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Malaysia rubber gloves

HEALTH CARE & PHARMACEUTICALS

EQUITY RESEARCH

Recent run sustainable?

June 17, 2013

Unattractive valuations without clear positive catalysts in sight for the near term
Strong demand may not translate into better margins The rubber glove industry has certainly continued to see healthy demand globally, with sales volumes remaining on an uptrend. While we concur with the glovemakers views that demand will remain strong amid a growing population and rising healthcare awareness, we are concerned about the potentially weaker pricing power for glove manufacturers as the aggressive expansion plans being put up by each major player suggests that competition looks set to increase somewhat significantly as soon as the end of this year. While we continue to monitor closely ASP trends for the glovemakers, we maintain our view that as more nitrile (NBR) capacity comes onto the market progressively, heightened competition within the segment is likely to prompt downward revision of ASPs, resulting in less lucrative margins moving forth. Lower raw material costs to benefit, but likely to be passed on Due to lacklustre automotive industry globally, rubber prices have remained weak throughout the first half of the year. As natural rubber (NR) latex and NBR raw material account for c.50-60% of total cost of production, soft raw material prices should provide a boost to glovemakers earnings. Nonetheless, in line with our view highlighted in the above section that stiffer competition is likely to weaken the pricing power of glovemakers, we believe that much of the cost savings from such will be passed on to customers. Valuations appear unattractive with impressive YTD performance Owing to the H7N9 virus outbreak in China in late-March 2013, the four Malaysia-listed glovemakers have rallied between 15-34% YTD (except Supermax, at +2.6%), outperforming the KLCIs 5.1% gain over the same time horizon. Following this, glove stocks trade between 0.7-2.7SD above their respective long-term averages, which are not cheap, in our view, considering the lack of near-term positive catalysts for the sector. Thus, we see limited upside potential for share prices from current levels. We think that Top Glove, Supermax and Kossan are currently fairly priced, but Hartalega appears to be trading at rather lofty valuations amid declining ROEs and high PEG of 2.2 on our estimates.
Fig. 1: Stocks for action
Stock HART MK KRI MK SUCB MK TOPG MK Rating Reduce Neutral Neutral Neutral Price (Jun 12) (local) 6.30 4.45 1.95 6.39 TP (local) 4.70 4.35 2.15 6.20 Potential up/dow nside (%) -25.4% -2.2% 10.3% -3.0%

Anchor themes We expect a healthy long-term demand outlook amid growing healthcare awareness and an aging population worldwide. Nonetheless, with competition set to increase in the years ahead, we see lower pricing power for glovemakers. Nomura vs consensus We are Neutral on the sector, diverging from the Bullish street view, on our expectation of mounting pricing pressure as a result of keener competition in the industry.
Research analysts Malaysia Health Care & Pharmaceuticals Celeste Yap - NSM celeste.yap@nomura.com +603 2027 6894 Bineet Banka - NSFSPL bineet.banka@nomura.com +91 22 4053 3784

Source: Nomura research, Bloomberg. Note: Pricing as of 12 June, 2013. Upgrading

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Nomura | Malaysia rubber gloves

June 17, 2013

Contents
3

Recent run sustainable?


3

Strong demand for rubber gloves

but can margins stay just as strong?

Updating our assumptions

Valuations Risks / catalysts


10

10

Pandemic outbreaks

10

Healthcare reforms

12

Hartalega Holdings Kossan Rubber Industries Supermax Corp Bhd Top Glove Corp Appendix A-1

17

22

27

32

Nomura | Malaysia rubber gloves

June 17, 2013

Recent run sustainable?


With the exception of Supermax (+2.6% YTD), the other Malaysian-listed glovemakers (Top Glove, Kossan and Hartalega) have rallied between 15-34% YTD, significantly outperforming the KLCIs 5.1% gain over the same time frame. While we expect rubber glove demand to remain strong globally, we remain cautious on the aggressive expansion plans by various manufacturers into the NBR segment which in our view will likely lead to weakening pricing power and lower margins. Trading between 0.7-2.7SD above respective long-term means, on average, we do not think valuations of the glove stocks are attractive; we are Neutral on Top Glove, Supermax and Kossan, and Reduce on Hartalega.

Strong demand for rubber gloves


We continue to see strong demand globally for rubber gloves, and the industry continues to grow at an average pace of 8-10% per year. While population growth contributes to organic growth in glove demand, increasing healthcare awareness along with rising affluence in developing countries are key drivers to the growth of the industry, too. We further believe that the ageing population worldwide will translate into a higher demand for rubber gloves in the long term, as age is likely to come with increased requirement of healthcare services which many a time suggests higher usage of rubber gloves (please see our report Asia-Pacific Healthcare: Asia aging for more details). The (slower) nitrile wave continues It is an obvious trend that nitrile (NBR) gloves continue to gain popularity at the expense of natural rubber (NR) counterparts, particularly in developed/regions like North America and Europe. Nonetheless, in developing countries (eg, Asia and Latin America), the increase in number of NBR gloves exported by Malaysia outweighed that of NR. While North America is clearly a SR-heavy country, Europe and East Asia have a balanced mix of NR and SR gloves imports; other regions remain largely focused in NR gloves. We further note that the y-y growth rates for Malaysian SR glove exports to the US, Europe and the rest of the world have stabilised around the 25-30% region. Going forward, while we expect the NBR-switching trend to continue, we think the NBR growth rate is likely to slow further as: 1) the main glove importing country US is already at c.82% NBR glove usage; 2) stable / lower NR latex prices would make NR gloves more competitive, which could induce some (price sensitive) buyers to switch back into NR gloves; and 3) developing countries are likely to see the highest growth rate going forward, but appear to prefer NR gloves thus far due to familiarity of NR latex and the more competitive NR glove prices, we believe.
Fig. 2: Malaysia exports of SR gloves
(mn prs) 12,000 10,000 8,000 6,000 4,000 2,000 0 2008 2009 2010 2011 2012 Europe N. America L. America Asia

NBR gloves continue to gain popularity in the developed world

We expect NBR to continue growing, but at a slower rate

Fig. 3: Malaysia exports of NR gloves


(mn prs) 12,000 10,000 8,000 6,000 4,000 2,000 0 2008 2009 2010 2011 2012 Europe N. America L. America Asia

Note: NBR makes up 99% of SR (synthetic rubber) gloves Source: MREPC, Nomura research

Source: MREPC, Nomura research

Nomura | Malaysia rubber gloves

June 17, 2013

Fig. 4: NR still dominant in most regions (2012 data)


mn pcs 30,000 25,000 20,000 15,000 10,000 5,000 0
U.S. East Asia EU27 North America West Asia Non-EU Africa Oceania ASEAN South America South Asia Others

Fig. 5: Malaysia exports of SR gloves


y-y growth

NR

SR

100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 2009

U.S.

Europe

RoW

Total

2010

2011

2012

Source: MREPC, Nomura research

Source: MREPC, Nomura research

but can margins stay just as strong?


In this regard, we do not downplay the visibility of demand for rubber gloves coming from across the world. Nonetheless, our concern remains on the margins of glovemakers given the keener competition coming and yet to come into play. Riding on the swing onto the NBR bandwagon back in 2011 when NR latex prices went through the roof, all major glovemakers are now aggressively expanding into the NBR glove segment. The four largest glove manufacturers have, together, planned to add on some 15bn pcs capacity of NBR gloves in calendar 2013 alone, with more of such plans in the bag for the near future. We note that while new production lines are all interswitchable between NR and NBR gloves with minimal downtime, all of the new capacities are currently earmarked for NBR gloves. Drawing comparison to Prisoners dilemma game We believe that as all players step up their productions in the NBR division, glovemakers will, in our view, likely be tempted to lower ASPs in order to lure customers, regardless of it being in the companies best interests to allow prices to stay high and reap maximum profits as demonstrated in Prisoners dilemma game. Indeed, our on-the-ground survey suggests that various companies already are, or do foresee themselves, producing NBR gloves at less profitable levels, and some seemingly contented with margins similar to that of NR gloves. Moreover, we opine that as more NBR capacity comes on-stream progressively throughout the year, the intensifying competition in such space will likely provide customers with higher bargaining power, thus affecting the glovemakers ability to price such gloves at a significantly higher price than the NR counterparts. This suggests that the high-margin days of NBR glove-manufacturing could be no longer, as its scarcity factor would be gone with the large additional capacity coming onto the market. Holding to our view of mounting pricing pressure Judging from the recent quarterly results, margins appear to have, generally, held up better than we have expected so far boosted also by the favourable raw material prices. We continue to monitor the ASP and raw material price trends closely, while maintaining our view that as some of the rather sizeable players begin to move towards competitive pricing, it will be somewhat difficult for the other glovemakers to keep their ASPs up without risking losing some customers. Hence, we expect ASPs to continue trending downward, reflecting both easing raw material costs and also declining margins due to keener competition in the NBR space.
We expect end users to gain from the NBR expansions as it is unlikely for manufacturers to cooperate and keep NBR as a high-margin product

Nomura | Malaysia rubber gloves

June 17, 2013

Updating our assumptions


We fine-tune the assumptions we have applied to the key inputs into our models, including exchange rates, raw material prices and capacity expansions. Taking into account these changes, we also roll forward our earnings base for Kossan, Supermax and Top Glove to FY14F, arriving at our new TPs for each stock. Now expecting a weaker ringgit Being an export-driven industry, goods sold are quoted in USD while the bulk of the costs are dealt with in MYR; the relative strength of the ringgit to the greenback therefore has an impact on the glovemakers earnings. We also note that while NBR raw materials are quoted in USD, providing a natural hedge to glovemakers, that of NR latex is quoted in MYR. However, we understand that glove manufacturers generally do convert their costs into USD before adjusting their ASPs to take into account any cost savings / inflation, thus the impact of exchange rates on earnings from the raw material perspective is less direct. Our latest exchange rate forecasts are shown in the table below.
Fig. 6: Nomuras in-house currency forecasts
1Q12 MYR / USD THB / USD THB / MYR 3.06 30.80 10.07 2Q12 3.18 31.80 10.00 3Q12 3.06 30.80 10.07 4Q12 3.06 30.60 10.00 1Q13 3.10 29.30 9.45 2Q13F 3.10 28.70 9.26 3Q13F 3.05 28.60 9.38 4Q13F 3.02 28.50 9.44 2012 3.06 30.60 10.00 2013F 3.02 28.50 9.44 2014F 2.92 27.80 9.52

