) 3 2261 9093 CIMB/consensus EPS (x) 0.96 0.98
SOURCE: COMPANY DATA, CIMB FORECASTS
Platform
BY THE NUMBERS
P/BV vs ROE 12-mth Fwd FD Core P/E vs FD Core EPS

7.70 36.0% 38.0 Growth 25.0%
7.20 33.1%
33.0 16.0%
6.70 30.3%
6.20 27.4% 28.0 7.0%
5.70 24.6% 23.0 -2.0%
5.20 21.7%
18.0 -11.0%
4.70 18.9%
4.20 16.0% 13.0 -20.0%
Jan-13A Jan-14A Jan-15A Jan-16A Jan-17F Jan-18F Jan-13A Jan-14A Jan-15A Jan-16A Jan-17F Jan-18F
Rolling P/BV (x) (lhs) ROE (rhs) 12-mth Fwd Rolling FD Core P/E (x) (lhs)
FD Core EPS Growth (rhs)
Profit & Loss

(RMm) Mar-15A Mar-16A Mar-17F Mar-18F Mar-19F
Total Net Revenues 1,146 1,498 1,824 2,153 2,530
Gross Profit 390 508 580 666 763
Operating EBITDA 325 387 437 503 578
Depreciation And Amortisation (45) (71) (89) (107) (129)
Operating EBIT 280 316 348 396 449
Financial Income/(Expense) 1 1 (1) (2) (3)
Pretax Income/(Loss) from Assoc. 0 0 0 0 0
Non-Operating Income/(Expense) 0 0 0 0 0
Profit Before Tax (pre-EI) 281 317 347 394 446
Exceptional Items (4) 0 0 0 0
Pre-tax Profit 277 317 347 394 446
Taxation (67) (59) (63) (70) (78)
Exceptional Income - post-tax 0 0 0 0 0
Profit After Tax 210 258 285 324 368
Minority Interests (0) (0) (1) (1) (1)
Preferred Dividends 0 0 0 0 0
FX Gain/(Loss) - post tax
Other Adjustments - post-tax 0 0 0 0 0
Net Profit 210 258 284 323 367
Recurring Net Profit 213 258 284 323 367
Fully Diluted Recurring Net Profit 213 258 284 323 367
Cash Flow
EBITDA 324.8 387.1 437.1 502.5 578.2
Cash Flow from Invt. & Assoc.
Change In Working Capital (47.3) (79.4) (21.2) (57.2) (65.5)
(Incr)/Decr in Total Provisions
Other Non-Cash (Income)/Expense
Other Operating Cashflow (2.6) (1.1) 0.0 0.0 0.0
Net Interest (Paid)/Received 1.3 1.2 (1.1) (2.0) (2.9)
Tax Paid (69.6) (64.4) (62.5) (69.9) (78.0)
Cashflow From Operations 206.5 243.4 352.2 373.5 431.8
Capex (38.6) (43.2) (350.0) (350.0) (350.0)
Disposals Of FAs/subsidiaries 0.0 0.0 0.0 0.0 0.0
Acq. Of Subsidiaries/investments (384.1) (378.9) 0.0 0.0 0.0
Other Investing Cashflow 4.9 (4.9) 0.0 0.0 0.0
Cash Flow From Investing (417.8) (427.0) (350.0) (350.0) (350.0)
Debt Raised/(repaid) 1.6 205.3 150.0 150.0 150.0
Proceeds From Issue Of Shares 31.0 0.6 0.0 0.0 0.0
Shares Repurchased 0.0 0.0 0.0 0.0 0.0
Dividends Paid (105.0) (122.9) (142.1) (161.6) (183.7)
Preferred Dividends
Other Financing Cashflow 189.0 114.8 0.0 0.0 0.0
Cash Flow From Financing 116.6 197.7 7.9 (11.6) (33.7)
Total Cash Generated (94.6) 14.2 10.1 11.8 48.1
Free Cashflow To Equity (209.6) 21.8 152.2 173.5 231.8
Free Cashflow To Firm (211.2) (183.5) 4.6 26.8 86.0
SOURCE: CIMB RESEARCH, COMPANY DATA

