Excerpts from Phillip Securities report

Analyst: Paul Chew

Never say never to blue skies

• Pandemic has resulted in spot prices for gloves ballooning 5-fold. Order lead times have been stretched from one month to a year. Supply shortfall to continue until 2021.

UG Healthcare 

Share price: 
$1.75

Target: 
$2.70

• With its own branded gloves and distribution network, UG Healthcare should be able to monetize a larger share of supply-chain profits, starting from manufacturing to distribution. 

• Initiate coverage with BUY recommendation and target price of S$2.70.

Valued at 15x FY21e PE, a 40% historical discount to peer on account of its smaller scale and size.

Investment Merits
1. A surge in demand. Covid-19 has resulted in a sharp spike in demand, precipitating severe industry shortages.

Industry order lead times have multiplied from one month before Covid to 12 months.

Ex-factory spot prices for nitrile gloves have skyrocketed from US$25 to US$120 per 1,000 pieces.

The three levers of demand:

a) quantum jumps in the number of hospital patients, frequency of use and typically low inventories, which have led to a scramble for gloves;

b) hospitals, governments and NGOs have started to build buffers or strategic stocks to prepare for future spikes in demand; and

c) the new normal of hygiene practices has necessitated the use of gloves by consumers and non-healthcare industries such as airlines, airports and restaurants.

2. Capturing the entire supply chain margins. Since listing, UG has been investing aggressively in its brands, logistics, warehouses and end-customer network.

The typical logistics or sales cycle is as follows: UG manufactures the gloves from its factory and ship to its warehouses in the UK, China, Brazil and Germany. UG services many end customers that may just order several cartons every week. UG needs to have sufficient stock to meet such consistent orders for next day delivery. For effective sales, UG needs a local sales team to promote the brand, speak to customers, engage in marketing activities and provide after-sales support. For more than a decade UG has spent building a distribution network for its own branded gloves.

Sales from its Unigloves brand have leapt from around 50% of the total in 2015 to 85%.

Own-brand products offer higher customer stickiness and selling prices. UG can also capture distribution margins.

With a network that reaches out to end-customers directly, UG can benefit from higher end-selling prices of gloves and enjoy both manufacturing and distribution margins for its premium branded gloves



3. Shortage should persist till 2021. Demand for gloves worldwide was already growing at a CAGR of 10.6% before Covid.

We believe the current shortage will persist into 2021.

Firstly, glove penetration in emerging markets such as China and Brazil is only 10 and 24 pieces per capita respectively.

This compares with 100 and 150 for Europe and the US. UG can benefit from growth in both countries, as it has been entrenching its brand and distribution networks in China and Brazil since 2002 and 2014 respectively.

Secondly, industry supply is not expected to meet demand growth even in 2021.

Demand was growing by around 30bn a year before Covid.

This year, it is expected to grow by 60bn and another 33bn in 2021, as the pandemic has created new growth drivers. This surge of almost 93bn in two years is above expected increases in planned glove capacity of around 74bn.

If we assume a 90% utilization rate for the industry, actual supply addition will only be around 67bn pieces.

PaulChewPaul Chew, Head of ResearchWe initiate UG Healthcare with a BUY rating. Our target price is S$2.70.

This is based on 15x PE FY21e.

The average discount to peers for UG since listing has been around 40%.


Full report here


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