Note: Numbers in bold are actual values; others forecast. Forecasts are end of period and modal. Table reflects data available as of 6 June 2013. Source: CEIC, Nomura Global Economics

Raw material prices weaker than expected Due to a large newly planted and re-planted area of rubber trees, we have expected NR latex prices to remain soft in the mid-term on the back of ample upcoming supply. Nonetheless, we have seen flattish prices over this years wintering period while NR latex prices have remained below the 600sen/kg mark since early-April, owing largely to the weak automotive industry globally. We hence revise downwards our average NR latex price assumption to 590/615 sen/kg for FY13F/FY14F, from 630/620 sen/kg. We also lower our average grossed-up NBR raw material price assumption to 553/563 sen/kg for FY13F/FY14F, from 608/611 sen/kg.
Fig. 7: New and re-planting of rubber trees by ANRPC countries
'000 ha 600 500 400 300 200 100 0 2003 2004 2005 2006 2007 2008 2009 2010 2011
Note: The Association of Natural Rubber Producing Countries (ANRPC) account for c.94% of the worlds NR production based on our estimates. Source: ANRPC, Nomura research

Fig. 8: NR latex price typically peaks around February in the absence of other factors
sen / kg

Newly planted area

Re-planted area

1,200 1,000 800 600 400 200 0

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Note: Pink highlights mark the end of February for each year. Source: Bloomberg, Nomura research

Jan-13

Nomura | Malaysia rubber gloves

June 17, 2013

Fig. 9: Automotive industry a main driver for NR latex prices


Motor vehicles Production (LHS) 90,000,000 85,000,000 80,000,000 75,000,000 70,000,000 65,000,000 60,000,000 55,000,000 50,000,000 Natural Rubber price (MYR/KG RHS) 16 14 12 10 8 6 4 2 0

Fig. 10: TOCOM rubber stocks vs. NR latex prices


Short ton 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 8/31/2006 200 800 MYR sen 1,200

TOCOM rubber stock (LHS)

NR latex prices (RHS)

1,000

600

400

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

0 8/31/2007 8/31/2008 8/31/2009 8/31/2010 8/31/2011 8/31/2012

Source: OICA, CEIC, Nomura research

Source: Bloomberg, Nomura research

but cost savings are likely to be passed on As raw materials comprise the largest chunk of each glovemakers cost of production, lower NR latex and nitrile cost are likely to generally mean improved profits and margins for the manufacturers. While this is the case, we note also that ASPs are always adjusted in tandem with the change in raw material costs. Such is likely to be especially true in the current operating environment where we expect the more intense competition to weaken the glovemakers pricing power. Thus, we expect the bulk of cost savings to be shared with the customers, muting somewhat the positive effect that softer raw material costs could have on earnings. Among the four listed glove manufacturers, we note that Top Glove and Supermax are the ones which appear to be more sensitive to raw material prices. As depicted in the charts below, margins of the two firms are inversely correlated with average latex prices. Kossan on the other hand does not display the same pattern, while that of Hartalega is rather the opposite of that of Top Glove and Supermax. We attribute such observation to 1) the NR-heavy product mix of Top Glove and Supermax, rather balanced mix of Kossan, and the NBR-focused Hartalega; and 2) the different business strategy deployed by the firms Hartalega and Kossan are relatively more focused on quality and do not adjust ASPs as aggressively, while Top Glove and Supermax appear to be more keen to compete on price, in comparison.
Fig. 11: EBITDA margins vs. NR latex price Top Glove
% 25 20 15 10 5 0
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13

Fig. 12: EBITDA margins vs. NR latex price Supermax


% 40 30 20 10 0
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13
Source: Company data, Bloomberg, Nomura research

EBITDA margin (%) (LHS) Avg EBITDA margin (%) (LHS) Avg NR latex price (RHS)

sen/kg 1,200 1,000 800 600 400 200 0

EBITDA margin (%) (LHS) Avg EBITDA margin (%) (LHS) Avg NR latex price (RHS)

sen/kg 1,200 1,000 800 600 400 200 -

Source: Company data, Bloomberg, Nomura research

Nomura | Malaysia rubber gloves

June 17, 2013

Fig. 13: EBITDA margins vs. NR latex price Kossan


% 20 15 10 5 0
1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13

Fig. 14: EBITDA margins vs. NR latex price Hartalega


% 60 50 40 30 20 10 0
3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13
Source: Company data, Bloomberg, Nomura research

EBITDA margin (%) (LHS) Avg EBITDA margin (%) (LHS) Avg NR latex price (RHS)

sen/kg 1,200 1,000 800 600 400 200 -

EBITDA margin (%) (LHS) Avg EBITDA margin (%) (LHS) Avg NR latex price (RHS)

sen/kg 1,200 1,000 800 600 400 200 -

Source: Company data, Bloomberg, Nomura research

Nomura | Malaysia rubber gloves

June 17, 2013

Valuations
The Rubber Gloves sector has significantly outperformed the KLCIs 5.1% gain YTD; with the exception of Supermax, with its mere 2.6% gain, while the other three listed companies have rallied 15-34%. We note that most of the gain has been accumulated since April, with the onset of the first H7N9 case in China back in late-March 2013. We believe that other factors driving the recent run likely include the favourable raw material prices and the weakening ringgit versus the US dollar which will both contribute to better top- and bottom-lines for the glovemakers. Nonetheless, following the recent rally, glove stocks are now trading between 0.7-2.7SD above their respective long-term means suggesting that the stocks are not cheap. We thus think that the favourable costs are already priced into the stocks at current levels. Taking into account current trading multiple and growth prospects, while Top Glove, Supermax and Kossan appear fairly priced, we believe Hartalegas valuations are lofty, considering the fact that its profitability is, in our view, set to look less attractive with declining ROEs amid the entrance of all other major glovemakers into its dominant NBR segment. Thus we have a Neutral rating on Top Glove, Supermax (upgraded from Reduce) and Kossan, while we maintain our Reduce rating on Hartalega.
Fig. 15: Valuations at a glance
Based on consensus (Bloomberg) estimates

31-Dec-12 Top Glove Share price 1y fwd P/E Supermax Share price 1y fwd P/E Kossan Share price 1y fwd P/E Hartalega Share price 1y fwd P/E 4.75 13.77 3.36 9.21 1.93 8.98 5.63 15.03

31-Mar-13 5.40 13.99 1.82 8.39 3.55 9.21 4.94 14.16

12-Jun-13 6.39 15.70 1.95 8.90 4.45 10.78 6.30 17.81

YTD gain 14.6%

3y Avg

15.35 2.6% 8.79 33.9% 8.47 32.8% 11.51

Source: Bloomberg, Nomura research

Fig. 16: Earnings growth estimates


FY13F Top Glove Nomura Consensus Supermax Nomura Consensus Kossan Nomura Consensus Hartalega Nomura Consensus 15.0% 16.6% 4.3% 8.1% 7.4% 9.5% 8.8% 11.3% 2.17 1.68 21.0% 19.0% 11.8% 13.6% 12.2% 13.3% 14.9% 15.3% 0.70 0.68 8.3% 15.1% 12.1% 14.1% 15.3% 8.5% 11.8% 12.5% 0.77 0.73 9.2% 13.0% 14.4% 10.8% 5.8% 10.2% 9.8% 11.4% 1.61 1.38 FY14F FY15F 3y CAGR PEG (FY14F)

Source: Bloomberg, Nomura estimates

Nomura | Malaysia rubber gloves

June 17, 2013

Fig. 17: Local and regional comparables


Mkt cap (USDm n) 1,264 423 453 1,476 2,490 16,120 37,243 424 554 75,252 393 2,087 5,454 1,059 4,769 7,338 1,800 Share Price (Local) 6.39 1.95 4.45 6.30 18.07 47.16 96.81 27.46 13.40 109.03 3,180 1,169 9.46 5.84 41.21 147.00 76.50 Target Price (Local) 6.20 2.15 4.35 4.70 16.10 NA NA NA NA NA NA 730.00 NA NA NA 166.75 102.75 EPS grow th (%) Rating NEUTRAL NEUTRAL NEUTRAL REDUCE NEUTRAL N.R. N.R. N.R. N.R. N.R. CY12 9.5 16.9 14.5 16.6 6.8 16.2 27.3 1.4 6.1 5.5 CY13F 14.7 8.3 21.0 6.8 12.0 (2.9) 5.3 14.6 15.5 1.9 6.7 (34.5) 23.2 16.6 14.0 17.5 13.0 CY14F 3.6 12.1 11.8 11.3 3.8 8.9 3.7 11.5 47.5 1.0 7.6 33.8 20.0 14.9 16.7 NA NA CY12 18.9 10.9 13.9 20.4 17.2 14.0 16.7 12.0 11.7 16.1 17.7 20.8 28.1 18.4 19.6 31.1 23.6 P/E (x) CY13F 17.0 10.1 11.5 18.7 15.7 13.2 15.9 10.5 10.1 15.8 18.0 23.9 22.8 15.8 17.2 26.5 20.9 CY14F 15.4 9.0 10.3 17.0 14.6 12.8 15.3 9.4 6.9 15.6 16.8 21.6 19.0 13.7 14.8 NA NA CY12 3.1 1.6 2.3 6.3 3.1 2.4 7.2 1.3 0.9 3.9 1.8 1.7 3.4 2.5 3.1 5.5 5.8 P/B (x) CY13F 2.8 1.4 2.1 5.4 2.8 2.3 7.6 1.2 0.8 3.5 1.7 1.7 3.1 2.3 2.7 4.9 5.0 CY14F 2.5 1.3 1.8 4.7 2.4 2.1 5.9 1.1 NA 3.1 1.6 1.6 2.8 2.1 2.4 NA NA CY12 2.6 1.7 2.0 2.0 2.0 2.1 3.3 2.8 3.7 2.3 1.9 1.8 1.0 1.3 1.2 1.3 2.1 Yield (%) CY13F 2.9 3.0 3.1 2.3 2.1 2.5 3.5 3.2 3.8 2.5 2.0 1.7 1.2 1.8 1.3 1.6 2.4 CY14F 3.2 3.3 3.9 2.5 2.2 2.7 3.9 3.4 NA 2.5 2.0 1.8 1.3 2.0 1.5 NA NA

