Careplus Group Berhad FV: RM 0.29 Top Tier 2 Glove Player

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1 ta securities holdings berhad(14948-m) A member of the ta group NEW LISTING Tuesday, November 23, 2010 Sector: Technology MENARA TA ONE, 22 JALAN P. RAMLEE, KUALA LUMPUR, MALAYSIA TEL: / FAX: Careplus Group Berhad FV: RM 0.29 Top Tier 2 Glove Player THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* ACE Market Listing Subscribe TA Research Team Coverage ext:1626 liwong@ta.com.my Background The Careplus group of companies is involved in the manufacturing, processing and trading of gloves. Careplus manufactures OEM and OBM latex examination glove, nitrile and vinyl gloves, surgical gloves as well as cleanroom gloves. The group also manufactures other disposable protection products such as facemasks, respirators, latex dental dams, gowns, caps and shoe covers to complement their glove products. Some products are sold under their own brand names include Rubbercare, Guardian, Sunshine, MasterClean Comfort, and MasterClean Protection. Figure 1: Corporate group structure Careplus Share Information Bloomberg Code n.a. Stock Code n.a. Listing ACE Market Share Cap (mn) Market Cap (RMmn) 48.3 Par Value wk Hi/Lo (RM) n.a. 12 mth Avg Daily Vol ('000 shrs) n.a. Estimated Free Float (%) 40.0 Beta n.a. Major Shareholders (%) Lim Kwee Shyan 31.4 Thinking Cap Sdn Bhd 14.4 Ng Shu Si 7.14 Chan Pek Ham 6.8 Careplus (M) (100%) Trading of gloves and other disposable protection products Figure 2: Product range Latex examination gloves Nitrile gloves PPG (100%) Manufacturing of rubber gloves Vinyl gloves Surgical gloves Cleanroom gloves Powdered Powdered Powdered Powdered Natural latex Powder free Powder free Powder free Powder free Nitrile IPO structure The public issue of 65.05mn shares at RM0.23 to: o Eligible investors 15.65mn shares; o Selected investors via placement 38.90mn shares; o Malaysian public 10.50mn shares; Masterclean Tech (100%) Manufacturing of cleanroom gloves and trading of gloves Listing dates Opening Closing Balloting of applications Allotment of shares Listing 16 Nov Nov Nov Dec Dec 10 Ratio & Analysis NTA per share (post IPO) (sen) 18.8 Price to NTA 1.2 Proforma ROE (%) 37.3 Proforma ROA (%) 21.8 Proforma net gearing (%) 2.2 Proforma current ratio (%) 2.4 Utilisation of proceeds RMmn % Capex Working cap Listing expenses Total Proposed utilisation of proceeds IPO proceeds totaling RM14.962mn will be utilised within 3 years from the date of listing in the following manner: Page 1 of 10

2 Figure 3: Utilisation of proceeds RM 000 Capital expenditures 10,000 Working capital 3,262 Estimated listing expenses 1,700 Total 14,962 Investment case Entrenched customer base Careplus has quite an extensive global customer base. Its products are sold to more than 20 countries worldwide such as Australia, Chile, Colombia, Cyprus, Czech Republic, Ethiopia, Greece, Honduras, Hong Kong, India, Indonesia, Israel, Japan, Kuwait, Mexico, New Zealand, Nigeria, Peru, the PRC, Singapore, South Korea, Switzerland, Syria, the Philippines, UK and US. Careplus products currently meet most international standards or requirements such as ASTM, British Standards Institution (BSI), Standard Malaysian Glove (SMG) scheme, AQL under the FDA of US and EN455 (European standard for medical gloves). Raising production capacity The group began operations in 1988 and has since expanded to owning 6 production lines focusing on the manufacturing of OEM and OBM latex examination gloves. However, due to the strong demand, Careplus has been outsourcing the production for some of its latex examination gloves, nitrile and vinyl gloves as well as surgical gloves to third party manufacturers. Figure 4: Production/Outsourcing Latex Examination Manufactured In House Cleanroom gloves Gloves Nitrile Vinyl Third Party Outsourcing Surgical Going forward, the group is looking to utilise bulk (or RM10mn) to expand its production facilities on a leasehold land (measuring 392,010sq. ft. /9 acres) by building a double storey office block and a factory unit to house up to 20 new production lines over the next 5 10 years in 3 phases. The plant will also be fully equipped with a chlorination plant, double storey warehouse, cleanroom facilities, other ancillary facilities and biomass plant. The total budgeted cost for the entire expansion is estimated at some RM106mn. Out of that, RM10mn has been budgeted for the cost of the land and construction of buildings. This is addition to the remaining balance of RM86mn, which will be funded via internally generated funds and bank borrowings. Page 2 of 10

