Sector Update Rubber Products - Affin Hwang Capital...2016/04/15 · 15 April 2016 Affin Hwang...

15 April 2016

Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd) of 21

Stretched year ahead

Over the past month, the rubber products sector (ex-Karex) has underperformed the KLCI amid concerns of margin compression due to Ringgit strength and the rally in commodity-input costs. Global glove demand should underpin volume growth supported by capacity expansion plans, but declining ASPs and forex trend reversals are risks to our earnings. For sector exposure, we recommend investors tread selectively and reaffirm our BUY on Top Glove for its attractive valuation and improving efficiencies. Maintain NEUTRAL sector view.

Global glove demand to grow 8-10%

Higher hygiene standards, progressive healthcare reforms and demand growth from emerging markets are expected to be the key growth drivers for global rubber glove consumption, which we estimate to grow between 8-10% annually. This loosely translates into an additional 55bn gloves for the next 5 years, keeping utilisation levels high and the volume-growth outlook intact. Glove consumption per capita is still low in Asia at c. 11 gloves p.a., vs. developed nations of c. 100 gloves p.a., indicating further upside to demand growth. Malaysian rubber glove manufacturers supplied c. 63% of the world’s total gloves in 2015 and are prime beneficiaries of growing global glove demand.

Benign raw material prices

Latex prices have declined for a fourth consecutive year due to depressed demand and pent-up supply. Global demand for latex, 60% of which is used in tire manufacturing, is slowing as world’s top buyer, China, rebalances its economy. Global rubber stockpiles are likely to reach a record 3.7m mt in 2017. The current rally in rubber prices is seasonally driven due to the wintering season. Without any corresponding increase in demand, we believe latex prices will remain benign.

Overcapacity concerns overplayed

The ‘Big 4’ glove makers total effective capacity is set to expand by 13% CAGR in CY16-19E. Assuming global glove demand were to grow at an annual 9%, overcapacity risk could escalate in CY18-19E, with the supply outstripping demand at a net surplus of 2.4bn or 1.0% of the total global demand. However, we believe that the risk is manageable and can be mitigated by delaying or slowing down some of the expansion plans, given the small surplus quantum. To put it in perspective, 2.4bn gloves are equivalent to roughly a single plant’s annual production capacity.

Declining ASPs a recurring theme

Declining ASPs should continue to be an ongoing theme, given the capacity influx, heightened competition and Ringgit strength. Margin compression is likely in the coming quarters but we understand that rubber glove manufacturers are taking measures to ease margin pressure, which includes entering into hedging contracts and implementing operational improvements initiatives. Our current forecasts assume RM3.95/USD1 for FY16-18 for all rubber glove makers under our coverage. Our sensitivity analysis shows that every 5-cent change in the MYR/USD could shave off net earnings by 5-9%.

Maintain NEUTRAL; Top Glove is our top pick We remain NEUTRAL on the sector. We peg our valuations to +1SD over

their respective past-3-year mean PERs on: (i) sustained global glove demand; (ii) preference shift to nitrile gloves with higher profitability; (iii) aggressive market-share gains over Thailand and Indonesia; and (iv) ongoing innovation and automation leading to productivity gains. We like Top Glove for its undemanding valuation and improving efficiencies. We reiterate our BUY rating on Top Glove and target price (TP) of RM7.17. We maintain HOLD on Hartalega and cut TP to RM4.90 (from RM5.16) as

we think current valuations have priced in most of the positives.

Sector Update

Rubber Products Neutral (maintain) Absolute Performance (%) 1M 3M 12M Hartalega -0.2 -21.7 +13.4 Kossan -4.1 -25.4 +9.5 Supermax +6.1 -17.7 +35.4 Top Glove -1.7 -23.2 +92.4

Relative Performance (%)

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Hartalega Kossan Top Glove Supermax

Source: Affin Hwang, Bloomberg

Coverage Summary

Name Rating Price New

TP Old TP

(RM) (RM) (RM)

Hartalega HOLD 4.70 4.90 5.16 Kossan BUY 6.33 7.50 8.50 Supermax BUY 2.79 3.40 3.40 Top Glove BUY 5.23 7.17 7.17 Source: Affin Hwang, Bloomberg

Note: Closing prices as of 14 April 2016

Research Team; (603) 2146 7599;

[email protected]

(For further enquiries, please contact Aaron Kee;

(603) 2146 7612; [email protected])

mailto:[email protected]

15 April 2016

Affin Hwang Investment Bank Bhd (14389-U) (Formerly known as HwangDBS Investment Bank Bhd)

of 21

Glove demand outlook still resilient Glove demand to grow 8-10%

Healthcare spending is expected to grow by more than 6% annually, driven by: (i) higher hygiene standards, (ii) healthcare reforms; and (iii) demand growth from emerging markets. Rubber glove demand shares a close correlation with healthcare spending growth. Global rubber glove consumption is expected to grow at 8-10% annually, according to the Malaysia Rubber Gloves Manufacturer Association (MARGMA). This loosely translates into an additional 55bn gloves for the next 5 years based on 2015 consumption of 180bn gloves, the majority of which will be filled up by Malaysia rubber glove manufacturers. The US and European markets are the world’s top buyers at c. 63% of global gloves consumption. Asian markets (ex-Japan) registered the highest growth driven by emerging economies particularly in China and India. Fig 1: Global Gloves Consumption by Region in 2015

EU32%

USA31%

Rest of world14%

Asia ex-Japan10%

Latin America8%

Japan5%

Source: International Trade Centre and Company

Wide gap in usage rate presents opportunities

On a per capita basis, the US and Europe still lead at c. 100 gloves per capita p.a. compared with c. 11 gloves per capita in Asia. The gap between the two has been narrowing in recent years due to progressive emphasis on healthcare reforms, especially in emerging markets. Nonetheless, the gap remains wide and we believe there could be further upside to the 8-10% rubber gloves demand growth projected, in the event of sudden surge in healthcare awareness. Rising pandemic diseases, a wild card, could potentially spike up rubber gloves demand, as seen during the outbreak of H1N1 and MERS in recent years.