Com panies Malaysian glove-m akers Top Glove Corp Supermax Corp Kossan Rubber Industries Hartalega Holdings International glove-m akers Ansell Cardinal Health Kimberly-Clark Corp Semperit AG Sri-Trang Agro 3M Co Other health-related Mani Inc Nipro Corp Shandong Weigao Microport Scientific Corp Mindray Medical Intl Ltd-Adr Bangkok Dusit Med Service Bumrungrad Hospital Pub Co

Ticker TOPG MK SUCB MK KRI MK HART MK ANN AU CAH US KMB US SEM AV STA TB MMM US 7730 JP 8086 JP 1066 HK 853 HK MR US BGH TB BH TB

N.R. (5.9) NEUTRAL 146.5 N.R. 19.4 N.R. (0.2) N.R. 34.8 NEUTRAL 18.5 BUY 13.3

Note: Pricing as of 12 June 2013 Source: Bloomberg (for Not rated stocks), Nomura research

Nomura | Malaysia rubber gloves

June 17, 2013

Risks / catalysts
Pandemic outbreaks
In the past, the largest driver of share price performance for the rubber glove sector as a group has been pandemics both with the SARS (2003-06) and the H1N1 (2009-10). We have, again, seen such an effect over the last two months when China began to report a spurt in cases of the H7N9 virus. On this front, we note that the H7N9 is beginning to quiet down with only 4 new cases reported between April 30 and June 10 (current total 131 cases, as per a China Daily report dated June 10, 2013). However, we cannot rule out completely any chance of this flu worsening further. We opine that the H7N9 virus touching off a pandemic outbreak will be the largest immediate positive catalyst for the sector, as glove demand is likely to spike up globally as a result.
Fig. 18: Share price correlation with pandemics Fig. 19: Market cap-weighted share price performance vs. number of new H7N9 cases reported

MYR 9 8 7 6 5 4 3 2 1 0
Jan 00 Jan 01 Jan 02

Top Glove Kossan Bulk latex (inverted) x10

Supermax Hartalega

% 14

Mcap weighted performance (LHS)

New H7N9 cases (RHS) 14

12

12

SARS

H1N1

10

10

Jan 03

Jan 04

Jan 05

Jan 06

Jan 07

Jan 08

Jan 09

Jan 10

Jan 11

Jan 12

Jan 13

0
10-Apr-13 11-Apr-13 12-Apr-13 13-Apr-13 14-Apr-13 15-Apr-13 16-Apr-13 17-Apr-13 18-Apr-13 19-Apr-13 20-Apr-13 21-Apr-13 22-Apr-13 23-Apr-13 24-Apr-13 25-Apr-13 26-Apr-13 27-Apr-13 28-Apr-13 29-Apr-13 30-Apr-13 3-Apr-13 4-Apr-13 5-Apr-13 6-Apr-13 7-Apr-13 8-Apr-13 9-Apr-13

-2

-2

Source: Bloomberg, Nomura research

Source: Bloomberg, News reports, Nomura research

Healthcare reforms
A catalyst from the more fundamental perspective will be any healthcare reforms introduced, particularly in the populous countries / regions. We note the vast discrepancy between glove usage and population between parts of the world (refer LHS chart), which suggests that using glove usage as a gauge for hygiene awareness, a large majority of the worlds population has a long way to go in terms of improving the healthcare regulations. Based on glove imports and population data, we put together the RHS chart below which shows, again, the gap between glove usage of the different countries. Thus, given the large population in the emerging countries (particularly China and India), we see a large latent demand in the region. We estimate that the current glove usage per capita of China is close to 1.3 pcs p.a. less than 1% that of the US. Thus, assuming that glove usage in China doubles to 2.6 (1.7% that of the US), that would imply an additional demand of more than 2bn pieces of gloves each year. While rising affluence could lead to higher healthcare awareness, we think that a spike in glove demand could only be seen if hard regulations are put in place by the government. Though we do not expect such to happen in the near future, we believe that the Chinese government is working towards this direction with its 12th Five-Year Plan (2011-15) depicting Chinas intention to improve the countrys healthcare standards including the prevention and control of major diseases outbreaks and communicable diseases. We view any healthcare reform as a longer-term catalyst for the rubber gloves sector.

10

Nomura | Malaysia rubber gloves

June 17, 2013

Fig. 20: Discrepancy between glove usage and population


100%

Fig. 21: Per capita glove usage


pcs 160

80% 60% 40% 20% 0% % of world population (2009) U.S. EU27 % of global glove usage (2009) RoW

140 120 100 80 60 40 20 0 US Hong Kong Australia UK Japan Brazil Mexico Indonesia China India

Source: MREPC. World Bank, Nomura research

Source: World Bank, World Trade Atlas, Nomura research

11

Hartalega Holdings
HEALTH CARE & PHARMACEUTICALS

HTHB.KL HART MK

EQUITY RESEARCH

Raising TP to MYR4.70; maintain Reduce

June 17, 2013 Rating Remains Target price Increased from 4.15 Closing price June 12, 2013 Potential downside

Valuations unattractive as dominant NBR segment sees keener competition


Action: Raising TP to MYR4.70; maintain Reduce We revise our TP upwards to MYR4.70 from MYR4.15, incorporating our updated raw material price assumptions, capacity estimates and exchange rate forecasts. Taking into account the new inputs, we adjust upward our FY13F/FY14F net profit by 6.4%/9.5%. While we acknowledge Hartalegas unparalleled efficiencies, we think that valuations are lofty in light of a more crowded NBR glove market, which should see pricing power come under pressure, in our view. Catalyst: Margin downtrend likely as ASP continues to weaken We note that all major glovemakers are expanding aggressively in the nitrile (NBR) market, with additional capacity of c.15bn pcs slated to be put on-stream by the four main players alone in calendar 2013. While demand is likely to remain strong for rubber gloves, we think heightened competition will continue to prompt manufacturers to lower ASPs as customers enjoy better bargaining power. Thus we remain cautious on NBR-focused glovemakers as we believe that margins are likely to see a downward trend in the near term. Valuation: Expensive amid stiffer competition in the NBR space Hartalega shares currently trade at 19.1x FY14F EPS of 33.04sen, which is a lofty valuation in our view, amid intensifying competition and declining ROEs. We arrive at our TP of MYR4.70 by pegging its FY14F EPS of 33.04sen to a target multiple of 14.2x the average one-year forward P/E it has traded at in the past 12 months. We do not use a long-term average as Hartalega saw a structural break in valuations back in 2012.

Reduce
MYR 4.70 MYR 6.30 -25.4%

Anchor themes We expect healthy long-term demand outlook due to growing healthcare awareness and an aging population worldwide. Nonetheless, with competition set to increase in the years ahead, we see lower pricing power for glovemakers. Nomura vs consensus Our TP is 16% below consensus on expectations of lower margins moving forth and TP being pegged to a lower P/E multiple; we think the stock is expensive at current levels.
Research analysts Malaysia Health Care & Pharmaceuticals Celeste Yap - NSM celeste.yap@nomura.com +603 2027 6894 Bineet Banka - NSFSPL bineet.banka@nomura.com +91 22 4053 3784

31 Mar Currency (MYR)

FY13 Actual Old

FY14F New Old

FY15F New Old

FY16F New

Revenue (mn) Reported net profit (mn) Normalised net profit (mn) FD normalised EPS FD norm. EPS growth (%) FD normalised P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%)

1,032 235 235 31.67c 15.0 19.9 13.1 6.0 2.0 33.9

1,165 236 236 32.29c 6.5 N/A N/A N/A N/A 28.8

1,209 251 251 33.04c 4.3 19.1 12.1 5.2 2.4 29.8

1,376 254 254 34.73c 7.6 N/A N/A N/A N/A 26.1

1,351 279 279 35.47c 7.4 17.8 10.7 4.6 2.5 27.9 N/A N/A N/A N/A

1,636 322 322 39.72c 12.0 15.9 9.1 4.0 2.8 27.4 0.2

net cash net cash net cash

1.7 net cash

Source: Company data, Nomura estimates

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Key company data: See page 2 for company data and detailed price/index chart.

Nomura | Hartalega Holdings

June 17, 2013

Key data on Hartalega Holdings


Incomestatement(MYRmn)
Year-end 31 Mar Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) FD normalised P/E at price target (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (MYR) Norm EPS (MYR) Fully diluted norm EPS (MYR) Book value per share (MYR) DPS (MYR)
Source: Company data, Nomura estimates

Relative performance chart (one year)


FY12 931 -634 297 -36 260 289 -29 260 -2 FY13 1,032 -731 301 6 307 339 -32 307 -1 FY14F 1,209 -832 377 -53 324 377 -53 324 -1 FY15F 1,351 -930 421 -58 363 430 -68 363 -1 FY16F 1,636 -1,145 492 -69 423 505 -82 423 -1

Source: ThomsonReuters, Nomura research


(%) Absolute (MYR) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (MYR) 3-mth avg daily turnover (USDmn) Major shareholders (%) Hartalega Industries Sdn Bhd Budi Tenggara Sdn Bhd 1M 3M 12M

10.5 31.0 64.1 5.4 30.0 66.6 10.0 22.7 51.4 1,473.0 44.9 6.4/3.83 1.31

258 -57 201 0

306 -71 235 0

323 -72 251 0

361 -82 279 0

421 -99 322 0

201 201 -91 110

235 235 -91 143

251 251 -113 138

279 279 -126 153

322 322 -145 177

50.1 5.0

Source: Thomson Reuters, Nomura research

Notes 22.8 22.8 22.9 17.1 2.0 23.0 7.4 15.5 17.2 31.9 31.1 27.9 21.6 22.0 45.3 3.8 1.2 36.2 46.7 19.6 19.6 19.9 14.9 2.0 14.7 6.0 13.1 14.5 29.1 32.8 29.7 22.7 23.2 38.9 1.8 0.6 33.9 45.5 19.1 19.1 19.1 14.2 2.4 19.6 5.2 12.1 14.1 31.2 31.2 26.8 20.7 22.3 45.0 21.6 4.9 29.8 36.5 17.8 17.8 17.8 13.3 2.5 15.1 4.6 10.7 12.7 31.2 31.9 26.8 20.7 22.7 45.0 18.5 3.7 27.9 32.1 15.9 15.9 15.9 11.8 2.8 14.1 4.0 9.1 10.9 30.0 30.9 25.8 19.7 23.5 45.0 15.3 3.0 27.4 31.3