3 Figure 5: Details of estimated expenditure Estimated amount (RM 000) Expected date of commissioning Two production lines 4,750 By 3Q 2011 Biomass plant and heating 4,050 By 3Q 2011 system Chilled water supply 500 By 1Q 2011 Compressed air supply 300 By 1Q 2011 Wastewater treatment 500 By 1Q ,100 Compared to larger glove manufacturers such as Top Glove and Supermax, Careplus production capacity is extremely small. Combined, Top Glove and Supermax is looking to produce some 63bn pieces of glove by end Figure 6: Expansion of production facilities No. of production lines Targeted commissioning Estimated increase in annual capacity ( 000 pcs) Estimated total cumulative annual capacity ( 000 pcs) Existing 6 420, ,000 Phase I 2 Q , ,200 Phase II 3 Q ,800 1,033,000 Phase III 5 Q ,000 1,646,000 Phase IV Up to 10 After ,226,000 2,872,000 Figure 7: Future plans Future Plans Product Development and Enhancement Expansion of Production Facilities Market Expansion Demand for gloves healthy Global demand and consumption of gloves is expected to remain healthy. For larger industry players, orders have picked up in the last two weeks of September. The lead time for customers to place orders have increased from around 45 to 60 days in early September to (up to) 4 months currently. For Careplus, since the group has been outsourcing the production for some of its gloves to third party manufacturers, we believe the new added capacity should easily be filled by new and existing customer base. We note that the group recently entered into an agreement with a potential customer to manufacture and supply 30mn pcs of medical gloves per month. Page 3 of 10

4 Susceptible to fluctuations in raw material prices and energy supply Natural rubber latex (NRL) and natural gas makes up around 60% and 10% of total production costs. Latex prices have soared to as high as RM8.67/kg, We expect latex price to continue accelerating and stay stubbornly high for a while as low supply of latex is further exacerbated by the start of the wintering season. Prices should however, begin to soften to around RM5 6 per kg by end 1Q Although we believe Careplus is not a price leader, we believe the rise in demand should allow rubber glove manufacturers to also raise ASP more frequently. The increase will help support topline growth. Figure 8: Latex prices (RM/kg) Jan 00 Jun 00 Nov 00 Apr 01 Sep 01 Feb 02 Jul 02 Dec 02 May 03 Oct 03 Mar 04 Aug 04 Jan 05 Jun 05 Nov 05 Apr 06 Sep 06 Feb 07 Jul 07 Dec 07 May 08 Oct 08 Mar 09 Aug 09 Jan 10 Jun 10 Nov 10 Source: Malaysian Rubber Board, TA Securities The removal of gas subsidies next year should erode future margins. To recap, Performance Management & Delivery Unit (PEMANDU) a unit under the Prime Minister's Department is proposing to progressively remove gas subsidies by RM3/mmbtu every 6 months. Gas prices currently stand at RM15/mmbtu. On a positive note, the group is looking to install a biomass plant to serve as an alternative source of energy to ensure sustainability of supply and cushion impact from cut in gas subsidy. The plant is expected to be operational by 3Q Exposure to foreign exchange risk Since approximately 80% of the group s total revenue are derived from the sale of rubber gloves to overseas countries, Careplus is susceptible to forex risks and will be adversely affected by the strengthening MYR vis à vis the USD. Figure 9: MYR/USD (RM) MYR/USD Jan 05 May 05 Sep 05 Jan 06 May 06 Sep 06 Jan 07 May 07 Sep 07 Jan 08 May 08 Sep 08 Jan 09 May 09 Sep 09 Jan 10 May 10 Sep 10 Source: Malaysian Rubber Board, TA Securities Page 4 of 10