15 April 2016


No catalyst for raw material prices Low raw material price environment is set to prolong

Natural rubber (latex) and nitrile butadiene (nitrile) prices, which constitute c. 50% of total costs for rubber glove manufacturers, continued their annual decline in 2015 to average at RM4.13/kg and RMB9,590/ton, respectively. This is the fourth consecutive annual decline for both feedstocks amid supply glut and tepid demand. As seen in the chart below, nitrile also demonstrates a close correlation with latex. Fig 2: Latex and nitrile prices

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Latex Nitrile(RM/kg) (CNY/ton)

Source: Bloomberg

China slowdown

Global demand for latex, 60% of which are used in tire manufacturing, is slowing as the world’s top buyer China is undergoing a rebalancing of its economy. The swing in automotive growth should dictate latex prices given its importance. China total passenger car sales growth has moderated to 7.3% in 2015, compared with 10% in 2014 and 16% in 2013. Demand is expected to cool further this year as China’s economy heads to its slowest expansion rate in 25 years. Fig 3: China automobile sales and growth yoy

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Source: Bloomberg

15 April 2016


Supply glut likely to continue

Meanwhile, the current latex glut has entered its fourth year of surplus without any trigger in sight for higher prices. A record rally to RM10.93/kg in 2011 prompted massive tree planting across world rubber supply majors like Malaysia, Thailand and Indonesia. Rubber tree gestation normally takes 5-7 years and we have entered into the productive phase of trees planted in the said period, with more tree output expected to come on stream throughout 2016. Despite the slump in latex prices, we continue to see strong supply growth as major planters are creating large rubber plantations for long-term investment and diversification away from palm-oil dominance. Malaysia’s acreage owned by large estates dedicated to rubber increased 7.5% in 2015, while small-farmer holdings rose less than 1%, according to the Rubber Board. In Indonesia, rubber plantations owned by large estates rose 2.5% in 2014, according to government data. Sime Darby plans to increase the share of rubber plantations in its agricultural-land portfolio from 2% to 10% and develop almost 100,000ha of rubber estates in Malaysia, Indonesia and Liberia within the next few years. Rubber prices to remain benign

The slump in latex prices has left small rubber estate holders reeling in losses. Authorities are pressured to shore up rubber prices. In February, Indonesia, Malaysia and Thailand have agreed to withhold 615,000mt of natural rubber from the market for six months, with effect from 1 March to 31 August 2016. The output cut could provide some near term support on prices together with the wintering season but unlikely able to trigger a price rally. Current rally due to seasonal reason

The current wintering period running from February to April in Malaysia and Thailand, where rubber trees shed leaves and reduce tapping yield, has provided some relief to planters with a brief rally in rubber prices. Ytd, latex gained 42%, albeit from a low base. However, we believe the rally is seasonally-driven and temporary. Any further upside will likely be limited, in view of the inventory build-up amid lacklustre demand. Fig 4: Latex prices ytd

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Source: Bloomberg

15 April 2016


Supply outstripping demand

According to The Rubber Economist, global surplus is set to exceed 400,000 metric tonnes (mt) in 2016, compared with a surplus of 98,000mt in 2015. Output is likely to keep expanding through 2018, worsening the current glut and outpacing consumption growth. Stockpiles are likely to reach a record of 3.7 million mt by 2017, putting a cap on any potential rubber prices rally without any corresponding increase in demand. The Association of Natural Rubber Producing Countries (ANRPC) estimates China’s imports of natural rubber will plunge 10% in 2016 alone. Fig 5: Latex and nitrile inventory

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Latex prices to stay low, nitrile should follow suit

Hence, after taking into account the lacklustre demand and growing supply glut, we believe latex prices will remain benign. Any meaningful impact to latex prices will have to come from a demand pick up, especially in the automotive sector, which is still sluggish in the absence of China support. Nitrile prices, which track latex prices closely, will likely to stay low.

15 April 2016


Overcapacity theme overplayed

Total effective capacity to expand 13%

The ‘Big 4’ gloves makers total effective capacity is set to expand by 13% CAGR in CY16-19. Hartalega’s expansion is the most aggressive of the lot at 19%, driven by the commissioning of its Next Generation Integrated Manufacturing Complex (NGC). To recap, NGC consists of 6 plants with 72 production lines and 28.5 bn gloves to be installed in 8 years. This is closely followed by Kossan (+18%), which is working to install 4 plants with 18bn pieces capacity over the next four years. Supermax (+17%) kicked off its expansion with the gradual capacity ramp up in Plant 10 & 11. Meanwhile, Top Glove expansion rate (+4%) is the least among peers, as it has shifted its focus to optimizing operational efficiencies and profitability after aggressive expansion in recent years. Fig 6: ‘Big 4’ total effective capacity

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Hartalega Kossan Supermax Top Glove(bn gloves)

Source: Affin Hwang estimates, Companies

Fig 7: ‘Big 4’ capacity increase Company Effective capacity (bn gloves) Net increase CAGR CY16E CY19E (bn gloves) (%)

Hartalega 20.9 35.2 14.3 19% Kossan 22.0 36.3 14.3 18% Supermax 22.4 36.2 13.8 17% Top Glove 47.0 52.4 5.4 4% Total 112.4 160.1 47.7 13% Source: Affin Hwang estimates, Companies

Malaysia rubber glove manufacturers to gain more market share

We project Malaysia’s total rubber gloves exports to expand by 12% annually, continuing their trajectory to gain market share at the expense of Thailand and Indonesia. Assuming world glove demand grows at an annual 9% pace, still within the estimated growth range of 8-10% given by MARGMA, we estimate Malaysia’s market share of the total gloves production will stretch to 65% in 2017, from 63% presently. Consequently, among the ‘Big 4’, we expect Hartalega to continue to chalk up market share, cementing its leading position in the nitrile segment. Top Glove is likely to lose some market share to its peers, given the tepid expansion growth, but still maintain its crown position as the world’s largest rubber glove manufacturer.

15 April 2016


Fig 8: Rubber glove manufacturers estimated market share

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Hartalega Kossan Supermax Top Glove Others(%)

Source: Affin Hwang estimates

Capacity increase manageable

Based on our estimates, overcapacity risk could escalate in CY18 and CY19, with the supply outstripping demand at a net surplus of 2.4bn or 1.0% of the total global demand. However, we believe that the risk is manageable and can be mitigated by delaying or slowing down some of the expansion plans, given the small surplus quantum. Hartalega has already deferred the commissioning of newer lines by 2 months. Top Glove is also facing a 2-month delay on its expansion plan due to some regulatory approval issues. To put this in perspective, 2.4bn gloves capacity is equivalent to roughly a single plant annual production. Hence, we think the overcapacity concerns could be overplayed and mitigating measures are in place to control glove supplies. Fig 9: 1.0% supply surplus is manageable

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Source: Affin Hwang estimates

15 April 2016


Declining ASP to be an ongoing theme Competition caps ASPs

We believe that declining ASPs will continue to be an ongoing theme. While we understand that rubber glove manufacturers conduct price reviews on a monthly basis, they will be hard-pressed to preserve margins purely on the forex factor, given the capacity influx and heightened competition. Further, the cost-pass-through mechanism should, ideally, only kick in when there is a significant change in the input prices, and not the revenue receipt factor. Margin compression is likely in the coming quarters but we understand that rubber-glove manufacturers are taking measures to ease margin pressure, which include entering into hedging contracts and implementing operational improvements initiatives. Hartalega biggest loser