We expect margins and returns above industry average; dividend payout policy of more than 45%

26.7 7.0 6.0 5.6 5.4

10.8 17.1 17.9 16.1 15.0

17.1 11.4 5.6 2.9 4.3

11.8 14.1 11.9 7.4 7.4

21.1 17.4 16.6 12.0 12.0

27.65c 27.65c 27.53c 0.85 0.13

32.10c 32.10c 31.67c 1.05 0.12

33.04c 33.04c 33.04c 1.21 0.15

35.47c 35.47c 35.47c 1.38 0.16

39.72c 39.72c 39.72c 1.57 0.18

13

Nomura | Hartalega Holdings

June 17, 2013

Cashflow(MYRmn)
Year-end 31 Mar EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Company data, Nomura estimates

FY12 289 -37 -52 200 -35 165 0 0 0 0 -25 140 -87 0 0 0 -7 -94 46 117 163 -139 FY13 339 38 -59 317 -18 299 0 0 0 0 -176 123 -99 0 0 0 -5 -104 19 163 182 -170 FY14F 377 -61 -73 244 -261 -17 0 0 0 0 0 -17 -113 0 0 0 20 -92 -110 182 73 -52 FY15F 430 -20 -83 327 -250 77 0 0 0 0 0 77 -126 12 0 0 1 -112 -35 73 38 -16 FY16F 505 -42 -100 363 -250 113 0 0 0 0 0 113 -145 12 0 0 1 -132 -18 38 19 3 Notes

Significantly higher capex for large, long-term capacity expansion plans which should see capacity more than triple upon completion (estimated completed in FY21F)

Balancesheet(MYRmn)
As at 31 Mar Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Company data, Nomura estimates

FY12 163 0 117 98 0 378 0 370 0 10 758 13 60 12 85 12 0 41 138 1 0 183 437

FY13 182 0 125 87 0 394 1 486 7 49 936 8 93 15 115 4 0 50 170 1 0 367 399

FY14F 73 0 156 117 0 346 1 693 7 49 1,096 13 93 15 121 8 0 50 179 1 0 379 537

FY15F 38 0 176 125 0 338 1 876 7 49 1,271 13 101 15 129 8 0 50 188 1 0 391 691

FY16F 19 0 212 158 0 389 1 1,043 7 49 1,489 13 129 15 157 9 0 50 216 2 0 403 868

Notes

Reducing cash pile in line with high capex; expected higher earnings should move Hartalega back to net cash position by FY16F

620 758

766 936

916 1,096

1,082 1,271

1,271 1,489

4.42 149.8

3.42 339.7

2.87 270.8

2.63 285.2

2.48 310.8

net cash net cash

net cash net cash

net cash net cash

net cash net cash

0.01 0.2

42.9 46.8 33.9 55.7

42.8 45.9 38.2 50.5

42.3 44.7 40.9 46.2

44.8 47.5 38.2 54.0

43.4 45.2 36.8 51.7

14

Nomura | Hartalega Holdings

June 17, 2013

Raising TP to MYR4.70; maintain Reduce


After a recent meeting with management, we were impressed by the companys ability to constantly upgrade its products and production processes via on-going R&D efforts. We also learned that Hartalega is looking for ways to diversify itself in terms of product offerings, geographical region and customer base. We note that Hartalega is currently highly concentrated on the NBR gloves segment (94% revenue), North American and European markets (>85% revenue), with a small customer base of 450 names (>100 active ones). While such a strategy has worked well for Hartalega in the past, we think that the lack of diversification of its revenue source potentially posts inherent risks to the company, and thus view its intention to diversify positively. We also understand from management that Hartalegas long-term expansion programme the Next Generation Integrated Glove Manufacturing Complex (NGC) has been delayed by eight months due to some setback in getting various approvals from the relevant authorities. As a result, capacity expansion is likely to be muted in FY14F, as new production lines from the NGC will only start coming into operations from August 2014, as per management guidance. However, construction of the new production facility will be sped up by building two production plants concurrently. We expect construction of the NGC to be completed by FY20F, adding production capacity by nearly 30bn pcs upon completion. Taking into account Hartalegas improved line speed and revised capacity expansion plans, while at the same time updating our raw material price assumptions and exchange rate forecasts, we adjust our FY14F/FY15F earnings estimates upward by 6.4%/9.5%. Our changes of inputs are summarised in the table below:
Fig. 22: Input assumptions changes
Input assumptions (period average) Latex prices (MYR/kg) Old New Nitrile prices (MYR/kg) Old New MYR/USD Old New
Source: Nomura estimates

2014F 6.20 5.96 6.10 5.56 2.95 3.05

2015F 6.23 6.19 6.13 5.64 2.89 2.95

2016F 6.35 6.35 6.25 5.78 2.88 2.92

Note: Nitrile prices are grossed up to the same solid content as latex for comparison purpose.

We expect margins to trend downwards


We note that Hartalegas ASPs have been trending south in the past few quarters, reflecting both a weaker raw material price and also lower profit margins. Management acknowledges the fact that stiffer competition in the NBR market has prompted industry players to lower prices, and expects itself to continue dropping prices in the rest of the year, albeit slightly, on the back of the previously mentioned two factors. As highlighted in the earlier section, Hartalega is highly concentrated in the NBR segment; we are thus cautious of its earnings growth prospects in the near term as pricing power is likely to come under pressure, in our view. We arrive at our new TP of MYR4.70 by pegging our revised FY14F EPS of 33.04sen to a higher 14.2x target one-year forward P/E, which is the average multiple Hartalega has traded at in the past 12 months, after its structural break in 2012. We have previously attached a target multiple of 12.8x for Hartalega 1SD above its 3-year mean; we change our target multiple to reflect the continuous improvement in the companys operations and potential diversification as previously discussed. Our P/E-based TP is well supported by our 10-year DCF valuation with cashflows discounted back to June 2013, which provides an intrinsic value of MYR4.77 per share.

15

Nomura | Hartalega Holdings

June 17, 2013

Fig. 23: Historical P/E band chart


MYR 7 6 5 4 3 2 1 0 May 08 May 09 May 10 May 11 May 12 17x 14x 11x 8x 5x

Fig. 24: Historical one-year forward P/E


P/E (x) 18 16 14 12 10 8 6 4 2 May 08 May 09 May 10 May 11 May 12 -1SD = 7.6 Mean = 10.4 +1SD = 13.1

Source: Bloomberg, Nomura research

Source: Bloomberg, Nomura research

While we believe that Hartalega deserves to trade at a premium to sector average P/E multiple, we opine that its current valuations are expensive particularly given the upcoming keen competition in the NBR segment which has previously been dominated by Hartalega. We further note that we expect Hartalega to see ROE decline from 36% in FY12, 34% in FY13 down to 27% in FY16F, owing to shrinking EBIT margins and lower asset turnover. As well, a PEG ratio of 2.2 on our estimates suggests that current lofty valuations appear to be somewhat unjustified for its growth potentials.

Risks to our view


Upside risks New, significant capacity expansion plans which will continue to boost capacity and earnings, or innovative product types which could push up margins. Higher/lower-than-expected pass-on rates of cost inflation/savings. Faster-than-expected completion of its NGC expansion plans. Further weakening of NBR raw material prices.

16

Kossan Rubber Industries


HEALTH CARE & PHARMACEUTICALS

KRIB.KL KRI MK

EQUITY RESEARCH

Raising TP to MYR4.35; maintain Neutral

June 17, 2013 Rating Remains Target price Increased from 3.80 Closing price June 12, 2013 Potential downside

Fundamentals intact but recent rally leaves behind limited upside, in our view
Action: Raising TP to MYR4.35; maintain Neutral We revise our TP upwards to MYR4.35 from MYR3.80, as we update our raw material price assumptions, capacity estimates and exchange rate forecasts, while rolling forward earnings to FY14F. Taking into account the new inputs, we adjust upward our net profit estimates for FY13F/FY14F by 2.7%/7.5%. Despite foreseeing better earnings to flow through for Kossan, we think that its current share price upside is somewhat limited post its 27% run-up since the start of April; we thus maintain our Neutral rating. Catalyst: Any slowdown in upcoming supply could mean higher pricing power and better margins While we believe that demand for rubber gloves is likely to remain on the back of increasing healthcare awareness, our concern lies mainly on the weakening pricing power for glovemakers as upcoming supply is likely to result in heightened competition. Major delays in large expansion projects or a sudden surge in demand will, however, give glovemakers better pricing power, resulting in better-than-expected margins and profits. Valuation: Fairly priced at current levels, in our view Kossan shares currently trade at 10.3x FY14F EPS of 43.36sen nearly +0.7SD above its long-term mean of 9.1x. We think such a valuation is fair as it is in line with the industrys long-term average one-year forward P/E. We arrive at our TP of MYR4.35 by pegging its FY14F EPS to a target multiple of 10x.

Neutral
MYR 4.35 MYR 4.45 -2.2%

Anchor themes We expect a healthy long-term demand outlook amid growing healthcare awareness and an aging population worldwide. Nonetheless, with competition set to increase in the years ahead, we see lower pricing power for glovemakers. Nomura vs consensus While our FY13F/FY14F earnings estimates are in line with consensus, our TP is 7% below consensus as we think Kossan is already fairly priced at current multiples.
Research analysts Malaysia Health Care & Pharmaceuticals Celeste Yap - NSM celeste.yap@nomura.com +603 2027 6894 Bineet Banka - NSFSPL bineet.banka@nomura.com +91 22 4053 3784

31 Dec Currency (MYR)

FY12 Actual Old

FY13F New Old

FY14F New Old

FY15F New

Revenue (mn) Reported net profit (mn) Normalised net profit (mn) FD normalised EPS FD norm. EPS growth (%) FD normalised P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%)

1,234 102 102 32.06c 14.6 13.9 8.0 2.3 2.0 18.6

1,343 120 120 37.78c 12.3 N/A N/A N/A N/A 19.5

1,368 124 124 38.78c 21.0 11.5 6.6 2.1 3.1 19.1

1,449 129 129 40.33c 6.8 N/A N/A N/A N/A 18.3

1,524 138 138 43.36c 11.8 10.3 5.9 1.8 3.9 18.9 N/A N/A N/A N/A

1,705 155 155 48.66c 12.2 9.1 5.0 1.6 4.9 19.0 net cash

16.4 net cash

1.6 net cash net cash

Source: Company data, Nomura estimates

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Key company data: See page 2 for company data and detailed price/index chart.