26
BY THE NUMBERS
Balance Sheet
Total Cash And Equivalents 71 84 89 101 149
Total Debtors 198 239 291 343 403
Inventories 120 202 209 250 297
Total Other Current Assets 0 14 14 14 14
Total Current Assets 388 539 603 708 863
Fixed Assets 822 1,134 1,400 1,644 1,864
Total Investments 0 0 0 0 0
Intangible Assets 0 0 0 0 0
Total Other Non-Current Assets 247 288 288 288 288
Total Non-current Assets 1,069 1,422 1,688 1,932 2,152
Short-term Debt 6 41 41 41 41
Current Portion of Long-Term Debt
Total Creditors 108 147 185 221 262
Other Current Liabilities 13 1 1 1 1
Total Current Liabilities 127 189 226 262 304
Total Long-term Debt 0 207 357 507 657
Hybrid Debt - Debt Component
Total Other Non-Current Liabilities 0 0 0 0 0
Total Non-current Liabilities 0 207 357 507 657
Total Provisions 59 61 61 61 61
Total Liabilities 187 457 644 830 1,022
Shareholders' Equity 1,269 1,502 1,644 1,806 1,990
Minority Interests 2 2 3 3 4
Total Equity 1,271 1,504 1,647 1,809 1,993
Key Ratios
Mar-15A Mar-16A Mar-17F Mar-18F Mar-19F
Revenue Growth 3.5% 30.7% 21.7% 18.0% 17.5%
Operating EBITDA Growth (7.5%) 19.2% 12.9% 15.0% 15.1%
Operating EBITDA Margin 28.3% 25.8% 24.0% 23.3% 22.9%
Net Cash Per Share (RM) 0.04 (0.10) (0.19) (0.27) (0.33)
BVPS (RM) 0.77 0.92 1.00 1.10 1.21
Gross Interest Cover 2,575 842 146 120 107
Effective Tax Rate 24.1% 18.7% 18.0% 17.8% 17.5%
Net Dividend Payout Ratio 47.0% 50.9% 50.0% 50.0% 50.0%
Accounts Receivables Days 55.26 53.29 52.96 53.71 53.83
Inventory Days 52.75 59.53 60.32 56.32 56.48
Accounts Payables Days 48.96 47.16 48.67 49.76 49.89
ROIC (%) 25.1% 18.7% 15.1% 14.7% 14.5%
ROCE (%) 24.0% 20.2% 17.8% 17.6% 17.4%
Return On Average Assets 16.6% 15.1% 13.4% 13.2% 13.1%
Key Drivers
Mar-15A Mar-16A Mar-17F Mar-18F Mar-19F
ASP (% chg, main prod./serv.) -19.5% -2.9% -0.5% -0.5% 1.6%
Unit sales grth (%, main prod./serv.) 9.6% 18.1% 28.5% 19.4% 17.9%
Util. rate (%, main prod./serv.) 87.0% 81.0% 81.5% 81.0% 85.0%
ASP (% chg, 2ndary prod./serv.) N/A N/A N/A N/A N/A
Unit sales grth (%,2ndary prod/serv) N/A N/A N/A N/A N/A
Util. rate (%, 2ndary prod/serv) N/A N/A N/A N/A N/A
Unit raw mat ASP (%chg,main) N/A N/A N/A N/A N/A
Unit raw mat ASP (%chg,2ndary) N/A N/A N/A N/A N/A
27
Company Note
▎Malaysia
Kossan Rubber Industries
ADD (no change) The best of the lot
■ Despite having no new capacity in FY16, we expect yoy earnings growth of 12% to
Current price: RM6.51 be underpinned by 12-month contribution from its two plants that started up in 2015.
Target price: RM7.60 ■ The group also recently announced the patent of its nitrile accelerator-free glove.
Previous target: RM7.90 The current limited availability could lead to a slight premium in ASPs.
Up/downside: 16.7%
■ The group’s upcoming new capacity expansion will cater to this new product.
■ We trim our earnings by 1.9-2.5% for FY16-18F. Our target price falls to RM7.60.
Reuters: KRIB.KL
Bloomberg: KRI MK
■ Kossan remains the top pick of the sector.
Market cap: US$1,046m Projecting FY16 earnings growth of 12.1% yoy
RM4,163m Kossan will not be adding any new capacity in 2016 but will be focusing on automating
Average daily turnover: US$1.40m more of its current lines to optimise efficiency. Instead, the earnings growth we project
RM5.65m for 2016 will be underpinned by full-year contribution from the two new plants (+4bn
Current shares o/s: 639.5m pieces/annum) that started production in June 2015. The fact that no new capacity will
Free float: 35.8% be added in 2016 should alleviate pricing pressure given the competitive landscape.
* Source: Bloomberg
Patented nitrile accelerator-free gloves is a step forward
Key changes in this note The group recently announced the patent of its latest product, nitrile accelerator-free
FY16-18F EPS lowered by 1.9-2.5%. gloves. This glove is designed to reduce the effects the chemical has on users with skin
sensitivities. We are positive on this development as the limited availability of this
Price Close Relative to FBMKLCI (RHS)
product and its additional features compared to regular nitrile gloves could lead to the
group commanding a slight premium in its ASPs. We understand that other glove
9.60 144.2
8.60 128.7
makers have a similar product but Kossan is the first to have patented it.
7.60 113.1
Upcoming expansion plans to cater to its new product
6.60 97.6
5.60 82.0
Hence, the group’s incoming new capacity of 3bn pieces in 3Q17 and 4.5bn pieces in
20
15
2Q18 will be used to manufacture this new product. We understand that some of its
10 older lines are less capable of producing this new glove efficiently due to limitations in
Vol m
5
the line designs. Hence, this will inevitably provide underlying demand for its new
Jul-15 Oct-15 Jan-16 Apr-16 capacity, alleviating worries of overcapacity due to its aggressive expansion plans. The
Source: Bloomberg group is looking to grow its production capacity to 43bn pieces/year by 2022.
Price performance 1M 3M 12M Increasing its dividend offerings
Absolute (%) 1.1 2.8 -3 The group also stated its intention to potentially increase its dividend payout ratio to 40%
Relative (%) -1.8 5.5 0.2 for FY16, 45% for FY17 and 50% for FY18, i.e. dividend yields of 2.2-3.7%. We are
positive on this as it offers investors an opportunity to invest in a rubber glove company
Major shareholders % held with growth potential and decent dividends. Despite the capex-intensive nature of its
Kossan Holdings Sdn Bhd 51.8
expansion plans, we believe that there is no cause for concern regarding maintaining
Kumpulan Wang Persaraan 7.6
this payout ratio given its healthy balance sheet and positive operating cash flows.
Asian Small Companies 4.9
Maintain Add with a lower target price of RM7.60
Nevertheless, we trim our earnings forecasts by 1.9-2.5% to take into account delays in
its expansion plans and lower ASPs from pricing competition. This leads to a lower
target price of RM7.60, still based on 19x CY17 P/E. Kossan remains our top pick for its
undemanding valuations and diversified earnings base. At current valuations, Kossan is
trading more cheaply vs. Hartalega and Top Glove. Downside risks to our view: delays
in its expansion plans and stronger-than-expected pricing competition.
[X]
Financial Summary Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F

Revenue (RMm) 1,302 1,636 1,913 2,077 2,449
Net Profit (RMm) 145.6 203.3 227.7 255.3 305.8
Analyst(s) Core EPS (RM) 0.23 0.32 0.36 0.40 0.48
Core EPS Growth 6.7% 39.6% 12.0% 12.1% 19.8%
FD Core P/E (x) 28.59 20.48 18.29 16.31 13.61
DPS (RM) 0.08 0.12 0.14 0.18 0.24
Dividend Yield 1.23% 1.84% 2.19% 2.76% 3.67%
EV/EBITDA (x) 17.52 12.29 11.29 10.01 8.57
P/FCFE (x) NA 39.3 120.1 26.8 26.0
Net Gearing 14.9% 3.0% 7.6% 3.6% 2.7%
P/BV (x) 5.16 4.24 3.72 3.31 2.95
Walter AW ROE 19.3% 22.7% 21.7% 21.5% 22.9%
% Change In Core EPS Estimates (1.93%) (2.48%) (2.03%)
T (60) 3 2261 9093
CIMB/consensus EPS (x) 1.00 0.99 0.99
28
Company Note
BY THE NUMBERS