In a declining ASPs environment, we believe Hartalega stands to be the most vulnerable as its products are at a premium due to better quality perception. Competitors have in recent years invested heavily in the nitrile segment and are making breakthroughs to narrow the quality gap with lower pricing. This resulted in Hartalega losing its market share in the nitrile segment and it was forced to drop pricing to match competition. While Hartalega’s superior margins should continue to stay above those of its competitors, we believe Hartalega’s commanding valuations could de-rate on the back of margin compression from lower ASPs. Fig 10: Hartalega’s nitrile gloves ASP trend

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15 April 2016


Top Glove to grow its efficiency levels

We like Top Glove in the space of improving operational efficiency, as we believe it has the critical mass and economies of scale to grow. Top Glove makes approximately RM10/thousand gloves on EBIT terms currently, less than half of what Hartalega makes. We think there is further room for Top Glove to grow its profitability profile premised on: (i) better product mix management; (ii) production lines revamp; and (iii) increased automation. Fig 11: EBIT/thousand gloves

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Hartalega Kossan Supermax Top Glove(RM)

Source: Affin Hwang, Companies

15 April 2016


USD/MYR sensitivity

Our house view believes that Ringgit will close the year at around RM3.95/USD. Our current forecast assumes RM3.95 for FY16-18 for all rubber glove makers under our coverage. Understandably, a sharp appreciation could hurt sentiment on the sector, as the sector is a net beneficiary of a stronger USD. Our sensitivity analysis shows that every 5-cent change in the MYR/USD exchange rate could shave off net earnings by 5-9%. Fig 12: Hartalega’s earnings sensitivity against MYR and effective capacity assumption changes

FY16E 3.80 3.90 3.95 4.00 4.10 4.20 4.30 4.40

85% 189.6 215.1 227.8 240.5 266.0 291.5 317.0 342.4

90% 204.0 231.0 244.5 258.0 284.9 311.9 338.9 365.9

95% 218.5 246.9 261.2 275.4 303.9 332.3 360.8 389.3

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105% 247.3 278.8 294.5 310.3 341.7 373.2 404.7 436.1

110% 261.8 294.7 311.2 327.7 360.7 393.6 426.6 459.6

115% 276.2 310.7 327.9 345.1 379.6 414.1 448.5 483.0 Source: Affin Hwang estimates

Fig 13: Kossan’s earnings sensitivity against MYR and effective capacity assumption changes

FY16E 3.80 3.90 3.95 4.00 4.10 4.20 4.30 4.40

85% 147.6 175.0 188.7 202.4 229.9 257.3 284.8 312.3

90% 158.1 187.2 201.7 216.2 245.3 274.4 303.5 332.6

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105% 189.9 223.9 240.9 257.9 291.8 325.8 359.8 393.8

110% 200.6 236.2 254.0 271.8 307.4 343.0 378.6 414.2


Fig 14: Supermax’s earnings sensitivity against MYR and effective capacity assumption changes

FY16E 3.80 3.90 3.95 4.00 4.10 4.20 4.30 4.40

85% 89.1 111.8 123.2 134.5 157.2 179.9 202.6 225.3

90% 94.3 118.3 130.4 142.4 166.4 190.4 214.4 238.5

95% 99.5 124.9 137.5 150.2 175.6 200.9 226.3 251.7

100% 104.7 131.4 144.7 158.1 184.8 211.5 238.2 264.9

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Fig 15: Top Glove’s earnings sensitivity against MYR and effective capacity assumption changes

FY16E 3.80 3.90 3.95 4.00 4.10 4.20 4.30 4.40

85% 273.2 323.2 348.3 373.3 423.3 473.3 523.4 573.4

90% 293.4 346.4 372.9 399.4 452.4 505.3 558.3 611.3

95% 313.6 369.6 397.5 425.5 481.4 537.3 593.2 649.2

100% 333.9 392.7 422.1 451.6 510.4 569.3 628.2 687.0

105% 354.1 415.9 446.8 477.7 539.5 601.3 663.1 724.9

110% 374.3 439.0 471.4 503.8 568.5 633.3 698.0 762.8


15 April 2016


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Valuation and Recommendation PERs de-rated

The export-oriented stocks are undergoing a PER de-rating on the back of Ringgit strength. Risk appetite has dissipated accordingly as investors have been fleeing export-related plays. All companies under our coverage have traded at +2SD above their mean valuations over the past year buoyed by expected record quarterly profit and benefits of USD strength. Nonetheless, we believe that valuation of the companies should be at +1SD over their respective past-3-year mean PERs. We still peg our target PERs to above their mean valuations premised on: (i) sustained global glove demand; (ii) preference shift to nitrile gloves with higher profitability; (iii) aggressive market share gains over Thailand and Indonesia; and (iv) ongoing innovation and automation leading to productivity gains. For bear-case scenario-analysis purposes, assuming that we de-rate our valuations and peg the respective companies to their past-3-year mean PER, we could see some interesting trading opportunities emerging. Specifically, we note that Supermax is already trading at its mean valuations. Fig 16: Target prices at mean valuations

Company Share Price

Valuation at mean PER

Past-3-year mean PER

Upside/

(downside)

(RM) (RM) (X) (%)

Hartalega 4.70 4.52 24.0 (3.8)

Kossan 6.33 6.05 17.0 (4.4)

Supermax 2.79 2.81 13.0 0.6

Top Glove 5.23 5.13 15.0 (2.0)

Source: Affin Hwang, Bloomberg

Top Glove is our sector top pick

We like Top Glove for its undemanding valuations and improving efficiencies. Top Glove is currently trading at 15x PE CY16E, in line with its past-3-year mean PER. This remains at a steep discount to sector leader Hartalega at close to 25x PER, based on CY16E EPS. The steep discount is unwarranted, in our view, given Top Glove’s improving profitability profile, economies of scale and higher profit base. To illustrate, Top Glove’s return on equity surged to the highest for the sector, while its EBITDA margin has overtaken Kossan to take the second spot. We reiterate our BUY rating on Top Glove and TP of RM7.17.

Fig 17: Return on equity Fig 18: EBITDA margin

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Source: Affin Hwang forecasts Source: Affin Hwang forecasts

15 April 2016


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Fig 20: Peer Comparison Company Rating Price TP Mkt Cap

(RM) (RM) (RMm) CY16E CY17E CY16E CY17E CY16E CY17E CY16E CY17E

Hartalega HOLD 4.70 4.90 7,712.7 18.7 18.6 24.9 21.0 1.6 1.9 19.6 20.3

Kossan BUY 6.33 7.50 4,048.0 12.1 9.1 17.8 16.3 2.9 3.1 21.8 21.2

Supermax BUY 2.79 3.40 1,872.9 14.3 13.4 12.9 11.4 2.3 2.6 12.6 13.1

Top Glove BUY 5.23 7.17 6,561.0 34.0 3.4 15.3 14.8 3.3 3.4 22.6 20.9

Sector (ex-Karex) NEUTRAL 20,194.7 21.9 10.1 18.2 16.5 2.5 2.7 19.6 19.3

Core PE (x) Div Yield (%) ROE (%)Core EPS growth (%)

Source: Affin Hwang forecasts, Bloomberg, pricing as of 14 April 2016

15 April 2016


Facing price competition

Hartalega remains most vulnerable to price competition as peers intensify their entry into the nitrile segment. As such, the premium valuation accorded to Hartalega should narrow as its superior profitability profile faces further pressure from heightened competition. We maintain our HOLD, but cut our TP to RM4.90.