Nomura | Kossan Rubber Industries

June 17, 2013

Key data on Kossan Rubber Industries


Incomestatement(MYRmn)
Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) FD normalised P/E at price target (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (MYR) Norm EPS (MYR) Fully diluted norm EPS (MYR) Book value per share (MYR) DPS (MYR)
Source: Company data, Nomura estimates

Relative performance chart (one year)


FY11 1,090 -761 329 -209 0 120 161 -41 120 -7 0 0 112 -22 91 -1 0 0 89 0 89 -35 54 FY12 1,234 -820 414 -269 0 145 190 -45 145 -6 0 0 138 -34 105 -3 0 0 102 0 102 -29 73 FY13F 1,368 -903 465 -298 0 168 217 -49 168 -9 0 0 159 -33 125 -2 0 0 124 0 124 -43 80 FY14F 1,524 -1,022 502 -314 0 187 240 -52 187 -10 0 0 177 -37 140 -2 0 0 138 0 138 -55 83 FY15F 1,705 -1,154 552 -339 0 213 269 -57 213 -12 0 0 201 -43 158 -3 0 0 155 0 155 -70 85

Source: ThomsonReuters, Nomura research


(%) Absolute (MYR) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (MYR) 3-mth avg daily turnover (USDmn) Major shareholders (%) Kossan Holdings Sdn Bhd 1M 3M 12M

10.4 30.5 46.9 5.3 29.6 49.2 9.9 22.3 34.3 454.6 48.8 4.5/2.97 1.03

51.2

Source: Thomson Reuters, Nomura research

Notes

15.9 15.9 15.9 15.2 2.5 30.9 2.9 9.5 12.8 30.2 14.7 11.0 8.2 19.3 39.3 3.7 1.0 19.0 16.6

13.9 13.9 13.9 13.3 2.0 15.3 2.3 8.0 10.5 33.5 15.4 11.7 8.3 24.3 28.1 6.7 1.8 18.6 17.5

11.5 11.5 11.5 11.0 3.1 10.3 2.1 6.6 8.6 34.0 15.8 12.2 9.0 21.1 35.0 4.4 1.2 19.1 18.6

10.3 10.3 10.3 9.8 3.9 13.4 1.8 5.9 7.5 32.9 15.7 12.3 9.1 21.0 40.0 4.6 1.3 18.9 19.8

9.1 9.1 9.1 8.7 4.9 11.0 1.6 5.0 6.3 32.3 15.8 12.5 9.1 21.4 45.0 4.1 1.2 19.0 21.0

Dividend payout policy increased from 25% to 35-40%, with managements intention to further raise it to 50%

4.1 -12.1 -19.4 -21.1 -21.1

13.2 18.2 21.0 14.6 14.6

10.9 14.0 15.7 21.0 21.0

11.4 10.6 11.9 11.8 11.8

11.9 12.5 13.4 12.2 12.2

27.99c 27.99c 27.99c 1.56 0.11

32.06c 32.06c 32.06c 1.90 0.09

38.78c 38.78c 38.78c 2.15 0.14

43.36c 43.36c 43.36c 2.42 0.17

48.66c 48.66c 48.66c 2.70 0.22

18

Nomura | Kossan Rubber Industries

June 17, 2013

Cashflow(MYRmn)
Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Company data, Nomura estimates

FY11 161 -58 -56 46 -40 6 0 0 0 0 -8 -1 0 0 -12 0 -20 -31 -33 81 48 108 FY12 190 -36 -61 93 -83 10 0 0 0 0 2 13 0 0 43 0 -10 33 46 48 94 99 FY13F 217 16 -94 138 -60 78 0 0 0 0 2 80 0 0 8 0 0 8 87 94 181 11 FY14F 240 -37 -96 106 -70 36 0 0 0 0 2 38 0 0 17 0 0 17 55 181 236 -21 FY15F 269 -23 -117 129 -70 59 0 0 0 0 3 62 0 0 23 0 0 23 85 236 321 -75 Notes

Management expects MYR70-80mn capex in the next two years

Balancesheet(MYRmn)
As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Company data, Nomura estimates

FY11 48 0 156 164 3 371 0 433 5 0 0 809 130 103 8 242 26 0 34 302 9 0 160 339 -2 497 809

FY12 94 0 217 149 5 464 0 514 5 0 0 984 155 115 9 278 38 0 50 366 13 0 160 448 -4 605 984

FY13F 181 0 195 179 5 561 0 525 5 0 0 1,091 146 139 9 294 46 0 50 390 14 0 160 530 -4 687 1,091

FY14F 236 0 218 209 5 667 0 543 5 0 0 1,216 153 153 9 315 63 0 50 428 16 0 160 615 -4 771 1,216

FY15F 321 0 243 232 5 801 0 556 5 0 0 1,362 160 178 9 347 86 0 50 483 19 0 160 703 -4 859 1,362

Notes

1.53 16.0

1.67 22.6

1.91 18.9

2.12 18.4

2.30 17.9

0.67 21.8

0.52 16.4

0.05 1.6

net cash net cash

net cash net cash

51.0 68.9 52.0 68.0

55.3 69.8 48.7 76.4

55.0 66.4 51.3 70.1

49.5 69.3 52.2 66.6

49.3 69.7 52.5 66.5

19

Nomura | Kossan Rubber Industries

June 17, 2013

Raising TP to MYR4.35; maintain Neutral


Accounting for the new capacity, which Kossan has managed to and should continue to bring on-stream, alongside its improvement in production efficiencies, we adjust upwards our estimates for FY13F-FY15F sales volumes. With NR latex prices being weaker than we have initially expected, we revise downwards our estimates for raw material input prices, resulting in lower cost of goods sold for Kossan. However we expect cost savings to be shared with customers amid competitors willingness to produce at lower margins in light of increased competition in the glove-making industry. Our changes of inputs are summarised in the table below:
Fig. 25: Input assumptions changes
Input assumptions (period average) Latex prices (MYR/kg) Old New Nitrile prices (MYR/kg) Old New MYR/USD Old New
Source: Nomura estimates

2013F 6.20 5.90 6.08 5.53 2.96 3.07

2014F 6.22 6.15 6.11 5.63 2.90 2.97

2015F 6.31 6.30 6.25 5.72 2.88 2.92

Note: Nitrile prices are grossed up to the same solid content as latex for comparison purpose.

As a result of the aforementioned changes, we revise our FY13F/FY14F earnings upwards by 2.7%/7.5%. We peg our revised FY14F EPS of 43.36sen to a 10x target one-year forward P/E, consistent with the industrys long-term average, arriving at TP of MYR4.35 with a Neutral rating. We cross-check our P/E-based TP with a 10-year DCF valuation with cashflows discounted back to June 2013, which provides an intrinsic value of MYR4.66 per share.

Recent rally leaves Kossan fairly priced, in our view


We initiated on the Rubber Glove sector back in January 2013 with Kossan as our top pick, as we saw it as a laggard with potential upside to valuations. Nonetheless, since the start of April, Kossan has rallied a rather significant 27%, hitting an all-time high of MYR4.50 on June 11, 2013. With its recent run-up, we think Kossan is currently fairly priced at 10.3x FY14F EPS nearly +0.7SD above its long-term mean of 9.1x. We note that the last time Kossan traded at such levels was back during the outbreak of H1N1 in 2009/10, where Kossans net profit grew 70% y-y in 2010. Hence, we believe that current multiples are fair and see limited upside to share price.

20

Nomura | Kossan Rubber Industries

June 17, 2013

Fig. 26: Historical P/E band chart


MYR 8 7 6 5 4 3 2 1 0 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 11x 8x 5x 17x 14x

Fig. 27: Historical one-year forward P/E


P/E (x) 18 16 14 12 10 8 6 4 2 0 Dec 05 Dec 06 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12 +1SD = 6.7 Mean = 9.1 +1SD = 11.4

Source: Bloomberg, Nomura research

Source: Bloomberg, Nomura research

Higher dividend payout on the cards Kossan has increased its dividend payout policy from 25% to 35-40%, and intends to raise it further to 50%. On this note, we highlight that Kossans dividend yields of 3.04.9% from FY13F-FY15F are among the highest in the industry.
Fig. 28: Dividend yield Malaysian-listed glovemakers
FY13F Top Glove Supermax Kossan Hartalega *
Source: Nomura estimates

FY14F 3.2 3.3 3.9 2.8

FY15F 3.4 3.8 4.9 3.2

2.9 2.9 3.0 2.6

* Hartalega FY13F=FY14F, FY14F=FY15F, FY15F=FY16F

Risks to our view


Upside risks Major delays in industry expansion projects or sudden surge in demand (eg, a pandemic), which will likely result in better pricing power for glovemakers. Higher/lower-than-expected pass-on rates of cost inflation/savings, as we have assumed that ASP will come under pressure amid increased competition. Better-than-expected earnings contribution from TRP segment from an improved automotive outlook or Indonesian venture which would likely lower labour costs. Downside risks An unexpected surge in latex prices, whereby cost inflation pass-on would likely see a lag, affecting margins. Expansion hiccups which would affect its penetration into higher-end segments and limit growth of its market share.