5 Financial Analysis Careplus has been registering strong profit growths over the past 3 FYs where net profit ballooned to RM6.2mn in FY10 vs. RM1.2mn in FY08. This is on the back of a CAGR of 8.5% over the past 3 FYs. The group s FY10 bottomline was further boosted by an expansion in margin attributed to the spike in demand due to the H1N1 in April The industry is currently plagued by several headwinds that could undermine Careplus profitability. With the demand and supply mechanism normalizes, glove manufacturers should find it increasingly difficult to pass on entire cost increases (such as from rising latex price, energy costs and unfavourable exchange rate). Annualising the 1H FY11 numbers, Careplus is expected to register lower net profit of RM5.7mn as compared to RM6.2mn in FY10. Going forward, the possibility of easing of latex price, stable exchange rate and potential threat of bird flu are catalysts for earnings upside. Additionally, with Careplus currently running at almost full capacity (utilization level for FYE 31 Jan 2010 was around 95.3%), we foresee the new added capacity to enhance the group s revenue and bottomline. Downside risk to earnings include rising borrowing costs (on the back of possible OPR increase next year) as the group would probably have to part finance future expansion plans via bank borrowings. For now however postlisting and utilisation of proceeds Careplus net gearing is expected to be at a low 0.03x (from 0.27x currently) as at end 31 July Elsewhere, Careplus does not have a fixed dividend policy in place. Figure 10: Revenue breakdown Other gloves, 7% Other disposable protection product, 1% Latex examination gloves, 91% Page 5 of 10

6 Figure 11: Gross profit breakdown Other gloves, 2% Other disposable protection product, 1% Latex examination gloves, 97% Figure 12: Gross profit margin FY Jan 08 FY Jan 09 FY Jan 10 1H FY09 1H FY10 Latex glove 12% 10% 27% 24% 20% OBM Latex glove 10% 11% 27% 26% 20% OEM Other gloves 8% 8% 12% 12% 12% Other disposable protection product 8% 8% 12% 12% 12% Figure 13: Breakdown in revenue by geographical segment Hong Kong, 19.9% Others, 49.5% Malaysia, 19.9% US, 15.9% Mexico, 3.3% Peru, 4.5% UK, 5.4% Colombia, 7.2% Greece, 7.1% The Philippines, 7.3% Page 6 of 10

7 Figure 14: Breakdown in raw materials Others, 20.9% Natural gas, 9.4% Natural rubber latex, 56.5% Polymer/chemic als, 13.2% Valuation and recommendation Ascribing a 10% discount to the industry s targeted PE of 12x to annualized FY11 EPS of RM0.27, we fairly value Careplus at RM0.29. We believe the discount is justified due to Careplus smallish size vis à vis its listed peers and lack of liquidity in the ACE Market. The fair value represents a 26.1% premium from the issue price of RM0.23. Subscribe. Figure 15: Ranking of Tier II NR Glove Manufacturers by Revenue (RM 000) Company FYE Revenue Gross profit PBT PBT Margin (%) PAT Oon Corp Resources (M) Sdn Bhd 31/03/09 71, , , ,670.9 Koon Seng Sdn Bhd 31/12/09 45,357.2 n.a. 2, ,984.2 Careplus 31/01/10 41, , , ,179.0 Tekmedic (M) Sdn Bhd 31/07/09 35, , , ,455.9 Cranberry (M) Sdn Bhd 31/12/09 28, (139.2) n.a. (219.9) Source: D&B Figure 16: Market share of Careplus in 2009 Revenue in terms of sales (Rubber gloves) Revenue in terms of exports (NR examination gloves) Careplus RM40.8mn RM39.1mn Industry RM6,461.9mn RM3,772.0mn Market share (%) Source: D&B Page 7 of 10