Topline growth intact

Hartalega’s topline growth should be driven by the gradual commissioning of its Next Generation Complex (NGC). Plants 1 & 2 are fully commissioned while Plants 3 & 4 should be progressively commissioned in CY17. NGC should double Hartalega’s total installed capacity to 42bn gloves/year by CY22. Hartalega’s product mix should remain unchanged at 90:10 (nitrile:latex).

Competition intensifies in nitrile

We do not foresee any difficulties for Hartalega’s to fill up its NGC capacity, as demand for nitrile gloves is still robust. However, we believe that premium pricing for its nitrile gloves will come under pressure, as competitors are now entering its turf armed with lower pricing to gain market share. More nitrile-centric plants are slated to come online over the next few years, in line with most rubber glove manufacturers to increase nitrile in their product mix.

Risk of margin compression

Hartalega has traditionally enjoyed a premium valuation vs. its peers predominantly due to: (i) leadership position in nitrile segment; and (ii) higher profitability margins. However, a slew of aggressive expansion plans announced by competitors have weakened Hartalega’s stronghold in the nitrile segment. We remain unconvinced that the decline in ASPs (in USD terms) can be reversed. Efficiency gains should be limited as we expect some start-up losses at its NGC, while there should be little room to raise utilisation rates (3QFY16: 81%).

Maintain HOLD with a lower TP at RM4.90 We maintain our HOLD and revise our earnings slightly. We also lower

our 12-month target price to RM4.90 (from RM5.16) as we switch our valuation method to CY16E (from average CY16-18E previously) and use a target PER of 26x (from 23x), or +1SD over its past-3-year mean PER. We like Hartalega for its strong management and competitive edge in the nitrile segment. However, we believe that valuations are stretched. Hartalega remains most vulnerable in a more competitive environment, and coupled with limited efficiency gains, should continue to see margin contraction and, hence, an erosion of its premium valuation.

Earnings & Valuation Summary

FYE Mar (RM'm) 2014 2015 2016E 2017E 2018E Revenue (RMm) 1,107.1 1,146.0 1,557.6 1,845.8 2,215.3 EBITDA (RMm) 354.1 322.2 439.1 507.0 592.2 Pretax profit (RMm) 309.0 276.8 366.3 422.5 503.0 Net profit (RMm) 232.8 209.6 277.9 320.6 381.8 EPS (sen) 14.2 12.8 16.9 19.5 23.3 PER (x) 33.1 36.8 27.8 24.1 20.2 Core net profit (RMm) 232.8 209.6 277.9 320.6 381.8 Core EPS (sen) 14.2 12.8 16.9 19.5 23.3 Core EPS growth (%) (0.2) (10.0) 32.6 15.4 19.1 Core PER (x) 33.1 36.8 27.8 24.1 20.2 DPS (sen) 6.6 6.4 6.8 7.8 9.3 Dividend Yield (%) 1.4 1.4 1.4 1.7 2.0 EV/EBITDA (x) 21.3 23.7 17.7 15.4 13.1 Chg in EPS (%) 1.4 (5.2) (0.2) Affin/Consensus (x) 1.0 1.0 1.0 Source: Company, Affin Hwang forecasts, Bloomberg

Company Update

Hartalega HART MK Sector: Rubber Products

RM4.70 @ 14 April 2016

HOLD (maintain) Upside: 4.3%

Price Target: RM 4.90 Previous Target: RM5.16

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Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16

(RM)

Price Performance

1M 3M 12M Absolute -0.2% -21.7% +13.4% Rel to KLCI -1.6% -25.8% +21.0%

Stock Data

Issued shares (m) 1,641.0 Mkt cap (RMm)/(US$m) 7,712.8/1,981.9 Avg daily vol - 6mth (m) 2.6 52-wk range (RM) 3.85-6.15 Est free float 28.6% BV per share (RM) 0.89

P/BV (x) 5.30 Net cash/ (debt) (RMm) (3QFY16) (99.1) ROE (2016E) 19.3% Derivatives Nil Shariah Compliant Yes

Key Shareholders

Hartalega Industries 49.3% EPF 7.4% Budi Tenggara 3.0% Source: Affin Hwang, Bloomberg

Research Team; (603) 2146 7599;

[email protected]




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HARTALEGA – FINANCIAL SUMMARY Profit & Loss Statement Key Financial Ratios and Margins

FYE 31 Mar (RMm) 2014A 2015A 2016E 2017E 2018E FYE 31 Mar (RMm) 2014A 2015A 2016E 2017E 2018E

Revenue 1,107.1 1,146.0 1,557.6 1,845.8 2,215.3 Growth

Operating expenses (753.0) (823.8) (1,118.5) (1,338.9) (1,623.1) Revenue (%) 7.3 3.5 35.9 18.5 20.0

EBITDA 354.1 322.2 439.1 507.0 592.2 EBITDA (%) 5.1 (9.0) 36.3 15.5 16.8

Depreciation (44.8) (45.3) (69.6) (78.2) (83.0) Core net profit (%) (0.2) (10.0) 32.6 15.4 19.1

EBIT 309.3 276.9 369.5 428.8 509.2

Net interest income/(expense) (0.8) (0.9) (0.3) (0.1) (3.3) Profitability

Associates' contribution - - - - - EBITDA margin (%) 32.0 28.1 28.2 27.5 26.7

EI - - - - - PBT margin (%) 27.9 24.2 23.5 22.9 22.7

Pretax profit 309.0 276.8 366.3 422.5 503.0 Net profit margin (%) 21.1 18.3 17.9 17.4 17.3

Tax (75.7) (66.7) (87.9) (101.4) (120.7) Effective tax rate (%) 24.5 24.1 24.0 24.0 24.0