21

Supermax Corp Bhd


HEALTH CARE & PHARMACEUTICALS

SUPM.KL SUCB MK

EQUITY RESEARCH

Raising TP to MYR2.15; upgrade to Neutral

June 17, 2013 Rating Up from Reduce Target price Increased from 1.90 Closing price June 12, 2013 Potential upside

Flattish share price performance makes valuations less demanding


Action: Raising TP to MYR2.15; upgrade to Neutral Supermax shares have gained a mere 2.6% YTD vs its peers rallies of 15-34% over the same time frame. We upgrade the stock to Neutral as its underperformance against peers makes its valuations fair, in our view. Nonetheless, we do not see compelling reasons to buy into the stock now. We revise our TP upwards to MYR2.15, from MYR1.90, as we roll forward earnings to FY14F while taking into account our updated raw material price assumptions and exchange rate forecasts. We tweak slightly our net profit estimates for FY13F/FY14F by +1.1%/+1.9% with the new inputs. Catalyst: Soft input prices a plus, but cost savings likely to be shared While weak raw material (NR and nitrile latex) prices are likely to benefit Supermax alongside other glovemakers, we believe that the bulk of such cost savings will likely be enjoyed by Supermaxs customers instead, as we expect the company to lower its ASPs to keep its goods competitive with peers. We maintain our view that Supermaxs margins are likely to come under pressure despite soft input prices. Valuation: Rather fair, but no upside catalyst in sight for now Supermax shares currently trade at 9.0x FY14F EPS of 21.74sen, which is on the lower end of the industry and below the industrys long-term average one-year forward P/E of 10x. However, we think that the lack of near-term positive catalysts makes Supermax less attractive. Our TP of MYR2.15 is arrived upon pegging its FY14F EPS to a 10x target multiple.

Neutral
MYR 2.15 MYR 1.95 +10.3%

Anchor themes We expect a healthy long-term demand outlook amid growing healthcare awareness and an aging population worldwide. Nonetheless, with competition set to increase in the years ahead, we see lower pricing power for glovemakers. Nomura vs consensus Our TP is 7% below consensus on expectations of compressed margins. We do not foresee significant downside to current levels as valuations seem undemanding for Supermax's size.
Research analysts Malaysia Health Care & Pharmaceuticals Celeste Yap - NSM celeste.yap@nomura.com +603 2027 6894 Bineet Banka - NSFSPL bineet.banka@nomura.com +91 22 4053 3784

31 Dec Currency (MYR)

FY12 Actual Old

FY13F New Old

FY14F New Old

FY15F New

Revenue (mn) Reported net profit (mn) Normalised net profit (mn) FD normalised EPS FD norm. EPS growth (%) FD normalised P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%)

997 122 122 17.92c 17.0 10.9 8.7 1.6 1.7 15.2 18.6

1,200 130 130 19.17c 3.0 N/A N/A N/A N/A 14.4 22.9

1,216 132 132 19.40c 8.3 10.1 7.9 1.4 3.0 15.0 22.2

1,291 145 145 21.30c 11.1 N/A N/A N/A N/A 14.5 20.4

1,347 148 148 21.74c 12.1 9.0 7.2 1.3 3.3 15.1 21.1 N/A N/A N/A N/A

1,485 170 170 25.05c 15.3 7.8 6.2 1.2 3.9 15.6 16.8

Source: Company data, Nomura estimates

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Key company data: See page 2 for company data and detailed price/index chart.

Nomura | Supermax Corp Bhd

June 17, 2013

Key data on Supermax Corp Bhd


Incomestatement(MYRmn)
Year-end 31 Dec Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) FD normalised P/E at price target (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (MYR) Norm EPS (MYR) Fully diluted norm EPS (MYR) Book value per share (MYR) DPS (MYR)
Source: Company data, Nomura estimates

Relative performance chart (one year)


FY11 1,021 -819 202 -113 90 114 -24 90 -13 35 112 -8 104 0 FY12 997 -734 263 -141 123 147 -24 123 -9 23 137 -16 121 0 FY13F 1,216 -933 283 -150 134 164 -31 134 -13 29 150 -18 132 0 FY14F 1,347 -1,041 307 -159 148 180 -32 148 -13 34 169 -22 147 0 FY15F 1,485 -1,145 339 -167 172 206 -34 172 -13 38 198 -28 170 0

Source: ThomsonReuters, Nomura research


(%) Absolute (MYR) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (MYR) 3-mth avg daily turnover (USDmn) Major shareholders (%) Dato' Seri Stanley Thai Datin Seri Cheryl Tan 1M -4.9 -9.3 -5.4 423.7 64.4 2.25/1.79 2.28 3M 12M 0.5 -0.2 -7.7 7.1 8.8 -5.5

20.4 15.1

104 0 104 -22 82

122 0 122 -22 100

132 0 132 -40 92

148 0 148 -44 103

170 0 170 -51 119

Source: Thomson Reuters, Nomura research

Notes

12.7 12.7 12.7 12.4 3.3 23.5 0.9 10.4 12.5 19.8 11.2 8.8 10.2 7.2 21.2 3.7 1.6 14.3 12.0

10.9 10.9 10.9 10.6 1.7 8.1 1.6 8.7 10.1 26.4 14.7 12.3 12.2 11.6 18.2 6.9 2.8 15.2 13.1

10.1 10.1 10.1 9.8 3.0 10.6 1.4 7.9 9.4 23.3 13.5 11.0 10.8 12.2 30.0 7.9 3.1 15.0 13.7

9.0 9.0 9.0 8.7 3.3 13.5 1.3 7.2 8.5 22.8 13.3 11.0 11.0 13.0 30.0 4.5 1.9 15.1 13.9

7.8 7.8 7.8 7.6 3.9 9.4 1.2 6.2 7.2 22.8 13.9 11.6 11.5 14.0 30.0 4.0 1.8 15.6 14.7

Dividend payout revised by management to 30% from FY12 onwards; 20% previously

4.5 -37.2 -42.2 -41.8 -41.8

-2.3 29.1 36.6 17.0 17.0

21.9 11.8 9.0 8.3 8.3

10.8 9.2 10.7 12.1 12.1

10.2 14.7 16.5 15.3 15.3

15.31c 15.31c 15.31c 2.26 0.06

17.92c 17.92c 17.92c 1.23 0.03

19.40c 19.40c 19.40c 1.36 0.06

21.74c 21.74c 21.74c 1.52 0.07

25.05c 25.05c 25.05c 1.69 0.08

23

Nomura | Supermax Corp Bhd

June 17, 2013

Cashflow(MYRmn)
Year-end 31 Dec EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Company data, Nomura estimates

FY11 114 -66 9 56 -38 18 -31 1 5 25 18 -27 0 -22 38 -11 7 97 104 226 FY12 147 31 -14 164 -69 94 18 0 2 -20 94 -12 0 -27 -37 -76 18 104 123 155 FY13F 164 -48 9 126 -96 30 -29 0 0 29 30 -40 0 24 -13 -29 1 123 124 206 FY14F 180 -52 -30 98 -60 38 -34 0 0 34 38 -44 0 -1 -13 -58 -20 124 104 217 FY15F 206 -30 -35 141 -60 81 -38 0 0 37 81 -51 0 -1 -13 -64 17 104 121 192 Notes

Significantly higher capex in FY13F for the additional 40 production lines which should increase NBR capacity by 5.4bn pcs pa

Balancesheet(MYRmn)
As at 31 Dec Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Company data, Nomura estimates

FY11 104 0 206 223 8 541 229 402 29 0 5 1,205 190 87 0 278 140 18 436 0 0 170 599 0 769 1,205

FY12 123 0 206 234 1 564 210 447 29 0 5 1,254 163 118 4 285 115 20 420 0 0 340 494 0 834 1,254

FY13F 124 0 250 213 1 588 239 512 29 0 5 1,373 190 93 4 288 139 20 447 0 0 340 586 0 926 1,373

FY14F 104 0 280 250 1 635 274 540 29 0 5 1,482 183 108 4 295 138 20 454 -1 0 340 689 0 1,029 1,482

FY15F 121 0 307 263 1 691 311 567 29 0 5 1,603 176 118 4 298 137 20 456 -1 0 340 808 0 1,148 1,603

Notes

Receivable, inventory and payable days include both manufacturing and distribution arms

1.95 7.2

1.98 14.0

2.04 10.4

2.15 11.6

2.32 13.7

1.99 29.4

1.06 18.6

1.25 22.2

1.21 21.1

0.93 16.8

74.9 79.4 32.9 121.4

75.6 113.9 51.2 138.4

68.5 87.5 41.3 114.7

71.8 81.3 35.3 117.8

72.1 81.8 36.1 117.9

24

Nomura | Supermax Corp Bhd

June 17, 2013

Raising TP to MYR2.15; upgrade to Neutral


As both NR latex and NBR raw material prices have been weaker than we initially expected, we revise downwards our estimates for raw material input prices, resulting in lower cost of goods sold. We build into our model our updated exchange rate forecasts as well. Our changes of inputs are summarised in the table below:
Fig. 29: Input assumptions changes
Input assumptions (period average) Latex prices (MYR/kg) Old New Nitrile prices (MYR/kg) Old New MYR/USD Old New
Source: Nomura estimates

2013F 6.20 5.90 6.08 5.53 2.96 3.07

2014F 6.22 6.15 6.11 5.63 2.90 2.97

2015F 6.31 6.30 6.25 5.72 2.88 2.92

Note: Nitrile prices are grossed up to the same solid content as latex for comparison purpose.

However, taking into account the aforementioned changes, the estimated impact on our FY13F/FY14F earnings are rather negligible as we expect Supermax to share with its customers most of the cost savings via lower ASPs. As a result, we only tweak our FY13F/FY14F earnings estimates slightly upwards by 1.1%/1.9%. We peg our revised FY14F EPS of 21.74sen to a 10x target one-year forward P/E, consistent with the industrys long-term average, arriving at TP of MYR2.15. We also run a 10-year DCF valuation with cashflows discounted back to June 2013 as a sense check to our P/Ebased TP; we arrived at an intrinsic value of MYR2.07 per share via this methodology.
Fig. 30: Historical P/E band chart
MYR 5 4 3 2 1 0 Mar 06 14x 11x 8x 5x 2x Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 14 12 10 8 Mean = 7.7 6 4 2 0 Mar 06 Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 -1SD = 5.7 +1SD = 9.7

Fig. 31: Historical one-year forward P/E


P/E (x)

Source: Bloomberg, Nomura research

Source: Bloomberg, Nomura research

Undemanding valuations, but unexciting near-term prospects


Traditionally a higher beta stock within the glove manufacturing sector, Supermax shares surged 18% within a week of the first H7N9 case in late-March 2013. It has however pared down some gains with 8% correction from its recent peak. We note that shares have gained a sheer 2.6% YTD while peers have enjoyed run-ups anywhere between 15-34% over the same horizon. Hence, from a valuation perspective, we think that Supermax is currently fairly priced, leading to our upgrade to a Neutral rating.

