*  1H21 PATMI jumped 64x YoY to S$54.9mn as revenue tripled to S$159mn, beating our

forecast by 22%.

*  Gross margins leapt from 18% to 62% YoY as selling prices rose more than 1.5x to S$117 per

1,000 pieces. UG sells both nitrile and latex gloves.

*  Maintain BUY. We raise FY21e PATMI by 28% to S$107.8mn to account for higher glove selling

prices and margins. Our target price remains pegged at a 30% PE discount to the Big 4 glove

makers&rsquo FY22e valuations. As rubber glove valuations have compressed to around 10x PE, our

target PE for FY22e drops from 14x to 7x. This lowers our TP from S$1.35 to S$1.03.

Positives

+ Higher selling price drove revenue growth. 1H21 revenue tripled YoY to S$159mn with an

estimated 20% growth in volume and 1.5x jump in prices. Sales to China spiked 457% YoY as

customers stocked up ahead of winter and the festive season.

 

+ Gross margins remained robust. 1H21 gross margin was 62%, triple that of 1H20 as glove prices

skyrocketed. QoQ, margins expanded from 60.6% in 1Q21 to 63.6% in 2Q21.

 

+ Record earnings bolstered cash. Cash from operations rose to S$45.9mn. The company now has

net cash of S$32.5mn, a major reversal from net debt of S$37mn a year ago. UG announced a

special DPS of S$0.00105 and a total payout of S$0.645mn.

 

Negative

- Some lag in deliveries and higher costs. There have been shipment delays. As a result,

inventories almost doubled in the past six months to S$57mn. Inventories were predominantly

finished goods on transit to Europe. Container constraints are expected to ease only after

February. Shipping rates to Europe have catapulted almost 5-fold to around US$10,000 per

container. Even then, shipping rates only account for around 2% of UG&rsquo s selling prices.

 

Outlook

Earnings are still expected to grow QoQ as prices continue to climb in 2021. We also see other

growth drivers for UG even if glove prices taper off. Firstly, production capacity will expand by

35% YoY to 4.6bn pieces in FY22e. Secondly, exposure to emerging markets and low penetration

rates could provide sources of growth.

2QFY6/21 results above expectations

UG Healthcare Corp&rsquo s (UGHC) 2QFY21 net profit of S$32.3m (+42% qoq, a 58-fold

increase yoy) was ahead of expectations, as we had forecast a S$30m net profit for the

quarter (1H was 53.3% of our FY21F forecast). The stronger profitability was led by

continued ASP hikes, which drove topline growth to S$88.2m (+24% qoq, +228% yoy)

and further margin expansion during the quarter. This is despite near-term logistical

disruptions and shipping delays, which caused lower revenue recognition in the quarter

(as evident from UGHC&rsquo s inventory level rising 70% hoh to S$57.4m as of end-1H21).
 

On the back of strong global glove demand, UGHC expects its ASPs to rise further in

coming months, albeit by a smaller quantum given the high base. We estimate ASPs

grew by 5%/8% monthly in Jan/Feb 21, respectively, supported by the narrowing price

gap for gloves between developing and developed countries. We believe quarterly

earnings can grow further in coming quarters, as ASP hikes more than offset higher raw

material prices and shipping costs.
 

Planned capacity expansion of 500m pcs/annum is on track to come on stream by Mar

2021, but construction progress of the new factory for additional 1.2bn pcs/annum

capacity has been delayed by Malaysia&rsquo s second movement control order (MCO). We

estimate a three-month delay and expect the plant to be fully commissioned by end-

1QFY22F, after which UGHC&rsquo s total manufacturing capacity will reach 4.6bn pcs/annum

(+59% yoy). Leveraging on the industry&rsquo s favourable demand-supply dynamics and

UGHC&rsquo s strengthened balance sheet (net cash of S$32.5m as of end-1HFY21), we see

possibility of further production capacity expansion in CY22F.
 

Reiterate Add UGHC remains our preferred pick in the Singapore-listed glove sector,

given its relatively cheaper valuation and our expectations of higher normalised profits,

backed by a 59% yoy manufacturing capacity expansion in CY21F. We lift our FY21-23F

EPS forecasts by 0.1%-12.5% to reflect higher ASP assumptions our TP is unchanged

at S$1.70, still pegged to 13.2x CY22F P/E. Potential re-rating catalysts include stronger-

than-expected increase in selling prices downside risks include earlier-than-expected

widespread vaccine availability for Covid-19.

 

  ■ 2QFY6/21 NP of S$32.3m (a 58-fold increase yoy) was above expectations, despite logistical disruptions that temporarily impacted sales volume. 

 

  ■ We continue to see stronger quarters ahead as ASPs remain on an uptrend. UGHC could leverage on favourable industry trends to expand capacity.

 

  ■ Reiterate Add and TP of S$1.70. UGHC is trading at an undemanding valuation of 6.1x CY22F P/E (a 55% discount to its Malaysian peers).