7.20 24.00% 30.5 Growth 50.0%
6.20 22.83% 25.5 34.0%
5.20 21.67%
20.5 18.0%
4.20 20.50%
15.5 2.0%
3.20 19.33%
2.20 18.17% 10.5 -14.0%
1.20 17.00% 5.5 -30.0%

Profit & Loss

(RMm) Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F
Gross Profit 616 676 766 864 1,026
Operating EBIT 190 276 304 339 404
Financial Income/(Expense) (3) (8) (7) (7) (7)
Exceptional Items 0 0 0 0 0
Pre-tax Profit 187 269 297 332 397
Taxation (38) (61) (65) (73) (87)
Exceptional Income - post-tax 0 0 0 0 0
Profit After Tax 149 207 232 259 310
Preferred Dividends 0 0 0 0 0
Other Adjustments - post-tax 0 0 0 0 0
Net Profit 146 203 228 255 306
Cash Flow
EBITDA 245.8 343.2 379.1 423.8 494.9
Change In Working Capital (45.3) (61.7) (122.1) (38.6) (90.3)
Net Interest (Paid)/Received (5.7) (7.9) (7.1) (7.1) (7.1)
Tax Paid (37.4) (36.8) (65.3) (73.1) (87.3)
Capex (141.3) (119.0) (150.0) (150.0) (150.0)
Acq. Of Subsidiaries/investments 0.0 0.0 0.0 0.0 0.0
Other Investing Cashflow (8.1) 8.1 0.0 0.0 0.0
Debt Raised/(repaid) (4.2) 19.7 0.0 0.0 0.0
Shares Repurchased 0.0 0.0 0.0 0.0 0.0
Dividends Paid (44.7) (28.8) (91.1) (114.9) (152.9)
Preferred Dividends
Other Financing Cashflow 0.0 0.0 0.0 0.0 0.0
Cash Flow From Financing (48.9) (9.1) (91.1) (114.9) (152.9)
Total Cash Generated (82.3) 77.1 (56.4) 40.2 7.3
Free Cashflow To Equity (37.6) 105.9 34.7 155.1 160.2
Free Cashflow To Firm (25.2) 96.2 43.8 164.2 169.4

29
Company Note
BY THE NUMBERS
Balance Sheet
Total Cash And Equivalents 63.9 166.5 110.1 150.2 157.5
Total Debtors 259.9 288.1 421.0 457.0 538.9
Inventories 193.5 205.6 218.1 230.5 270.4
Total Other Current Assets 42.7 25.1 25.1 25.1 25.1
Total Current Assets 560.0 685.2 774.2 862.8 991.9
Fixed Assets 724.6 776.7 851.4 916.9 976.1
Total Investments 0.1 0.1 0.1 0.1 0.1
Intangible Assets 4.9 4.9 4.9 4.9 4.9
Total Other Non-Current Assets 0.0 0.0 0.0 0.0 0.0
Total Non-current Assets 729.7 781.7 856.5 922.0 981.2
Short-term Debt 123.6 100.9 100.9 100.9 100.9
Total Creditors 170.3 148.8 172.2 182.0 213.5
Other Current Liabilities 41.8 39.6 39.6 39.6 39.6
Total Current Liabilities 335.8 289.3 312.7 322.5 354.0
Total Long-term Debt 38.6 82.6 82.6 82.6 82.6
Total Other Non-Current Liabilities 24.8 13.5 13.5 13.5 13.5
Total Non-current Liabilities 63.4 96.1 96.1 96.1 96.1
Total Provisions 62.5 74.3 74.3 74.3 74.3
Total Liabilities 461.7 459.7 483.0 492.8 524.3
Shareholders' Equity 807.0 982.4 1,119.0 1,259.4 1,412.3
Minority Interests 21.0 24.8 28.7 32.5 36.4
Total Equity 828.0 1,007.2 1,147.7 1,291.9 1,448.7
Key Ratios
Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F
Revenue Growth (0.4%) 25.7% 17.0% 8.6% 17.9%
Operating EBITDA Growth 4.4% 39.6% 10.5% 11.8% 16.8%
Higher payout ratio of 50% in FY18.
Net Cash Per Share (RM) (0.19) (0.05) (0.14) (0.07) (0.06)
BVPS (RM) 1.26 1.54 1.75 1.97 2.21
Gross Interest Cover 32.56 27.45 33.11 36.97 44.03
Inventory Days 91.05 75.89 67.55 67.49 64.23
ROIC (%) 16.9% 20.5% 20.5% 19.4% 21.5%
ROCE (%) 19.0% 23.7% 22.7% 22.9% 24.7%
Key Drivers
Dec-14A Dec-15A Dec-16F Dec-17F Dec-18F
ASP (% chg, main prod./serv.) -36.1% -19.1% -5.3% 4.8% 2.7%
30
Company Note
▎Malaysia
Supermax Corp
ADD (no change) Proving the skeptics wrong
■ We estimate 4QFY16 was a flattish quarter owing to ongoing revamp works on older
Current price: RM2.04 lines and a less favourable operating environment.
Target price: RM2.70 ■ As Plant 10 and 11 are expected to be fully commissioned by 1QFY17, we believe
Previous target: RM2.90 the group will post robust earnings growth of 14.4% yoy in FY17.
Up/downside: 32.4%
■ Neutral on contact lenses business; project minimal contribution in the near term.
■ Re-rating catalysts include consistent earnings delivery and better earnings visibility.
Reuters: SUPM.KL
Bloomberg: SUCB MK
■ Our target P/E multiple is lowered to 12x, cutting our target price to RM2.70.
Market cap: US$344.2m
RM1,369m
Flattish earnings estimated for 4QFY16
In 4QFY16, we expect Supermax to report relatively flattish earnings qoq in spite of the
additional contribution from both Plants 10 and 11. This was likely mainly due to the loss
RM5.29m of production volume from ongoing revamp works in its Kapar plants and also the
Current shares o/s: 679.2m diminishing tailwinds in terms of strong US$/RM and low latex prices. However, we
Free float: 56.0% expect results to improve from 1QFY17 onwards as all its lines from its Kapar plant
* Source: Bloomberg
resume production and contribution from the full ramp-up of its new plants kicks in.
Key changes in this note Expect full commissioning of Plants 10 and 11 by 1QFY17
Target P/E multiple lowered to 12x from The group expects to begin full commercial production at both Plants 10 and 11 by
13x. 1QFY17. Both of the long-overdue plants (since end-2013) will increase the group’s
production capacity by 3.4bn pieces to a total of 23.2bn pieces/annum. All the 20 newly-
Price Close Relative to FBMKLCI (RHS) installed lines will cater to the production of nitrile gloves (NBR), bringing the group’s
3.30 164 overall product mix to 55 NBR: 45 NR.
2.80 139
Moving on to Glove City next
2.30 114 After the completion of both Plants 10 and 11, the group will shift its focus to its other
1.80
30
89 project, named Glove City, in Bukit Kapar. The group originally intended to begin
20 construction of its first factory in 3QCY16 but we think that the delay was due to ongoing
works on Plants 10 and 11. Note that Glove City will host four new plants and the
Vol m
10