25

Nomura | Supermax Corp Bhd

June 17, 2013

Nevertheless, alongside managements strategy of moving towards competitive pricing, we expect weaker margins for Supermax. While we expect raw material input prices to remain soft, we foresee Supermax sharing such cost savings with customers by adjusting ASPs downward in tandem with changes in raw material prices. We also believe that its distribution arm could stand as a liability to the group in the event of margin compression, as Supermax will likely have to absorb a larger proportion of the squeeze in margins, in our view. We thus opine that operationally, Supermax remains unattractive in the near-term, justifying our Neutral view of the stock.

Risks to our view


Upside risks Higher/lower-than-expected pass-on rates of cost inflation/savings, as we have assumed that ASP will come under pressure amid increased competition. Increased hygiene awareness from emerging markets like Brazil, which Supermax already has large exposure to and would readily benefit from such increase in demand. Major delays in expansion projects by other industry players or sudden surge in demand (eg, a pandemic), which will likely result in better pricing power for glovemakers, limiting ASP downward adjustments. Downside risks An unexpected surge in latex prices, whereby cost inflation pass-on would likely see a lag, affecting margins. Delays in its expansion plans which will stunt volume growth, resulting in flattish earnings growth.

26

Top Glove Corp


HEALTH CARE & PHARMACEUTICALS

TPGC.KL TOPG MK

EQ U I T Y R E S E A R C H

Raising TP to MYR6.20; maintain Neutral

June 17, 2013 Rating Remains Target price Increased from 5.65 Closing price June 12, 2013 Potential downside

Lacking catalyst(s) for further run-up in the near term


Action: Raise TP to MYR6.20; maintain Neutral We raise our TP to MYR6.20 from MYR5.65 as we incorporate Top Gloves revised timeline for its capacity expansion plan, and our new raw material price assumptions and exchange rate forecasts, while rolling forward our earnings base to FY14F from FY13F. As a result, we tweak our FY13F/FY14F net profit estimates by -3.1%/-0.2%. We peg our FY14F EPS of 40.92sen at an unchanged target P/E of 15.2x, to arrive at our new TP of MYR6.20. Catalyst: Cost savings from soft raw material prices unlikely to translate into better margins Given Top Gloves large(r) exposure to the natural rubber (NR) segment, it is likely to be the main beneficiary of weak NR latex prices as well as a strengthening USD, to some extent, in our view. Nonetheless, we see little upside for margin expansion as keener competition will, in our view, urge glovemakers to pass on any cost savings to respective customers. Valuations: Fair with no visible near-term catalysts Though we expect volumes to remain strong for Top Glove, we believe our expectations of further ASP cuts make the stock less attractive particularly following the 19% run-up in stock price since April 2013. Currently trading at 15.6x one-year forward P/E (FY14F EPS: 40.92sen), we believe that valuations are rather fair, as it trades just above its threeyear mean of 15.2x. With no visible near-term catalysts, we maintain our Neutral rating on the stock as we see limited upside potential to the current share price.
31 Aug Currency (MYR) FY12 Actual Old FY13F New Old FY14F New Old FY15F New

Neutral
MYR 6.20 MYR 6.39 -3%

Anchor themes We expect healthy long-term demand outlook due to growing healthcare awareness and an aging population worldwide. Nonetheless, with competition set to increase in the years ahead, we see lower pricing power for glovemakers. Nomura vs consensus Our FY14F earnings estimates and TP are in line with consensus.
Research analysts Malaysia Health Care & Pharmaceuticals Celeste Yap - NSM celeste.yap@nomura.com +603 2027 6894 Bineet Banka - NSFSPL bineet.banka@nomura.com +91 22 4053 3784

Revenue (mn) Reported net profit (mn) Normalised net profit (mn) FD normalised EPS FD norm. EPS growth (%) FD normalised P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%)

2,314 203 203 32.74c 79.2 19.5 12.8 3.1 2.5 17.1

2,495 229 229 36.99c 13.2 N/A N/A N/A N/A 17.4

2,443 222 222 35.76c 9.2 17.9 10.9 2.9 2.8 16.9

2,809 255 255 41.22c 11.4 N/A N/A N/A N/A 17.7

2,743 255 255 40.92c 14.4 15.6 9.6 2.6 3.2 17.6

3,041 260 260 41.90c 1.7 N/A N/A N/A N/A 16.5

2,962 270 270 43.31c 5.9 14.8 8.8 2.4 3.4 17.0

net cash net cash net cash net cash net cash net cash net cash

Source: Company data, Nomura estimates

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Key company data: See page 2 for company data and detailed price/index chart.

Nomura | Top Glove Corp

June 17, 2013

Key data on Top Glove Corp


Incomestatement(MYRmn)
Year-end 31 Aug Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) FD normalised P/E at price target (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (MYR) Norm EPS (MYR) Fully diluted norm EPS (MYR) Book value per share (MYR) DPS (MYR)
Source: Company data, Nomura estimates

Relative performance chart (one year)


FY11 2,054 -1,819 235 -101 134 196 -61 134 10 1 145 -30 115 -2 FY12 2,314 -1,929 385 -157 228 297 -69 228 12 0 241 -33 207 -5 FY13F 2,443 -2,019 424 -154 270 353 -83 270 9 0 279 -54 225 -3 FY14F 2,743 -2,267 476 -170 305 402 -97 305 11 0 316 -57 259 -5 FY15F 2,962 -2,454 508 -184 324 431 -107 324 11 0 335 -60 274 -4

Source: ThomsonReuters, Nomura research


(%) Absolute (MYR) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (MYR) 3-mth avg daily turnover (USDmn) Major shareholders (%) Tan Sri Lim Wee Chai KWAP 1M 3M 12M

-1.7 16.2 38.0 -6.2 15.3 40.2 -2.2 1,265.5 71.1 6.7/4.57 3.21 7.9 25.4

28.9 6.0

113 113 -68 45

203 203 -99 104

222 222 -111 111

255 255 -127 127

270 270 -135 135

Source: Thomson Reuters, Nomura research

Notes

34.9 34.9 35.0 33.9 1.7 23.0 3.5 19.4 28.2 11.4 9.5 6.5 5.5 20.9 60.1 6.9 2.3 10.2 11.3

19.5 19.5 19.5 18.9 2.5 14.9 3.1 12.8 16.6 16.6 12.8 9.9 8.8 13.9 48.8 6.2 2.1 17.1 16.9

17.9 17.9 17.9 17.3 2.8 14.8 2.9 10.9 14.3 17.3 14.4 11.0 9.1 19.2 50.0 9.3 2.7 16.9 17.8

15.6 15.6 15.6 15.2 3.2 12.4 2.6 9.6 12.6 17.3 14.7 11.1 9.3 18.0 50.0 8.3 2.3 17.6 18.0

14.8 14.8 14.8 14.3 3.4 11.7 2.4 8.8 11.7 17.2 14.5 10.9 9.1 18.0 50.0 5.6 1.6 17.0 17.5

The 50% dividend payout policy is the highest among peers; there is potential for an upward revision in dividend payout, given the strong net cash position

-1.2 -45.8 -55.6 -54.1 -54.0

12.7 51.9 70.0 79.2 79.2

5.5 18.8 18.1 9.1 9.2

12.3 14.0 13.2 14.4 14.4

8.0 7.1 6.1 5.9 5.9

18.29c 18.29c 18.27c 1.81 0.11

32.77c 32.77c 32.74c 2.03 0.16

35.76c 35.76c 35.76c 2.22 0.18

40.92c 40.92c 40.92c 2.44 0.21

43.31c 43.31c 43.31c 2.67 0.22

28

Nomura | Top Glove Corp

June 17, 2013

Cashflow(MYRmn)
Year-end 31 Aug EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Company data, Nomura estimates

FY11 196 -74 51 172 -141 31 -2 2 10 -66 -25 -88 1 -1 -2 -89 -114 263 149 -146 FY12 297 -32 0 266 -143 123 0 -7 -3 -11 102 -85 1 0 1 -84 18 149 167 -164 FY13F 353 -31 -54 268 -227 41 0 0 0 12 54 -111 1 0 7 -103 -50 167 117 -115 FY14F 402 -24 -57 322 -227 95 0 0 0 15 110 -127 1 0 7 -120 -9 117 108 -105 FY15F 431 -29 -60 342 -167 175 0 0 0 15 190 -135 1 0 7 -127 63 108 171 -168

Notes

Large capex going forward to account for rubber plantation and long-term capacity expansion plans

Balancesheet(MYRmn)
As at 31 Aug Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Company data, Nomura estimates

FY11 149 262 176 129 715 7 661 20 0 20 1,423 0 195 35 229 3 0 44 277 25 0 481 626 15 1,122 1,423

FY12 167 294 179 170 811 7 734 20 0 26 1,598 0 232 43 274 3 0 41 318 24 0 484 747 24 1,255 1,598

FY13F 117 311 193 170 791 7 878 20 0 26 1,722 0 231 43 273 3 0 41 317 28 0 491 861 24 1,377 1,722

FY14F 108 349 214 170 841 7 1,008 20 0 26 1,902 0 267 43 309 3 0 41 353 32 0 499 993 24 1,517 1,902

FY15F 171 377 233 170 951 7 1,067 20 0 26 2,072 0 285 43 328 3 0 41 371 36 0 507 1,133 24 1,664 2,072

Notes

Close to nil borrowings; strong net cash position to support potential upcoming M&A deals