Minority interest (0.5) (0.5) (0.5) (0.5) (0.5) ROA (%) 20.9 14.4 15.3 15.9 16.8

Net profit 232.8 209.6 277.9 320.6 381.8 Core ROE (%) 24.7 16.5 19.3 19.7 20.5

ROCE (%) 23.2 15.7 16.8 17.4 18.4

Balance Sheet Statement Dividend payout ratio (%) 46.2 50.1 40.0 40.0 40.0

FYE 31 Mar (RMm) 2014A 2015A 2016E 2017E 2018E

PPE 684.8 1,044.2 1,324.6 1,496.5 1,563.5 Liquidity

Other non-current assets 7.1 24.8 24.8 24.8 24.8 Current ratio (x) 3.8 3.1 2.8 2.8 3.4

Total non-current assets 691.9 1,069.0 1,349.4 1,521.3 1,588.3 Op. cash flow (RMm) 248.9 206.5 318.7 345.2 395.9

Cash and equivalents 160.7 65.3 73.0 39.9 133.1 Free cashflow (RMm) 144.8 (210.8) (31.3) 95.2 245.9

Inventory 98.2 120.2 162.4 194.4 235.7 FCF/share (sen) 8.8 (12.8) (1.9) 5.8 15.0

Trade receivables 133.8 181.1 204.8 242.7 291.3

Other current assets 27.4 21.8 21.8 21.8 21.8 Asset management

Total current assets 420.1 388.4 462.0 498.9 681.9 Inventory turnover (days) 51.6 57.8 53.0 53.0 53.0

Trade payables 53.2 45.5 82.7 99.0 120.1 Receivables turnover (days) 44.1 57.7 48.0 48.0 48.0

Short term borrowings 3.0 6.1 6.1 6.1 6.1 Payables turnover (days) 28.0 21.9 27.0 27.0 27.0

Other current liabilities 53.5 75.4 75.4 75.4 75.4

Total current liabilities 109.7 127.0 164.2 180.5 201.5 Capital structure

Long term borrowings 1.8 0.3 150.3 150.3 150.3 Net Gearing (%) net cash net cash 0.1 0.1 0.0

Other long term liabilities 57.0 59.5 59.5 59.5 59.5 Interest Cover (x) 1,031.0 2,769.0 113.5 68.5 81.4

Total long term liabilities 58.8 59.8 209.8 209.8 209.8

Shareholders' Funds 942.3 1,269.0 1,436.2 1,629.1 1,858.6

Cash Flow Statement

FYE 31 Mar (RMm) 2014A 2015A 2016E 2017E 2018E

PAT 232.8 209.6 277.9 320.6 381.8

Depreciation & amortisation 44.8 45.3 69.6 78.2 83.0

Working capital changes (37.4) (47.4) (28.7) (53.6) (68.8)

Others 8.7 (1.0) - - -

Cashflow from operations 248.9 206.5 318.7 345.2 395.9

Capex (105.8) (417.8) (350.0) (250.0) (150.0)

Others (98.4) - - - -

Cash flow from investing (204.2) (417.8) (350.0) (250.0) (150.0)

Debt raised/(repaid) - 4.4 150.0 - -

Equity raised/(repaid) 49.8 220.1 - - -

Dividends paid (107.6) (105.0) (111.1) (128.2) (152.7)

Others 7.7 2.9 - - -

Cash flow from financing (65.5) 116.6 38.9 (128.2) (152.7)

Free Cash Flow 144.8 (210.8) (31.3) 95.2 245.9 Source: Company, Affin Hwang forecasts

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Looking forward to 2017E

Kossan’s CY16E earnings growth should moderate vs. 2015’s +40% yoy. Expansion should resume in 2017E, which should see a 34% addition to capacity. An ASP decline is likely, but Kossan’s capacity increase and operational efficiency should partly compensate for margin loss. Maintain BUY but with a lower TP of RM7.50.

Nitrile gloves likely to drive growth

Kossan’s focus shift to a nitrile-centric product mix should continue to boost earnings growth. Nitrile gloves made up approximately 70% of its total gloves sold in 2015, an increase from 57% in 2014. The switch to nitrile was in line with market demand, mainly due to increasing health awareness in developed markets. The utilisation rate for 2015 was elevated at >80%. Management guides that they are comfortable within the 80-85% range, as excess capacity should allow it to capture any immediate large orders. Higher nitrile proportion in the mix should also partly boost its profitability, as nitrile gloves carry higher margins comparatively. The EBITDA margin rose by 2.0 ppt yoy in 2015 to 21%.

Earnings growth could accelerate in 2018

Kossan’s expansion plan will likely resume in 2017 after a hiatus in 2016. This year’s earnings growth are underpinned by full-year contribution from the 2 new nitrile-centric plants (+2.0bn gloves), which came online in 3QCY15, bringing Kossan’s total installed capacity to 22.0bn gloves per annum. Kossan has recently revealed its latest capacity expansion programme, with plans to construct 4 plants with 18.0bn gloves capacity per annum in 4 years in Bestari Jaya. The first plant under Phase 1 (4.5bn gloves) is expected to come online in 4QCY17. Separately, it is also working on an additional nitrile-centric plant in Meru with 3.0bn gloves capacity, which is scheduled to commence production in 3QCY17.

Maintain BUY, lower TP at RM7.50 We maintain our BUY call and leave our earnings forecasts largely

unchanged, but lower our 12-month target price to RM7.50 (from RM8.50) as we switch our valuation method to 2016E (from average 2016-18E previously) and use a target PER of 21x, or +1SD above the past-3-year mean. Heightened competition would be a key risk, as it could lead to lower ASPs, and hence, further crimp gross margins. However, we expect the impact to be manageable for Kossan given: (i) capacity expansion; (ii) balanced product mix; and (iii) operational efficiency delivery track record.


FYE Dec (RM'm) 2014 2015 2016E 2017E 2018E Revenue (RMm) 1,301.7 1,635.9 1,875.6 2,076.2 2,567.2 EBITDA (RMm) 248.0 345.3 373.1 405.8 475.6 Pretax profit (RMm) 186.9 268.5 296.1 322.8 386.8 Net profit (RMm) 145.8 203.3 227.8 248.6 298.5 EPS (sen) 22.8 31.8 35.6 38.9 46.7 PER (x) 27.8 19.9 17.8 16.3 13.6 Core net profit (RMm) 145.2 203.3 227.8 248.6 298.5 Core EPS (sen) 22.7 31.8 35.6 38.9 46.7 Core EPS growth (%) 6.5 40.0 12.1 9.1 20.1 Core PER (x) 27.9 19.9 17.8 16.3 13.6 DPS (sen) 7.8 4.5 18.1 19.7 23.6 Dividend Yield (%) 1.2 0.7 2.9 3.1 3.7 EV/EBITDA (x) 16.9 11.9 11.1 10.1 8.7 Chg in EPS (%) (0.3) 0.1 0.1 Affin/Consensus (x) 1.0 0.9 0.9 Source: Company, Affin Hwang forecasts, Bloomberg