remaining factories 2, 3 and 4 will only be constructed if the demand outlook improves.
Source: Bloomberg Neutral on its contact lens venture
We are currently neutral on the group’s venture into the contact lens segment. Although
Price performance 1M 3M 12M
the contact lens market is profitable and commands higher margins, we do not project
Absolute (%) -4.7 -27.9 -2.4
any earnings contribution from this segment in the near term due to the high start-up
Relative (%) -7.6 -25.2 0.8
costs as well as the importance of branding, which will require a period of time to
Major shareholders % held establish. We will only turn positive when the segment begins to deliver earnings on a
Dato' Seri Thai Kim Sim, Stanley 20.5 stable basis.
Datin Seri Tan Bee Geok, Cheryl 15.1
Employee Provident Fund 8.3
Maintain Add with lower target price of RM2.70
No change to our earnings estimates but we lower our target P/E multiple from 13x to
12x (5-year historical mean) due to intensified pricing competition and an unfavourable
operating environment. Hence, our 12-month target price is lowered to RM2.70. Given
its current valuation of 9.2x CY17 P/E, we think that the company is undervalued and its
share price could play catch-up. Hence, Supermax remains a laggard play despite
skepticism on its earnings delivery. Downside risk: lower-than-expected sales volume.
[X]
Financial Summary Jun-14A Jun-15A Jun-16F Jun-17F Jun-18F

Revenue (RMm) 1,026 959 1,092 1,260 1,486
Net Profit (RMm) 107.8 97.9 123.4 141.1 162.5
Analyst(s) Core EPS (RM) 0.16 0.14 0.18 0.21 0.24
Core EPS Growth (10.6%) (9.2%) 26.0% 14.4% 15.2%
FD Core P/E (x) 12.86 14.15 11.23 9.82 8.52
DPS (RM) 0.050 0.047 0.054 0.062 0.072
Dividend Yield 2.45% 2.31% 2.67% 3.05% 3.52%
EV/EBITDA (x) 8.44 9.28 7.60 7.17 6.81
P/FCFE (x) 59.53 35.26 NA NA 24.22
Net Gearing 20.4% 22.2% 27.0% 39.5% 44.6%
P/BV (x) 1.50 1.41 1.30 1.19 1.08
ROE 12.1% 10.2% 12.0% 12.6% 13.3%
Walter AW
% Change In Core EPS Estimates 0% 0% 0%
T (60) 3 2261 9093 CIMB/consensus EPS (x) 0.83 0.91 0.93
Platform
BY THE NUMBERS

2.30 15.00% 22.3 Growth 40.0%
2.10 14.00% 20.3 31.3%
18.3 22.5%
1.90 13.00%
16.3 13.8%
1.70 12.00% 14.3 5.0%
1.50 11.00% 12.3 -3.8%
10.3 -12.5%
1.30 10.00%
8.3 -21.3%
1.10 9.00% 6.3 -30.0%
Profit & Loss

(RMm) Jun-14A Jun-15A Jun-16F Jun-17F Jun-18F
Total Net Revenues 1,026 959 1,092 1,260 1,486
Gross Profit 319 297 317 400 459
Operating EBIT 134 120 157 183 212
Financial Income/(Expense) (9) (9) (12) (15) (18)
Exceptional Items 0 0 0 0 0
Pre-tax Profit 138 122 157 178 205
Taxation (31) (25) (35) (37) (43)
Exceptional Income - post-tax
Profit After Tax 107 98 123 141 162
Preferred Dividends
Other Adjustments - post-tax
Net Profit 108 98 123 141 163
Cash Flow
EBITDA 161.0 149.3 191.4 227.1 255.0
Change In Working Capital 0.4 2.6 (85.1) (118.3) (68.2)
Other Non-Cash (Income)/Expense 0.0 0.0 0.0 0.0 0.0
Net Interest (Paid)/Received (8.8) (9.2) (11.6) (15.1) (17.9)
Tax Paid (29.0) (28.8) (34.6) (37.4) (43.1)
Capex (135.0) (123.8) (110.0) (200.0) (200.0)
Disposals Of FAs/subsidiaries
Acq. Of Subsidiaries/investments
Other Investing Cashflow
Proceeds From Issue Of Shares
Shares Repurchased (0.0) 0.0 0.0 0.0 0.0
Dividends Paid (27.2) (23.8) (37.0) (42.3) (48.8)
Preferred Dividends
Other Financing Cashflow (8.8) (9.2) (13.9) (15.1) (17.9)
Cash Flow From Financing (0.9) 41.8 (50.9) 42.6 33.3
Total Cash Generated (12.7) 6.3 (77.2) (73.1) (9.5)
Free Cashflow To Equity 23.3 39.3 (26.3) (15.6) 57.2
Free Cashflow To Firm (3.1) (26.3) (14.7) (100.5) (24.9)