3.12 na

2.95 na

2.89 na

2.72 na

2.90 na

net cash net cash

net cash net cash

net cash net cash

net cash net cash

net cash net cash

46.6 34.4 39.8 41.3

44.0 33.7 40.4 37.2

45.2 33.6 41.8 37.0

43.9 32.8 40.0 36.6

44.7 33.3 41.0 37.0

29

Nomura | Top Glove Corp

June 17, 2013

Raising TP to MYR6.25; maintain Neutral


Top Glove had previously expected additional capacity of 4.8bn pieces for FY13; however, this figure was subsequently lowered to 3.6bn due to several delays. We, thus, tweak our estimates for its volume slightly downwards to take into account such delays in target completion for its expansion plans. We also revise our raw material price assumptions as NR latex prices remain weaker-than-expected, resulting in lower cost of goods sold for Top Glove. Our changes in input estimates are summarised in the table below:
Fig. 32: Input assumptions changes
Input assumptions (period average) Latex prices (MYR/kg) Old New Nitrile prices (MYR/kg) Old New MYR/USD Old New
Source: Nomura estimates

2013F 6.30 6.00 6.14 5.74 2.98 3.07

2014F 6.20 6.07 6.09 5.59 2.92 3.00

2015F 6.28 6.25 6.15 5.68 2.88 2.93

Raw material cost savings to benefit customers more


We note that Top Glove is arguably the glovemaker which most swiftly adjusts its ASP in tandem with the changes in raw material prices, reflecting its price-maker status due to its unrivalled size as well as its high-volume and low-margin business model. We, thus, foresee Top Glove sharing most of the cost savings with its customers via more competitively priced goods particularly as competition heightens in the industry. Nonetheless, as Top Gloves goods are already priced at the lower end of the spectrum, we believe that ASPs will not have to be lowered significantly in order to remain competitive, hence limiting somewhat a potential margin compression. On the back of this scenario, our input assumption changes highlighted above largely neutralise each other; we, thus, only tweak our FY13F/FY14F earnings estimates by 3.1%/-0.2%. We roll forward our earnings estimate base and peg our revised FY14F EPS of 40.92sen with our unchanged target one-year forward P/E of 15.2x, in line with its own three-year mean, arriving at our new TP of MYR6.20. We maintain our Neutral rating on the stock. Our P/E-based valuation is supported by our 10-year DCF methodology discounted back to June 2013, which fetches an intrinsic value of MYR6.26 per share. Our valuation methodology remains unchanged.

30

Nomura | Top Glove Corp

June 17, 2013

Fig. 33: Historical P/E band chart


MYR 10 8
17x

Fig. 34: Historical one-year forward P/E


P/E (x) 25 20 +1SD = 15.3 15 10 5 0 Jan 06

6 4 2 0 Jan 06

14x 11x 8x 5x

Mean = 11.1 -1SD = 6.9

Jan 07

Jan 08

Jan 09

Jan 10

Jan 11

Jan 12

Jan 13

Jan 07

Jan 08

Jan 09

Jan 10

Jan 11

Jan 12

Jan 13

Source: Bloomberg, Nomura research

Source: Bloomberg, Nomura research

Risks to our view


Positive surprises Stronger-than-expected demand from the emerging Latin American and Asian markets, to which Top Glove has large exposure. Higher/lower-than-expected pass-on rates from cost inflation/savings. Synergistic acquisitions undertaken to contribute to cost-saving measures. Negative surprises An unexpected surge in NR latex prices, which will affect pass-on rates. Delays of expansion plans which will impede volume growth.

31

Nomura | Malaysia rubber gloves

June 17, 2013

Appendix A-1
Analyst Certification
I, Celeste Yap, hereby certify (1) that the views expressed in this Research report accurately reflect my personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of my compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures


The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.

Materially mentioned issuers


Issuer Hartalega Holdings Kossan Rubber Industries Supermax Corp Bhd Top Glove Corp Ticker HART MK KRI MK SUCB MK TOPG MK Price MYR 6.32 MYR 4.29 MYR 1.89 MYR 6.35 Price date 13-Jun-2013 13-Jun-2013 13-Jun-2013 13-Jun-2013 Stock rating Reduce Neutral Neutral Neutral Sector rating Disclosures Not rated Not rated Not rated Not rated

Hartalega Holdings (HART MK)


Rating and target price chart (three year history)

MYR 6.32 (13-Jun-2013) Reduce (Sector rating: Not rated)


Date 09-Jan-13 09-Jan-13 Rating Target price Reduce 4.15 Closing price 4.95 4.95

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our target price of MYR4.70 is pegged to a one-year forward P/E of 14.2x, on FY14F EPS of 33.04sen. Our 10-year DCF valuation, discounted back to June 2013 on a WACC of 7.6% and terminal growth of 2%, provides a fair value of MYR4.77. Risks that may impede the achievement of the target price Upside risks to our view include 1) new, significant capacity expansion plans which will continue to boost capacity and earnings, or innovative product types which could push up margins; 2) higher/lower-than-expected pass-on rates of cost inflation/savings; 3) faster-than-expected completion of its NGC expansion plans; and 4) further weakening of NBR raw material prices.

32

Nomura | Malaysia rubber gloves

June 17, 2013

Kossan Rubber Industries (KRI MK)


Rating and target price chart (three year history)

MYR 4.29 (13-Jun-2013) Neutral (Sector rating: Not rated)


Date 09-Jan-13 09-Jan-13 21-May-12 13-Feb-12 27-Sep-11 27-Sep-11 Rating Neutral Target price Closing price 3.48 3.80 3.48 Not Rated 3.09 Suspended 3.57 Neutral 2.65 2.51 2.65

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology We peg Kossans FY14F EPS of 43.36sen to target one-year forward P/E of 10.0x, which is the sector average since 2007, arriving at target price of MYR4.35. Our 10-year DCF valuation discounted back to June 2013, using WACC of 7.0% and terminal growth of 2%, gives us a fair value of MYR4.66. Risks that may impede the achievement of the target price Upside risks to our view include: 1) delay in industry expansion or sudden surge in demand; 2) higher/lower-than-expected pass-on rates of cost inflation/savings; and 3) better-than-expected earnings contribution from TRP segment. Downside risks to our view include: 1) an unexpected surge in latex prices, and; 2) expansion hiccups which would affect penetration into higher-end segments and market share growth.
Supermax Corp Bhd (SUCB MK)
Rating and target price chart (three year history) Date 09-Jan-13 09-Jan-13 21-May-12 13-Feb-12 19-Nov-11 19-Nov-11 27-Sep-11 Rating Reduce Target price Closing price 2.03 1.90 2.03 Not Rated 1.67 Suspended 2.09 Neutral 1.845 4.00 1.845 2.88 1.215

MYR 1.89 (13-Jun-2013) Neutral (Sector rating: Not rated)

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology We arrive at our target price of MYR2.15 by pegging FY14F EPS of 21.74sen to one-year forward P/E of 10.0x, which is the sector average since 2007. With a WACC of 9.0% and terminal growth of 2%, our 10-year DCF valuation discounted back to June 2013 provides a fair value of MYR2.07. Risks that may impede the achievement of the target price Upside risks include 1) higher/lower-than-expected pass-on rates of cost inflation/savings; 2) increased hygiene awareness in emerging markets like Brazil which Supermax already has large exposure to; and 3) major delays in expansion projects by other industry players or sudden surge in demand which will likely result in better pricing power for glovemakers. Downside risks include 1) an unexpected surge in latex prices, whereby

33

Nomura | Malaysia rubber gloves

June 17, 2013

cost inflation pass-on would likely see a lag; and 2) delays in its expansion plans which will stunt volume growth, resulting in flattish earnings growth.
Top Glove Corp (TOPG MK)
Rating and target price chart (three year history) Date 09-Jan-13 09-Jan-13 21-May-12 13-Feb-12 27-Sep-11 27-Sep-11 09-Mar-11 13-Dec-10 13-Dec-10 06-Oct-10 Rating Neutral Target price Closing price 5.57 5.65 5.57 Not Rated 4.10 Suspended 5.07 Reduce 4.07 3.42 4.07 5.00 4.89 Neutral 5.56 5.80 5.56 6.82 5.69

MYR 6.35 (13-Jun-2013) Neutral (Sector rating: Not rated)

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology We peg our FY14F EPS of 40.92sen to a 15.2x target multiple, its 3-year average, to arrive at our target price of MYR6.20. Our 10-year DCF valuation discounted back to June 2013 is based on a WACC of 8.8% and terminal growth of 2% and implies a fair value of MYR6.26. Risks that may impede the achievement of the target price Upside risks to our view include 1) stronger-than-expected demand from the Latin American and Asian markets, to which Top Glove has large exposure; and 2) synergistic acquisitions undertaken to contribute to cost-saving measures. Downside risks include 1) lower-than-expected ASPs as a result of pricing pressure from peers; 2) higher-than-expected raw material prices; and 3) expansion coming in at a slower pace than the projected c.4.8bn pieces per year, limiting volume growth.

Rating and target price changes


Issuer Ticker Old stock rating New stock rating Old target price New target price

Hartalega Holdings Kossan Rubber Industries Supermax Corp Bhd Top Glove Corp

HART MK KRI MK SUCB MK TOPG MK

Reduce Neutral Reduce Neutral

Reduce Neutral Neutral Neutral

MYR 4.15 MYR 3.80 MYR 1.90 MYR 5.65

MYR 4.70 MYR 4.35 MYR 2.15 MYR 6.20

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Important Disclosures
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Nomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email grpsupport@nomura.com for help. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Nomura Global Financial Products Inc. (NGFP) Nomura Derivative Products Inc. (NDPI) and Nomura International plc. (NIplc) are registered with the Commodities Futures Trading Commission and the National Futures Association (NFA) as swap dealers. NGFP, NDPI, and NIplc are generally engaged in the trading of swaps and other derivative products, any of which may be the subject of this report. Any authors named in this report are research analysts unless otherwise indicated. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarily responsible for marketing Nomuras Equity Research product in the sector for which they have coverage. Marketing Analysts may also contribute to research reports in which their names appear and publish research on their sector.

Distribution of ratings (Global)


The distribution of all ratings published by Nomura Global Equity Research is as follows: 43% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 40% of companies with this rating are investment banking clients of the Nomura Group*. 46% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 48% of companies with this rating are investment banking clients of the Nomura Group*. 11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 23% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 March 2013. *The Nomura Group as defined in the Disclaimer section at the end of this report.

Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America
The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including, but not limited to, when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.

Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan
STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.

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Target Price
A Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.

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Nomura | Malaysia rubber gloves Additional information is available upon request and disclosure information is available at the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx Copyright 2013 Nomura International (Hong Kong) Ltd.. All rights reserved.

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