Company Update

Kossan KRI MK Sector: Rubber Products

RM6.33 @ 14 April 2016

BUY (maintain) Upside: 18.5%

Price Target: RM7.50 Previous Target: RM8.50

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Price Performance


Stock Data

Issued shares (m) 639.5 Mkt cap (RMm)/(US$m) 4,047.8/1,041.0 Avg daily vol - 6mth (m) 1.6 52-wk range (RM) 5.57-9.50 Est free float 29.7% BV per share (RM) 1.54

P/BV (x) 4.12 Net cash/ (debt) (RMm)

(3QFY16)

(56.6) ROE (2016E) 20.3% Derivatives Nil Shariah Compliant Yes

Key Shareholders

Kossan Holdings 51.1% EPF 9.5% Invesco 5.6% Source: Affin Hwang, Bloomberg

Research Team; (603) 2146 7599;

[email protected]




15 April 2016


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KOSSAN – FINANCIAL SUMMARY Profit & Loss Statement Key Financial Ratios and Margins

FYE 31 Dec (RMm) 2014A 2015A 2016E 2017E 2018E FYE 31 Dec (RMm) 2014A 2015A 2016E 2017E 2018E

Revenue 1,301.7 1,635.9 1,875.6 2,076.2 2,567.2 Growth

Operating expenses (1,053.7) (1,290.6) (1,502.5) (1,670.4) (2,091.7) Revenue (%) (0.4) 25.7 14.7 10.7 23.6

EBITDA 248.0 345.3 373.1 405.8 475.6 EBITDA (%) 5.4 39.2 8.0 8.8 17.2

Depreciation (55.9) (66.7) (71.7) (77.7) (83.7) Core net profit (%) 6.5 40.0 12.1 9.1 20.1

EBIT 192.1 278.6 301.4 328.2 391.9


Associates' contribution - - - - - EBITDA margin (%) 19.1 21.1 19.9 19.5 18.5

EI 0.6 - - - - PBT margin (%) 14.4 16.4 15.8 15.5 15.1





ROCE (%) 13.3 15.6 16.0 16.1 17.6


FYE 31 Dec (RMm) 2014A 2015A 2016E 2017E 2018E

PPE 724.6 776.7 823.8 866.1 902.5 Liquidity


Total non-current assets 729.7 781.7 828.8 871.1 907.5 Op. cash flow (RMm) 164.2 225.5 192.3 280.0 263.4

Cash and equivalents 63.9 166.5 124.4 158.6 151.1 Free cashflow (RMm) 24.3 106.8 72.3 160.0 143.4

Inventory 193.5 205.6 327.1 363.7 455.4 FCF/share (sen) 3.8 16.7 11.3 25.0 22.4



Total current assets 560.0 685.2 779.7 882.8 1,046.4 Inventory turnover (days) 103.0 79.5 79.5 79.5 79.5





Long term borrowings 63.4 96.1 96.1 96.1 96.1 Net Gearing (%) 0.2 0.1 0.1 0.1 0.1

Other long term liabilities 62.5 74.3 74.3 74.3 74.3 Interest Cover (x) 33.1 27.7 57.2 61.1 77.8


Shareholders' Funds 807.0 982.4 1,094.7 1,217.4 1,365.1

Cash Flow Statement

FYE 31 Dec (RMm) 2014A 2015A 2016E 2017E 2018E

PAT 149.0 207.1 231.0 251.8 301.7


Working capital changes (43.4) 6.5 (110.4) (49.4) (122.0)

Others 2.7 (54.8) - - -


Capex (141.3) (119.0) (120.0) (120.0) (120.0)

Others (6.6) 8.4 - - -


Debt raised/(repaid) 62.3 24.4 - - -

Equity raised/(repaid) - - - - -

Dividends paid (49.8) (28.8) (115.5) (125.9) (150.9)

Others 66.4 4.7 - - -

Cash flow from financing (53.9) (9.1) (115.5) (125.9) (150.9)

Free Cash Flow 24.3 106.8 72.3 160.0 143.4 Source: Company, Affin Hwang forecasts

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Better visibility

Supermax’s total installed capacity is expected to double to 39.2bn gloves in 5 years, as its expansion plans are now progressing on schedule after numerous delays. Supermax is still trading at a steep discount to sector average despite better visibility on its earnings-growth trajectory, which we see as too steep despite some company-specific issues. Maintain BUY with an unchanged TP of RM3.40.

Playing catch up

Supermax resumed its earnings-growth trajectory in CY15 after playing catch up with its peers for the past two years as its capacity expansion was hampered with many delays. Its CY15 core earnings grew 33% yoy, lifted by higher capacity and a better product mix. Eight lines in Plants 10 and 11 were fully commissioned in 4QCY15 with a total installed capacity of 2.2bn gloves for nitrile. We also observed improvement in profitability as evident in the EBITDA margin, which expanded 1.3ppt yoy, driven by new lines with better throughput and lower input costs. We believe the efficiency gains should be sustainable on the back of a gradual ramp up of new production lines, coupled with a better product mix, which should partially offset margins loss from the declining ASPs.

Capacity likely to double in 5 years

CY16E earnings growth should be underpinned by the full-year contribution of Plants 10 & 11. The remaining 12 lines will be fully commissioned by 1HCY16, lifting total installed capacity to 22bn gloves. The nitrile glove mix will likely reach 50% (CY14:40%), in line with market demand. Meanwhile, management has shed further light on the proposed Glove City at Bukit Kapar that will house 4 plants with 22 production lines and 8bn gloves per annum. Approvals for all infrastructure have been obtained to date and construction is scheduled to begin in 3QCY16. We expect the Glove City to ramp up gradually beginning 3QCY17 and a full commissioning by CY22. All-in, Supermax’s total installed capacity should double from 20bn gloves presently to 40bn gloves in 5 years.

Maintain BUY with unchanged TP of RM3.40

Supermax shares are currently trading at 13x PE CY16E, still at a steep discount to current sector PE of 18x. We believe there is further room to narrow the discount given better earnings visibility and some certainty in its expansion plan. We maintain our BUY rating and 12-month target price of RM3.40, based on a CY16E PER of 16x, or +1SD above its past-3-year

mean PE. Our target PE for Supermax remains at c. 30% discount to our sector target CY16E PER of 22x (weighted average of our individual target PERs), which is in line with the historical average discount.