32
BY THE NUMBERS
Balance Sheet
Total Cash And Equivalents 149.7 194.9 249.9 176.8 167.4
Total Debtors 250.7 252.8 228.9 334.7 394.9
Inventories 172.2 190.3 132.7 190.5 227.7
Total Other Current Assets 3.0 0.6 2.2 4.3 2.0
Total Current Assets 575.6 638.6 613.7 706.4 792.0
Fixed Assets 594.8 691.9 902.8 1,054.2 1,211.5
Total Investments 212.7 216.9 216.9 216.9 216.9
Intangible Assets 28.7 28.7 28.7 28.7 28.7
Total Other Non-Current Assets 9.1 1.6 1.6 1.6 1.6
Total Non-current Assets 845.4 939.1 1,150.1 1,301.5 1,458.8
Short-term Debt 201.1 214.9 214.9 214.9 214.9
Total Creditors 129.4 152.0 126.6 171.9 201.1
Other Current Liabilities
Total Current Liabilities 330.5 366.9 341.5 386.8 416.0
Total Long-term Debt 136.5 197.7 322.7 422.7 522.7
Total Other Non-Current Liabilities 0.0 0.0 0.0 0.0 0.0
Total Non-current Liabilities 136.5 197.7 322.7 422.7 522.7
Total Provisions 33.4 33.2 33.2 33.2 33.2
Total Liabilities 500.3 597.8 697.4 842.7 971.8
Shareholders' Equity 921.7 981.0 1,067.4 1,166.2 1,279.9
Minority Interests (1.0) (1.1) (1.0) (1.0) (1.0)
Total Equity 920.7 980.0 1,066.4 1,165.2 1,278.9
Key Ratios
Jun-14A Jun-15A Jun-16F Jun-17F Jun-18F
Revenue Growth 0.5% (6.6%) 13.9% 15.3% 18.0%
Operating EBITDA Growth 3.2% (7.3%) 28.2% 18.6% 12.3%
Net Cash Per Share (RM) (0.28) (0.32) (0.42) (0.68) (0.84)
BVPS (RM) 1.36 1.44 1.57 1.72 1.88
Effective Tax Rate N/A N/A N/A N/A N/A
Inventory Days 99.54 99.96 76.25 68.60 74.27
ROIC (%) 16.1% 12.9% 15.5% 15.6% 14.7%
ROCE (%) 10.8% 8.7% 10.2% 10.5% 10.9%
Key Drivers
Jun-14A Jun-15A Jun-16F Jun-17F Jun-18F
ASP (% chg, main prod./serv.) 2.2% 3.8% -0.8% 0.5% 2.3%
Unit sales grth (%, main prod./serv.) -0.5% 46.8% 9.9% 17.4% 14.4%
33
Company Note
▎Malaysia
Top Glove Corporation
REDUCE (no change) Rolling from the top
■ Given the less favourable US$/RM and more stable latex prices, the group’s
Current price: RM4.42 earnings will no longer benefit from external tailwinds.
Target price: RM4.05 ■ The group is most susceptible to intensified pricing pressures due to the multiplier
Previous target: RM4.05 effect from its larger capacity.
Up/downside: -8.4%
■ Current product mix and market segments are unfavourable in this environment.
■ Earnings peaked in 2015; projecting a 12.3% yoy earnings decline in FY17.
Reuters: TPGC.KL
Bloomberg: TOPG MK
■ Maintain our non-consensus Reduce call and target price of RM4.05.
Market cap: US$1,380m
RM5,536m
Projecting a 12.3% yoy earnings decline in FY17
Given the more stable operating environment, we believe that external tailwind factors
on the group’s earnings are diminishing. To recap, Top Glove’s earnings in 2QFY15-
RM19.44m 1QFY16 soared by 15.2-42.7% qoq despite a mere 4% capacity increase (+2bn pieces
Current shares o/s: 1,235m in Jan 2015). This leads us to believe that Top Glove’s earnings are set to return to
Free float: 50.0% normalised levels, with an estimated 12.3% yoy earnings decline in FY17 as the group is
* Source: Bloomberg
unlikely to replicate its previously exceptional performance in 1HFY16.
Key changes in this note Most susceptible to intensified pricing competition
No change. We expect Top Glove’s earnings to be impacted by intensified pricing competition due to
the sharp influx of capacity in the sector, particularly in the nitrile butadiene (NBR)
Price Close Relative to FBMKLCI (RHS) segment. This is due to its larger production capacity, which should result in a multiplier
7.20 208
effect. Hence, any negative impact on ASPs will weigh on its bottomline more as the
6.20 178
group will need to rake in higher sales to compensate for the shortfall in pricing.
5.20 148
4.20 118 Unfavourable product mix and clientele base

3.20
30
88 With a significant client base in emerging countries that are of smaller scale and
20 sensitive to pricing, the group is likely to face issues in adjusting prices to cost hikes as
demand from these customers is very price-elastic. Moreover, we believe that the risk of
Vol m
10
customers shifting their preference to NBR gloves is high as the ASP gap between NBR
and NR (natural rubber) gloves has narrowed. Hence, the group’s product mix of 32
Source: Bloomberg
NBR: 78 NR is unfavourable given the demand shift to NBR gloves.
Price performance 1M 3M 12M Pacing down capacity expansion plans
Absolute (%) -6.8 -16 17.1
Due to the competitive landscape, Top Glove will be slowing down its new incoming
Relative (%) -9.7 -13.6 20.4
capacity from existing expansion plans. Originally, the group targeted to increase its
Major shareholders % held capacity by another 2.0bn pieces/annum by Mar 2016, bringing total capacity to 46.6bn
Tan Sri Dato Sri Lim and family 35.0 pieces/annum. However, management is looking to turn on its new lines gradually,
KWAP 8.4 depending on supply-demand dynamics. This is positive as it will alleviate the stronger
EPF 6.7 pricing competition in the industry but will result in lower earnings growth.
Maintain Reduce and target price of RM4.05
We maintain our Reduce call on the stock and target price of RM4.05, based on 15x
CY17 P/E (5-year historical mean). At current levels, valuations have outpaced
fundamentals after taking into account more subdued earnings expectations, prompting
us to turn cautious on the stock. Note that our FY16-18 estimates are 7.3-20.3% lower
than Bloomberg consensus forecasts. Risks to our view include weaker-than-expected
pricing competition and a sharp appreciation of US$/RM.
[X]
Financial Summary Aug-14A Aug-15A Aug-16F Aug-17F Aug-18F

