Maybank IB Research

PP16832/04/2011 (029339)

Company Update

22 February 2011

Kossan Rubber Industries

Buy (unchanged)
Share price: Target price: RM3.29 RM3.60 (unchanged)

Better than peers at riding out the storm

Expect commendable 4Q10 results. Kossans 4Q earnings are likely to have been stable QoQ (+17% YoY) on sustained EBIT margins. Such a performance would be highly commendable in our view, considering the fact that high latex prices had negatively impacted the margins and earnings of its latex peers in the recent quarter. Latex gloves presently account for 60% of Kossans glove production with nitrile accounting for the remaining 40%. Kossans share price has unjustifiably underperformed the bigger latex peers by 5% YTD and valuations are undemanding. Maintain Buy and DCF-derived TP of RM3.60. Bottomline protected by higher nitrile glove margins. 4Q10 results are set to be released on 23rd Feb. We expect net profit to come in at RM28m (flattish QoQ, +17% YoY), slightly below our expectation but in line with consensus. We estimate sales volume in the quarter to have dipped 4% QoQ to 2.2b pieces, due to the conversion of lines to nitrile production during the period production yield per line for nitrile is 20% lower than latex. Bottomline nevertheless, has effectively been protected by higher margins for these gloves. Specialty gloves provide some margin buffer. While most of the local glove-makers are rushing into producing more medical nitrile gloves, Kossan plans to produce more specialty nitrile gloves where the barriers to entry are higher. The 16 lines (1.6b pieces or +10% to previous total capacity), which have been up and running since Jan 11, are dedicated for this specialty glove segment. This diversification would provide some buffer to volatile latex prices over the longer term. We expect nitrile to account for 50% of Kossans product mix in 2011. Undemanding valuation. We maintain our forecasts, expecting 10% EPS growth in 2011 and 8% in 2012, underpinned by its speciality gloves production and the completion of its 8 new nitrile lines in 2Q12 (converting from 6 latex powdered gloves lines). At our DCF-derived TP of RM3.60, Kossan would trade at 8x 2012 PER, against Top Gloves 14x and Hartalegas 10x.
Kossan Summary Earnings Table
FYE Dec (RM m) Revenue EBITDA Recurring Net Profit Recurring EPS EPS growth (%) Gross DPS (sen) PER (x) EV/EBITDA Gross Div Yield (%) P/BV (x) Net Gearing (%) ROE (%) ROA (%) Consensus net profit (RM m) Source: Maybank-IB 2008A 897.2 123.3 74.1 23.2 34.5 2.6 14.2 10.2 0.8 3.5 70.6 19.6 9.0 2009A 842.1 181.4 119.6 37.4 61.4 4.5 8.8 6.8 1.4 3.0 51.3 18.7 9.7 2010F 1,075.3 208.0 124.8 39.0 4.4 8.4 8.7 6.0 2.5 2.3 36.0 27.4 14.4 117.0 2011F 1,242.2 230.1 137.0 42.8 9.7 9.2 8.3 5.3 2.6 1.9 18.8 24.3 13.7 134.9 2012F 1,426.6 246.9 148.2 46.3 8.2 10.0 7.6 4.7 2.8 1.6 5.8 21.8 13.6 141.3

Lee Yen Ling Lee.yl@maybank-ib.com (603) 2297 8691

Description: OEM gloves manufacturer. Information: Ticker: Shares Issued (m): Market Cap (RM m): 3-mth Avg Daily Volume (m): KLCI: Major Shareholders: Kossan Hldgs SB KWAP

KRI MK 319.7 1,026.3 0.86 1,496.65 % 51.8 6.9

Price Performance: 52-week High/Low 1-mth 0.3 3-mth (24.5)

RM4.275/ RM2.42 6-mth (3.2) 1-yr 27.6 YTD 18.2

Price Chart (RM3.21)

5.0 4.0 3.0 2.0 1.0 0.0 Aug-09 Nov-08 May-09 Nov-09 May-10 Aug-10 Feb-09 Feb-10 KRI MK Equity