FYE June (RM'm) 2014 2015 2016E 2017E 2018E Revenue (RMm) 1,004.4 1,053.2 1,318.0 1,506.7 1,831.9 EBITDA (RMm) 154.5 174.9 214.8 243.0 257.5 Pretax profit (RMm) 128.2 152.4 180.3 205.1 216.4 Net profit (RMm) 95.5 127.0 144.7 164.6 173.6 EPS (sen) 14.2 18.9 21.6 24.5 25.9 PER (x) 19.6 14.8 12.9 11.4 10.8 Core net profit (RMm) 95.5 127.0 144.7 164.6 173.6 Core EPS (sen) 14.2 18.9 21.6 24.5 25.9 Core EPS growth (%) (20.2) 32.9 14.0 13.7 5.5 Core PER (x) 19.6 14.8 12.9 11.4 10.8 DPS (sen) 5.1 4.0 6.4 7.3 7.7 Dividend Yield (%) 1.8 1.4 2.3 2.6 2.8 EV/EBITDA (x) 13.4 11.9 10.0 8.8 8.5 Chg in EPS (%) - - - Affin/Consensus (x) 1.0 1.0 0.9 Source: Company, Affin Hwang forecasts, Bloomberg

Company Update

Supermax SUCB MK Sector: Rubber Products

RM2.79 @ 14 April 2016


Price Target: RM3.40 Previous Target: RM3.40

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Price Performance

1M 3M 12M Absolute +6.1% -17.7% +35.4% Rel to KLCI +4.6% -22.0% +44.5%

Stock Data

Issued shares (m) 671.3 Mkt cap (RMm)/(US$m) 1,872.8/481.7 Avg daily vol - 6mth (m) 6.9 52-wk range (RM) 1.93-3.56 Est free float 55.4% BV per share (RM) 1.53


(3QFY16)

(298.3) ROE (2016E) 20.3% Derivatives Nil Shariah Compliant Yes

Key Shareholders

Stanley Thai 20.7% Tan Bee Geok 15.3% EPF 5.0% Source: Affin Hwang, Bloomberg

Research Team; (603) 2146 7599;

[email protected]




15 April 2016


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SUPERMAX – FINANCIAL SUMMARY Profit & Loss Statement Key Financial Ratios and Margins

FYE 30 June (RMm) 2014A 2015A 2016E 2017E 2018E FYE 30 June (RMm) 2014A 2015A 2016E 2017E 2018E

Revenue 1,004.4 1,053.2 1,318.0 1,506.7 1,831.9 Growth

Operating expenses (849.9) (878.3) (1,103.2) (1,263.7) (1,574.4) Revenue (%) (4.2) 4.9 25.1 14.3 21.6

EBITDA 154.5 174.9 214.8 243.0 257.5 EBITDA (%) (6.7) 13.2 22.8 13.1 6.0

Depreciation (27.9) (28.2) (34.9) (37.3) (39.7) Core net profit (%) (20.2) 32.9 14.0 13.7 5.5

EBIT 126.6 146.7 179.9 205.6 217.7


Associates' contribution 9.8 13.0 9.0 8.1 7.3 EBITDA margin (%) 15.4 16.6 16.3 16.1 14.1

EI - - - - - PBT margin (%) 12.8 14.5 13.7 13.6 11.8



Minority interest 0.4 0.6 0.5 0.5 0.5 ROA (%) 6.5 8.0 8.4 8.9 8.7


ROCE (%) 7.2 8.9 9.4 10.0 9.8


FYE 30 June (RMm) 2014A 2015A 2016E 2017E 2018E

PPE 663.1 750.6 835.6 918.3 998.5 Liquidity


Total non-current assets 918.8 1,006.3 1,091.3 1,174.0 1,254.2 Op. cash flow (RMm) 157.7 141.0 98.4 177.1 117.0

Cash and equivalents 131.9 126.0 61.2 69.0 14.0 Free cashflow (RMm) (19.9) 21.0 (21.6) 57.1 (3.0)

Inventory 151.4 192.5 241.8 277.0 345.1 FCF/share (sen) (3.0) 3.1 (3.2) 8.5 (0.5)



Total current assets 554.3 584.0 625.0 675.3 750.8 Inventory turnover (days) 80.6 80.0 80.0 80.0 80.0





Long term borrowings 146.1 146.1 146.1 146.1 146.1 Net Gearing (%) 0.2 0.2 0.2 0.2 0.2

Other long term liabilities 42.7 42.7 42.7 42.7 42.7 Interest Cover (x) 15.4 20.0 20.9 23.9 25.3


Shareholders' Funds 945.2 1,044.7 1,145.7 1,260.5 1,381.7

Cash Flow Statement

FYE 30 June (RMm) 2014A 2015A 2016E 2017E 2018E

PAT 95.5 127.0 144.7 164.6 173.6


Working capital changes 12.6 (14.2) (81.2) (24.9) (96.4)

Others 21.7 - - - -


Capex (177.6) (120.0) (120.0) (120.0) (120.0)

Others (0.4) - - - -


Debt raised/(repaid) 58.4 - - - -

Equity raised/(repaid) - - - - -

Dividends paid (34.0) (26.9) (43.3) (49.2) (51.9)

Others 41.9 - - - -

Cash flow from financing (17.5) (26.9) (43.3) (49.2) (51.9)

Free Cash Flow (19.9) 21.0 (21.6) 57.1 (3.0) Source: Company, Affin Hwang forecasts

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Efficiency gains

Top Glove’s 1HFY16 EBITDA margin rose by 7ppt yoy to 24%, second only to sector leader Hartalega (27%). This was partly due to Ringgit weakness, aided by its ongoing focus on operational improvements and lower input costs. Its EBITDA margin should moderate at around the 20-22% level in FY16-18E, still a commendable achievement from its historical levels of 15-17%. In terms of valuation, shares of Top Glove are still trading at a discount to sector leader Hartalega despite an improving profitability profile. Reaffirm BUY and TP of RM7.17.

Record profit

Top Glove’s 1H FY16 net profit grew 122% yoy to RM233m, a record high. The strong earnings growth was due to: (i) higher sales volume from nitrile gloves; (ii) better operating performance; (iii) low input costs; and (iv) Ringgit weakness. Management is increasingly focused on expanding its nitrile segment to meet market demand. The nitrile glove mix is now at 32% (FY15: 28%) and Top Glove targets a mix of 50% in nitrile gloves.

Operational efficiency to underpin margin

Management has guided that priority will be shifted towards operational efficiency optimisation, which has been lagging despite economies of scale as the world’s largest glove manufacturer. Several initiatives are already in place, such as increased automation and faster lines for higher throughput. Its latest factories are equipped with lines capable of making 40,000 gloves an hour. We believe that margin improvements will be sustainable, and expect Top Glove’s EBITDA margin to normalise at 20-22% over FY16-18E. The shift to a higher nitrile glove mix should improve its profitability further. Currency volatility would be a risk to our call, but should be partially offset by higher sales volume and efficiency gains.