Revenue (RMm) 2,275 2,511 2,809 2,981 3,176
Analyst(s) Net Profit (RMm) 180.5 280.1 374.9 328.8 345.5
Core EPS (RM) 0.15 0.23 0.30 0.27 0.28
Core EPS Growth (7.8%) 55.2% 33.8% (12.3%) 5.1%
FD Core P/E (x) 30.24 19.49 14.56 16.60 15.80
DPS (RM) 0.16 0.23 0.15 0.13 0.14
Dividend Yield 3.62% 5.20% 3.43% 3.01% 3.16%
EV/EBITDA (x) 18.02 12.81 9.79 10.48 9.76
P/FCFE (x) 28.25 23.09 21.65 19.08 16.51
Net Gearing (4.4%) 21.1% 15.4% 8.1% 0.2%
P/BV (x) 3.92 3.39 3.02 2.76 2.54
Walter AW
ROE 13.2% 18.7% 21.9% 17.4% 16.8%
T (60) 3 2261 9093 CIMB/consensus EPS (x) 0.99 0.86 0.86
Platform
BY THE NUMBERS

5.50 24.0% 25.5 Growth 100%
5.00 22.5% 23.5 84%
4.50 21.0% 21.5 69%
4.00 19.5% 19.5 53%
17.5 38%
3.50 18.0%
15.5 22%
3.00 16.5%
13.5 7%
2.50 15.0% 11.5 -9%
2.00 13.5% 9.5 -24%
1.50 12.0% 7.5 -40%
Profit & Loss

(RMm) Aug-14A Aug-15A Aug-16F Aug-17F Aug-18F
Gross Profit 508 671 837 805 846
Operating EBIT 207 354 473 413 428
Financial Income/(Expense) 6 21 15 11 16
Pretax Income/(Loss) from Assoc. 3 (12) (6) (4) (3)
Exceptional Items
Pre-tax Profit 216 364 481 420 441
Taxation (33) (82) (103) (88) (93)
Exceptional Income - post-tax
Profit After Tax 184 282 378 332 348
Preferred Dividends
Other Adjustments - post-tax
Net Profit 181 280 375 329 346
Cash Flow
EBITDA 298.6 452.8 586.7 536.8 560.5
Change In Working Capital 0.0 0.0 (64.0) (21.8) (26.2)
Other Operating Cashflow (2.7) (2.2) (1.7) (1.7) (1.7)
Net Interest (Paid)/Received 6.0 21.0 14.6 11.0 15.7
Tax Paid (32.7) (82.1) (103.4) (88.2) (92.6)
Capex (192.4) (243.1) (180.0) (150.0) (125.0)
Acq. Of Subsidiaries/investments
Other Investing Cashflow (17.4) (358.9) 0.0 0.0 0.0
Shares Repurchased
Dividends Paid (99.9) (105.0) (187.4) (164.4) (172.8)
Preferred Dividends
Other Financing Cashflow 0.0 (10.7) 0.0 0.0 0.0
Cash Flow From Financing 32.2 352.4 (187.4) (164.4) (172.8)
Total Cash Generated 95.3 139.9 64.6 121.7 158.0
Free Cashflow To Equity 193.2 236.4 252.1 286.1 330.7
Free Cashflow To Firm 67.4 (208.4) 264.7 305.0 349.6