Kossan Rubber Industries

INCOME STATEMENT (RM) FY Dec Revenue EBITDA Depreciation & Amortisation Operating Profit Associates Interest (Exp)/Inc Exceptional Items Pre-Tax Profit Tax Minority Interest Net Profit Recurring Net Profit Revenue Growth (%) EBITDA Growth (%) EBIT Growth (%) Net Profit Growth (%) Recurring Net Profit Growth (%) Effective Tax Rate % CASH FLOW (RM m) FY Dec Profit before taxation Depreciation Net interest receipts/(payments) Non-cash working capital change Cash tax paid Others (incl'd exceptional items) Cash flow from operations Net Capex Disposal/(purchase) Others Cash flow from investing Net Debt raised/(repaid) Net Equity raised/(repaid) Dividends (paid) Interest payments Others Cash flow from financing Change in cash Sources: Company, Maybank-IB 2009A 85.8 33.7 9.1 (50.4) (4.0) 16.4 90.6 (40.6) 4.4 0.0 (36.2) (29.4) 0.0 (8.2) (9.1) 0.0 (46.7) 7.7 2010F 160.9 37.7 9.5 (57.0) (35.4) (0.0) 115.6 (60.0) 0.0 0.0 (60.0) 50.0 0.0 (26.9) (9.5) (0.0) 13.6 69.2 2011F 178.8 41.0 10.4 (40.8) (41.1) 0.0 148.2 (50.0) 0.0 0.0 (50.0) 10.0 0.0 (29.6) (10.4) 0.0 (29.9) 68.3 2012F 193.3 44.3 9.3 (45.1) (44.5) (0.0) 157.4 (50.0) 0.0 0.0 (50.0) (50.0) 0.0 (32.0) (9.3) (0.0) (91.3) 16.1 2009A 842.1 181.4 (33.7) 147.8 (9.1) 0.0 (52.9) 85.8 (18.5) (0.7) 66.7 119.6 (6.1) 47.2 51.3 13.7 61.4 21.5 2010F 1,075.3 208.0 (37.7) 170.4 (9.5) 0.0 0.0 160.9 (35.4) (0.7) 124.8 124.8 27.7 14.7 15.3 87.2 4.4 22.0 2011F 1,242.2 230.1 (41.0) 189.1 (10.4) 0.0 0.0 178.8 (41.1) (0.7) 137.0 137.0 15.5 10.6 11.0 9.7 9.7 23.0 2012F 1,426.6 246.9 (44.3) 202.6 (9.3) 0.0 0.0 193.3 (44.5) (0.7) 148.2 148.2 14.8 7.3 7.1 8.2 8.2 23.0 BALANCE SHEET (RM m) FY Dec Fixed Assets Other LT Assets Cash/ST Investments Other Current Assets Total Assets ST Debt Other Current Liabilities LT Debt Other LT Liabilities Minority Interest Shareholders' Equity Total Liabilities & Capital Share Capital (m) Net Debt/(Cash) Working capital 2009A 359.3 1.4 23.5 304.4 688.5 159.4 101.5 47.4 21.3 1.6 357.4 688.5 319.7 183.3 205.8 2010F 381.6 1.4 92.7 388.4 864.1 209.4 128.5 47.4 21.3 2.3 455.3 864.1 319.7 164.1 262.8 2011F 390.6 1.4 161.0 448.4 1,001.5 219.4 147.8 47.4 21.3 2.9 562.7 1,001.5 319.7 105.8 303.6 2012F 396.3 1.4 177.1 514.9 1,089.7 169.4 169.1 47.4 21.3 3.6 678.9 1,089.7 319.7 39.7 348.7

RATES & RATIOS FY Dec EBITDA Margin % Op. Profit Margin % Net Profit Margin % ROE % ROA % Dividend Cover (x) Interest Cover (x) Asset Turnover (x) Net Debt/ Equity (x) Debtors Turn (days) Creditors Turn (days) Inventory Turn (days) Net Gearing % Net Debt/ EBITDA (x) Net Debt/ Market Cap (x) EV/EBITDA (x) 2009A 21.5 17.5 7.9 18.7 9.7 7.9 4.6 7.3 1.2 3.3 83.8 42.3 47.6 51.3 1.1 0.2 2010F 19.3 15.8 11.6 27.4 14.4 11.6 4.6 12.7 1.2 3.4 83.8 42.3 47.6 36.0 1.2 0.3 2011F 18.5 15.2 11.0 24.3 13.7 11.0 4.6 12.4 1.2 3.8 83.8 42.3 47.6 18.8 1.2 0.3 2012F 17.3 14.2 10.4 21.8 13.6 10.4 4.6 14.5 1.3 5.0 83.8 42.3 47.6 5.8 0.9 0.2