Reaffirm BUY and target price of RM7.17

Shares of Top Glove have been trading at a discount to Hartalega despite a higher capacity (44bn gloves/year) and higher profit base. We believe this was mainly due to its lower profitability profile, which was bogged down by plant inefficiencies and an unfavourable product mix in the past. Nonetheless, its operational improvement initiatives are showing promising results, and coupled with better product mix, we believe the valuation gap with sector leader Hartalega should narrow. Top Glove’s EBITDA margin has overtaken Kossan’s and is now the sector’s highest after Hartalega. We reaffirm our BUY rating and target price of RM7.17, based on a

CY16E PER of 21x, or +1SD above the past-3-year mean PE. Shares of Top Glove currently trade at undemanding valuation of 15x PE CY16E.


FYE Aug (RM'm) 2014 2015 2016E 2017E 2018E Revenue (RMm) 2,275.4 2,510.5 2,890.6 3,116.7 3,312.6 EBITDA (RMm) 265.4 434.9 620.4 646.1 661.1 Pretax profit (RMm) 212.1 355.2 529.4 550.7 562.5 Net profit (RMm) 176.4 271.5 422.1 439.2 448.6 EPS (sen) 14.1 21.7 33.7 35.1 35.8 PER (x) 37.1 24.1 15.5 14.9 14.6 Core net profit (RMm) 158.4 268.5 422.1 439.2 448.6 Core EPS (sen) 12.7 21.4 33.7 35.1 35.8 Core EPS growth (%) (6.8) 69.5 57.2 4.0 2.1 Core PER (x) 41.3 24.4 15.5 14.9 14.6 DPS (sen) 7.9 8.4 16.9 17.6 18.0 Dividend Yield (%) 1.5 1.6 3.2 3.4 3.4 EV/EBITDA (x) 24.1 14.6 10.1 9.5 9.0 Chg in EPS (%) - - - Affin/Consensus (x) 1.0 1.0 1.0 Source: Company, Affin Hwang forecasts, Bloomberg

Company Update

Top Glove TOPG MK Sector: Rubber Products

RM5.23 @ 14 April 2016


Price Target: RM 7.17 Previous Target: RM7.17

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Price Performance


Stock Data

Issued shares (m) 1,254.6 Mkt cap (RMm)/(US$m) 6,561.6/1,687.8 Avg daily vol - 6mth (m) 6.4 52-wk range (RM) 2.62-7.03 Est free float 51.0% BV per share (RM) 1.41


(3QFY16)

337.4 ROE (2016E) 23.1% Derivatives Nil Shariah Compliant Yes

Key Shareholders

Tan Sri Lim Wee Chai 29.4% Firstway United 5.1% MFP Capital 3.5% Source: Affin Hwang, Bloomberg

Research Team; (603) 2146 7599;

[email protected]




15 April 2016


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TOP GLOVE – FINANCIAL SUMMARY Profit & Loss Statement Key Financial Ratios and Margins

FYE 31 Aug (RMm) 2014A 2015A 2016E 2017E 2018E FYE 31 Aug (RMm) 2014A 2015A 2016E 2017E 2018E

Revenue 2,275.4 2,510.5 2,890.6 3,116.7 3,312.6 Growth

Operating expenses (2,010.0) (2,075.6) (2,270.3) (2,470.6) (2,651.5) Revenue (%) (1.6) 10.3 15.1 7.8 6.3

EBITDA 265.4 434.9 620.4 646.1 661.1 EBITDA (%) (3.9) 63.9 42.6 4.1 2.3

Depreciation (90.9) (98.1) (110.4) (119.9) (129.5) Core net profit (%) (6.8) 69.5 57.2 4.0 2.1

EBIT 174.5 336.8 510.0 526.1 531.6

Net interest income/(expense) 12.2 12.0 6.1 19.7 23.0 Profitability

Associates' contribution 3.3 (11.7) (3.6) (3.6) (3.6) EBITDA margin (%) 11.7 17.3 21.5 20.7 20.0

EI 18.0 3.0 - - - PBT margin (%) 9.3 14.1 18.3 17.7 17.0





ROCE (%) 10.9 11.8 16.8 16.1 15.2


FYE 31 Aug (RMm) 2014A 2015A 2016E 2017E 2018E

PPE 995.2 1,026.5 1,070.0 1,100.7 1,121.9 Liquidity


Total non-current assets 1,093.1 1,214.8 1,254.4 1,284.5 1,305.0 Op. cash flow (RMm) 308.5 336.2 472.2 519.1 542.9

Cash and equivalents 184.0 146.5 256.9 405.7 573.6 Free cashflow (RMm) 120.1 134.3 322.2 369.1 392.9

Inventory 207.4 252.1 307.1 334.2 358.8 FCF/share (sen) 9.6 10.7 25.7 29.5 31.4



Total current assets 840.0 1,473.1 1,646.7 1,851.6 2,069.3 Inventory turnover (days) 42.0 49.5 45.0 45.0 45.0





Long term borrowings 2.5 105.7 105.7 105.7 105.7 Net Gearing (%) net cash net cash net cash net cash net cash

Other long term liabilities 47.3 47.2 47.2 47.2 47.2 Interest Cover (x) na na na na na


Shareholders' Funds 1,393.4 1,608.0 1,819.8 2,040.1 2,265.1

Cash Flow Statement

FYE 31 Aug (RMm) 2014A 2015A 2016E 2017E 2018E

PAT 176.4 271.5 422.1 439.2 448.6

Depreciation & amortisation (90.9) (98.1) (110.4) (119.9) (129.5)

Working capital changes 58.7 (44.8) (60.3) (40.1) (35.3)

Others 164.3 207.6 220.7 239.9 259.0


Capex (192.2) (205.6) (150.0) (150.0) (150.0)

Others (68.1) (296.2) - - -


Debt raised/(repaid) 130.1 364.1 - - -

Equity raised/(repaid) 2.0 17.6 - - -

Dividends paid (99.3) (105.0) (211.8) (220.3) (225.0)

Others 0.6 14.7 (0.0) 0.0 (0.0)

Cash flow from financing 32.2 262.0 (211.8) (220.3) (225.0)

Free Cash Flow 120.1 134.3 322.2 369.1 392.9

Source: Company, Affin Hwang forecasts

15 April 2016


of 21

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BUY Total return is expected to exceed +10% over a 12-month period

HOLD Total return is expected to be between -5% and +10% over a 12-month period

SSEELLLL Total return is expected to be below -5% over a 12-month period

NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a

recommendation

The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months.

OVERWEIGHT Industry, as defined by the analyst’s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months

NEUTRAL Industry, as defined by the analyst’s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months

UNDERWEIGHT Industry, as defined by the analyst’s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months

This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) (“the Company”) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company’s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company’s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) (formerly known as HwangDBS Investment Bank Berhad) A Participating Organisation of Bursa Malaysia Securities Bhd Chulan Tower Branch, 3rd Floor, Chulan Tower, No 3, Jalan Conlay, 50450 Kuala Lumpur. www.affinhwang.com Email : [email protected] Tel : + 603 2143 8668 Fax : + 603 2145 3005

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