35
BY THE NUMBERS
Balance Sheet
Total Cash And Equivalents 242 288 349 468 625
Total Debtors 289 395 421 447 476
Inventories 207 256 258 283 303
Total Other Current Assets 102 537 537 537 537
Total Current Assets 840 1,477 1,565 1,736 1,942
Fixed Assets 995 1,138 1,218 1,244 1,237
Total Investments 20 5 5 5 5
Intangible Assets 23 23 23 23 23
Total Other Non-Current Assets 55 50 50 50 50
Total Non-current Assets 1,093 1,215 1,296 1,322 1,315
Short-term Debt 178 498 498 498 498
Total Creditors 267 334 297 327 350
Other Current Liabilities 41 66 66 66 66
Total Current Liabilities 486 898 861 891 914
Total Long-term Debt 3 132 132 132 132
Total Other Non-Current Liabilities 47 48 48 48 48
Total Non-current Liabilities 50 180 180 180 180
Total Provisions 0 0 0 0 0
Total Liabilities 536 1,078 1,041 1,071 1,094
Shareholders' Equity 1,393 1,608 1,810 1,975 2,148
Total Equity 1,398 1,615 1,820 1,987 2,163
Key Ratios
Aug-14A Aug-15A Aug-16F Aug-17F Aug-18F
Revenue Growth (1.6%) 10.3% 11.9% 6.1% 6.5%
Operating EBITDA Growth (4.4%) 51.6% 29.6% (8.5%) 4.4%
Net Cash Per Share (RM) 0.05 (0.28) (0.23) (0.13) (0.00)
BVPS (RM) 1.13 1.30 1.47 1.60 1.74
Net Dividend Payout Ratio 109% 51% 50% 50% 50%
Inventory Days 44.09 45.97 47.64 45.36 45.95
ROIC (%) 15.7% 26.0% 23.6% 19.3% 19.5%
ROCE (%) 14.5% 19.9% 21.3% 17.5% 17.1%
Key Drivers
Aug-14A Aug-15A Aug-16F Aug-17F Aug-18F
ASP (% chg, main prod./serv.) N/A N/A N/A N/A N/A
Util. rate (%, main prod./serv.) N/A N/A N/A N/A N/A
ASP (% chg, 2ndary prod./serv.) -3.4% -1.7% -6.3% -1.3% 1.4%
36
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AAV, ADVANC, AMATA, ANAN, AOT, AP, BA, BANPU, BBL, BCH, BCP, BDMS, BEAUTY, BEC, BEM, BH, BJCHI, BLA, BLAND, BTS, CBG,
CENTEL, CHG, CK, CKP, COM7, CPALL, CPF, CPN, DELTA, DTAC, EGCO, EPG, ERW, GL, GLOBAL, GLOW, GPSC, GUNKUL, HANA,
HMPRO, ICHI, IFEC, INTUCH, IRPC, ITD, IVL, JWD, KBANK, KCE, KKP, KTB, KTC, LH, LHBANK, LPN, MAJOR, MINT, MTLS, PLANB, PS,
PTG, PTT, PTTEP, PTTGC, QH, ROBINS, RS, S, SAMART, SAWAD, SCB, SCC, SGP, SIRI, SPALI, SPCG, STEC, STPI, SVI, TASCO, TCAP,
THAI, THCOM, TISCO, TMB, TOP, TPIPL, TRC, TRUE, TTA, TTCL, TTW, TU, TVO, UNIQ, VGI, VNG, WHA, WORK.
Corporate Governance Report:
The disclosure of the survey result of the Thai Institute of Directors Association (“IOD”) regarding corporate governance is made pursuant to the
policy of the Office of the Securities and Exchange Commission. The survey of the IOD is based on the information of a company listed on the
Stock Exchange of Thailand and the Market for Alternative Investment disclosed to the public and able to be accessed by a general public
investor. The result, therefore, is from the perspective of a third party. It is not an evaluation of operation and is not based on inside information.
The survey result is as of the date appearing in the Corporate Governance Report of Thai Listed Companies. As a result, the survey result may
be changed after that date. CIMBS does not confirm nor certify the accuracy of such survey result.
Score Range: 90 - 100 80 - 89 70 - 79 Below 70 or No Survey Result
Description: Excellent Very Good Good N/A
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authorities or governmental agencies in the United Arab Emirates. This report is strictly private and confidential and has not been reviewed by,
deposited or registered with UAE Central Bank or any other licensing authority or governmental agencies in the United Arab Emirates. This report
is being issued outside the United Arab Emirates to a limited number of institutional investors and must not be provided to any person other than
the original recipient and may not be reproduced or used for any other purpose. Further, the information contained in this report is not intended to
lead to the sale of investments under any subscription agreement or the conclusion of any other contract of whatsoever nature within the territory
of the United Arab Emirates.
United Kingdom: In the United Kingdom and European Economic Area, this report is being disseminated by CIMB Securities (UK) Limited
(“CIMB UK”). CIMB UK is authorized and regulated by the Financial Conduct Authority and its registered office is at 27 Knightsbridge, London,
SW1X7YB. Unless specified to the contrary, this report has been issued and approved for distribution in the U.K. and the EEA by CIMB UK.
Investment research issued by CIMB UK has been prepared in accordance with CIMB Group’s policies for managing conflicts of interest arising
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40
relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended,
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United States: This research report is distributed in the United States of America by CIMB Securities (USA) Inc, a U.S. registered broker-dealer
and a related company of CIMB Research Pte Ltd, CIMB Investment Bank Berhad, PT CIMB Securities Indonesia, CIMB Securities (Thailand)
Co. Ltd, CIMB Securities Limited, CIMB Securities (India) Private Limited, and is distributed solely to persons who qualify as “U.S. Institutional
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Other jurisdictions: In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is only for distribution to
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Distribution of stock ratings and investment banking clients for quarter ended on 30 June 2016
1574 companies under coverage for quarter ended on 30 June 2016
Rating Distribution (%) Investment Banking clients (%)
Add 56.5% 7.1%
Hold 32.2% 2.9%
Reduce 9.8% 0.6%
Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (Thai IOD) in
2015, Anti-Corruption Progress Indicator 2015.
AAV – Very Good, 3B, ADVANC – Excellent, 3A, AEONTS – Good, 1, AMATA – Very Good, 2, ANAN – Very Good, 3A, AOT – Very Good, 2, AP -
Good, 3A, ASK – Very Good, 3B, ASP – Very Good, 4, BANPU – Very Good, 4, BAY – Very Good, 4, BBL – Very Good, 4, BCH – not available,
no progress, BCP - Excellent, 5, BEM – not available, no progress, BDMS – Very Good, 3B, BEAUTY – Good, 2, BEC - Good, 3B, BH - Good, 2,
BIGC - Excellent, 3A, BJC – Good, 1, BLA – Very Good, 4, 1, BTS - Excellent, 3A, CBG – Good, 1, CCET – not available, 1, CENTEL – Very
Good, 3A, CHG – Good, 3B, CK – Excellent, 3B, COL – Very Good, 3A, CPALL – Good, 3A, CPF – Very Good, 3A, CPN - Excellent, 5, DELTA -
Very Good, 3A, DEMCO – Very Good, 3A, DTAC – Excellent, 3A, EA – not available, 3A, ECL – Good, 4, EGCO - Excellent, 4, EPG – not
available, 3B, GFPT - Very Good, 3A, GLOBAL – Very Good, 2, GLOW - Good, 3A, GPSC – not available, 3B, GRAMMY - Excellent, 3B,
GUNKUL – Very Good, 1, HANA - Excellent, 4, HMPRO - Excellent, 3A, ICHI – Very Good, 3A, INTUCH - Excellent, 4, ITD – Good, 1, IVL -
Excellent, 4, JAS – not available, 3A, JASIF – not available, no progress, JUBILE – Good, 3A, KAMART – not available, no progress, KBANK -
Excellent, 4, KCE - Excellent, 4, KGI – Good, 4, KKP – Excellent, 4, KSL – Very Good, 2, KTB - Excellent, 4, KTC – Very Good, 3A, LH - Very
Good, 3B, LPN – Excellent, 3A, M - Good, 2, MAJOR - Good, 1, MAKRO – Good, 3A, MALEE – not available, 2, MBKET – Good, 2, MC – Very
Good, 3A, MCOT – Excellent, 3A, MEGA – Very Good, 2, MINT - Excellent, 3A, MTLS – Good, 2, NYT – Good, no progress, OISHI – Very Good,
3B, PLANB – Good, 3B, PS – Excellent, 3A, PSL - Excellent, 4, PTT - Excellent, 5, PTTEP - Excellent, 4, PTTGC - Excellent, 5, QH – Very
Good, 2, RATCH – Excellent, 3A, ROBINS – Excellent, 3A, RS – Very Good, 1, SAMART - Excellent, 3B, SAPPE - Good, 3B, SAT – Excellent, 5,
SAWAD – Good, 1, SC – Excellent, 3B, SCB - Excellent, 4, SCBLIF – not available, no progress, SCC – Excellent, 5, SCN – Good, 1, SCCC -
Good, 3A, SIM - Excellent, 3B, SIRI - Good, 1, SPALI - Excellent, 3A, SPRC – not available, no progress, STA – Very Good, 1, STEC – Very
Good, 3B, SVI – Very Good, 3A, TASCO – Very Good, 3A, TCAP – Very Good, 4, THAI – Very Good, 3A, THANI – Very Good, 5, THCOM –
Excellent, 4, THRE – Very Good, 3A, THREL – Very Good, 3A, TICON – Very Good, 3A, TISCO - Excellent, 4, TK – Very Good, 3B, TKN – not
available, no progress, TMB - Excellent, 4, TPCH – Good, 3B, TOP - Excellent, 5, TRUE – Very Good, 2, TTW – Very Good, 2, TU – Very Good,
3A, UNIQ – not available, 2, VGI – Excellent, 3A, WHA – Good, 3A, WORK – not available, no progress.
Comprises level 1 to 5 as follows:
Level 1: Committed
Level 2: Declared
Level 3: Established (3A: Established by Declaration of Intent, 3B: Established by Internal Commitment and Policy)
Level 4: Certified
Level 5: Extended
41
CIMB Recommendation Framework