22 February 2011 Page 2 of 3

Kossan Rubber Industries

Definition of Ratings
Maybank Investment Bank Research uses the following rating system: BUY HOLD SELL Total return is expected to be above 10% in the next 12 months Total return is expected to be between -5% to 10% in the next 12 months Total return is expected to be below -5% in the next 12 months

Applicability of Ratings
The respective analyst maintains a coverage universe of stocks, the list of which may be adjusted according to needs. Investment ratings are only applicable to the stocks which form part of the coverage universe. Reports on companies which are not part of the coverage do not carry investment ratings as we do not actively follow developments in these companies.

Some common terms abbreviated in this report (where they appear):

Adex = Advertising Expenditure BV = Book Value CAGR = Compounded Annual Growth Rate Capex = Capital Expenditure CY = Calendar Year DCF = Discounted Cashflow DPS = Dividend Per Share EBIT = Earnings Before Interest And Tax EBITDA = EBIT, Depreciation And Amortisation EPS = Earnings Per Share EV = Enterprise Value FCF = Free Cashflow FV = Fair Value FY = Financial Year FYE = Financial Year End MoM = Month-On-Month NAV = Net Asset Value NTA = Net Tangible Asset P = Price P.A. = Per Annum PAT = Profit After Tax PBT = Profit Before Tax PE = Price Earnings PEG = PE Ratio To Growth PER = PE Ratio QoQ = Quarter-On-Quarter ROA = Return On Asset ROE = Return On Equity ROSF = Return On Shareholders Funds WACC = Weighted Average Cost Of Capital YoY = Year-On-Year YTD = Year-To-Date

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This report is for information purposes only and under no circumstances is it to be considered or intended as an offer to sell or a solicitation of an offer to buy the securities referred to herein. Investors should note that income from such securities, if any, may fluctuate and that each securitys price or value may rise or fall. Opinions or recommendations contained herein are in form of technical ratings and fundamental ratings. Technical ratings may differ from fundamental ratings as technical valuations apply different methodologies and are purely based on price and volume-related information extracted from Bursa Malaysia Securities Berhad in the equity analysis. Accordingly, investors may receive back less than originally invested. Past performance is not necessarily a guide to future performance. This report is not intended to provide personal investment advice and does not take into account the specific investment objectives, the financial situation and the particular needs of persons who may receive or read this report. Investors should therefore seek financial, legal and other advice regarding the appropriateness of investing in any securities or the investment strategies discussed or recommended in this report. The information contained herein has been obtained from sources believed to be reliable but such sources have not been independently verified by Maybank Investment Bank Bhd and consequently no representation is made as to the accuracy or completeness of this report by Maybank Investment Bank Bhd and it should not be relied upon as such. Accordingly, no liability can be accepted for any direct, indirect or consequential losses or damages that may arise from the use or reliance of this report. Maybank Investment Bank Bhd, its affiliates and related companies and their officers, directors, associates, connected parties and/or employees may from time to time have positions or be materially interested in the securities referred to herein and may further act as market maker or may have assumed an underwriting commitment or deal with such securities and may also perform or seek to perform investment banking services, advisory and other services for or relating to those companies. Any information, opinions or recommendations contained herein are subject to change at any time, without prior notice. This report may contain forward looking statements which are often but not always identified by the use of words such as anticipate, believe, estimate, intend, plan, expect, forecast, predict and project and statements that an event or result may, will, can, should, could or might occur or be achieved and other similar expressions. Such forward looking statements are based on assumptions made and information currently available to us and are subject to certain risks and uncertainties that could cause the actual results to differ materially from those expressed in any forward looking statements. Readers are cautioned not to place undue relevance on these forwardlooking statements. Maybank Investment Bank Bhd expressly disclaims any obligation to update or revise any such forward looking statements to reflect new information, events or circumstances after the date of this publication or to reflect the occurrence of unanticipated events. This report is prepared for the use of Maybank Investment Bank Bhd's clients and may not be reproduced, altered in any way, transmitted to, copied or distributed to any other party in whole or in part in any form or manner without the prior express written consent of Maybank Investment Bank Bhd and Maybank Investment Bank Bhd accepts no liability whatsoever for the actions of third parties in this respect. This report is not directed to or intended for distribution to or use by any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Published / Printed by

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