8 Appendix Profit and loss FYE 31 Jan 2010 FY08 FY09 FY10 1H FY11 FY11 (Annualised) FY12 RM ('000) RM ('000) RM ('000) RM ('000) RM ('000) RM ('000) Revenue 35,547 38,050 41,866 23,326 46,652 52,250 Less: Cost of sales (31,871) (34,090) (31,052) (18,967) (37,934) (42,845) Gross profit 3,676 3,960 10,814 4,359 8,718 9,405 PBT 1,416 2,411 8,293 2,385 4,770 5,225 Taxation (192) (439) (2,114) (784) Net profit 1,224 1,972 6,179 2,850 5,700 4,441 EPS Based on enlarged share cap 210, , , , , ,000 Profit margin Gross profit margin (%) 10.3% 10.4% 25.8% 18.7% 18.7% 18.0% PBT margin (%) 4.0% 6.3% 19.8% 10.2% 10.2% 10.0% Net profit margin (%) 3.4% 5.2% 14.8% 12.2% 12.2% 8.5% Effective tax rate (%) 13.6% 18.2% 25.5% 19.5% 19.5% 15.0% PER RM PER RM Page 8 of 10

9 Balance Sheet FYE Jan 2008 FYE Jan 2009 FYE Jan 2010 As at 31 Jul 2010 Balance sheet (RM '000) (RM '000) (RM '000) (RM '000) Non current assets Proprty, plant and equipment 6,823 6,236 9,978 11,638 Investment in an associate Goodwill on consolidation Investment property Other investments Deferred tax assets ,310 6,585 10,675 12,256 Current assets Inventories 2,801 1,855 3,853 4,499 Trade receivables 4,721 5,453 7,332 7,813 Other receivables, deposits and prepayment Amount owing by a related party Derivative assets Tax refundable Fixed deposits ,110 0 Cash and bank balances 508 2, ,279 8,748 10,313 14,650 14,371 Asset held for sale Total assets 16,058 16,898 25,725 26,627 Equity attributable to equity holders of the company Share capital ,596 14,495 Share premium 1,379 1,379 1,379 1,380 Merger deficits (12,900) Retained profits 7,200 9,070 11,649 12,999 9,344 11,217 14,624 15,974 Non current liabilities Long term borrowings ,576 2,454 Deferred tax liabilities ,675 2,581 Current liabilities Trade payables 3,200 2,689 2,542 3,246 Other payables and accruals , Short term borrowings 2,100 1, ,751 Dividend payable 0 0 2,500 0 Provision of taxation , Bank overdrafts ,184 5,120 8,426 8,072 Total liabilities 6,714 5,681 11,101 10,653 Total equity and liabilities 16,058 16,898 25,725 26,627 Based on enlarged share cap 210, , , ,000 NTA (RM '000) 9,002 10,875 14,282 15,632 NTA per share (sen) Trade receivables turnover ratio (days) Trade payable turnover ratio (days) Gearing ratio (times) Page 9 of 10

10 Balance sheet post PI After public issue As at 31 Jul 2010 After the public issue and utilisation of proceeds Balance sheet (RM '000) (RM '000) (RM '000) Non current assets Proprty, plant and equipment 11,638 11,638 21,838 Goodwill on consolidation Investment property ,256 12,256 22,458 Current assets Inventories 4,499 4,499 4,499 Trade receivables 7,813 7,813 7,813 Other receivables, deposits and prepayment Amount owing by a related party Derivative assets Cash and bank balances 1,279 16,241 4,541 14,371 29,333 17,408 Total assets 26,627 41,589 39,866 Equity attributable to equity holders of the company Share capital 14,495 21,000 21,000 Share premium 1,380 9,837 8,993 Merger deficits (12,900) (12,900) (12,900) Retained profits 12,999 12,999 12,723 15,974 30,936 29,816 Non current liabilities Long term borrowings 2,454 2,454 2,454 Deferred tax liabilities ,581 2,581 2,581 Current liabilities Trade payables 3,246 3,246 3,246 Other payables and accruals Short term borrowings 2,751 2,751 2,751 Provision of taxation Bank overdrafts ,072 8,072 7,287 Total liabilities 10,653 10,653 9,848 Total equity and liabilities 26,627 41,589 39,664 Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. for TA SECURITIES HOLDINGS BERHAD(14948-M) (A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan Head of Research Page 10 of 10