Stock Ratings Definition:
Add The stock’s total return is expected to exceed 10% over the next 12 months.
Hold The stock’s total return is expected to be between 0% and positive 10% over the next 12 months.
Reduce The stock’s total return is expected to fall below 0% or more over the next 12 months.
The total expected return of a stock is defined as the sum of the: (i) percentage difference between the target price and the current price and (ii) the forward
net dividend yields of the stock. Stock price targets have an investment horizon of 12 months.
Sector Ratings Definition:
Overweight An Overweight rating means stocks in the sector have, on a market cap-weighted basis, a positive absolute recommendation.
Neutral A Neutral rating means stocks in the sector have, on a market cap-weighted basis, a neutral absolute recommendation.
Underweight An Underweight rating means stocks in the sector have, on a market cap-weighted basis, a negative absolute recommendation.
Country Ratings Definition:
Overweight An Overweight rating means investors should be positioned with an above-market weight in this country relative to benchmark.
Neutral A Neutral rating means investors should be positioned with a neutral weight in this country relative to benchmark.
Underweight An Underweight rating means investors should be positioned with a below-market weight in this country relative to benchmark.
42

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Industrial Goods and Services│Malaysia│Equity research│July 19, 2016

Sector Note │ Alpha series

Summary valuation metrics Our case study shows a short-term oversupply…

Analyst(s) Figure 1: Stock Recommendations

Hartalega 7.06 Reduce Hold 4.00 4.00

Figure 2: Sector Comparisons

Loosening its grip

Market Stock New Previous

Hartalega 7.06 Reduce 4.00 4.00 22x (5-year historical mean)

Overall sector at 5-year historical mean of 15.9x

Figure 4: Sector's 5-year historical mean

Sector PE Mean +1SD -1SD +2SD -2SD

SOURCES: CIMB, COMPANY REPORTS

Strategy for 2H16: a stock-selective approach

leading to less pricing pressure and 3) continuous emphasis on product

2. GLOVE SECTOR PERFORMANCE REVIEW

Figure 5: Glove sector's performance in 2015

FBMKLCI Glove Sector under Coverage

SOURCES: CIMB, COMPANY REPORTS

40.0 40.0 Title:

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

21.0 26.0 Title:

SOURCES: CIMB, COMPANY REPORTS SOURCES: CIMB, COMPANY REPORTS

2.2 The stars were shining on the sector in 2015

Hartalega Kossan Rubber Supermax Top Glove

SOURCES: CIMB, COMPANY REPORTS

2.3 1Q16 results were below expectations…

Figure 11: 1QCY16 results recap

2.4 …leading to sector-wide EBITDA margins contraction

Figure 12: 1QCY16: EBITDA Margin table

3. OVERALL GLOVE OUTLOOK

Net demand attributed to four companies (38% of global glove market

Net increase in demand Net Increase in Actual Production Surplus/ (Deficit)

SOURCES: CIMB, COMPANY REPORTS

Figure 15: Indicated expansion plans (bn pieces p.a.)

Hartalega Topglove Kossan Supermax

3.1.3 Gunning ahead with capacity expansion regardless of

Figure 16: Net planned capacity increase

Total installed capacity 109.2

3.1.4 Passing on costs just got a little bit tougher

Figure 17: Average cost breakdown

SOURCES: CIMB, COMPANY REPORTS

3.1.5 Margin compression from minimum wage hike and

Figure 18: Revised tariff schedule effective 17 Jul 2016

3.1.6 Sensitivity analysis on gas and electricity costs

Figure 19: Sensitivity analysis on electricity and gas cost (+5%)

3.1.7 Increased emphasis on automation and operating

3.2 LONG-TERM SECTOR OUTLOOK – GROWTH

Figure 20: Global examination glove demand (2001-2018F)

Figure 21: Malaysia rubber glove exports (value and quantity)

9,100 9,019 9,983

Medical (RM m)-Value Medical (mn pieces) -Quantity

3.2.2 Growth from developed markets may have reached

Please fill in the values aboveJapan,

Rest of the World,

SOURCES: MREPC SOURCES: INTERNATIONAL TRADE CENTRE AND COMPANY (ITCC)

3.2.3 …but emerging countries exhibit plenty of growth

Figure 24: Glove usage per capita

Overall Asia 4.8

SOURCES: COMPANY REPORTS

3.2.4 Malaysia to continue its dominance in global glove

Figure 25: Malaysia's glove exports by product (2015)

Figure 26: Malaysia's top 10 exports destination (by volume)