Careplus Group CPG MK Sector: Rubber Products

An emerging force Careplus is an emerging small-sized rubber-gloves manufacturer with an ambitious expansion plan. The company has doubled its capacity to 4bn units in the past 4 years and set its target on reaching the 1bn capacity mark by 22. Earnings were weak in 216, but have rebounded in 1Q17, driven by higher sales demand and improved efficiencies. Management is confident about delivering better earnings ahead in tandem with its capacity expansion, rising nitrile mix and improving efficiencies. Targets a 25% CAGR in capacity over 216-2E With an ambitious expansion plan in full swing, Careplus aims to hit a capacity target of 1bn gloves by 22E, implying a 25% CAGR over 216-2E. In tandem with market demand, Careplus is also aiming to ramp up its nitrile gloves production from 15% currently, to over 3% of its total product mix by 22E. A higher nitrile mix generally leads to better margin compared to latex gloves on lower raw material consumption and higher production efficiency. Global rubber-gloves demand remains robust, and is expected to grow by 6-8% annually, which should sustain Careplus utilisation level in the 7-8% range. Competition within the industry has also moderated with key players slowing expansion, allowing for better pricing management and to the benefit smaller players like Careplus. Have earnings troughed in 216? Earnings were down sharply in 216, but showed a good rebound in 1Q17 underpinned by capacity expansion, improved efficiency and a favourable product mix. Natural rubber prices, a key raw material, have gradually trended down from a peak of RM8/kg to below RM6/kg now. Against the backdrop of strong capacity expansion, favourable industry dynamics, rising nitrile contribution and moderating raw material prices, management is confident about brighter days ahead for Careplus. Share price has rebounded significantly Careplus share price has been up sharply since the release of the 1Q17 results. The share price spiked from 29.5sen to a high of 43.5sen, before retreating to its last close of 4.5sen. Valuation-wise, Careplus shares trade at 64x trailing-12 months earnings. However, assuming the 1Q17 run rate were to carry through for the full year, the shares would be trading at approximately a 13x PER for 217E. The sector average PER in our glove universe stands at ca.21x for CY17E and 18x for CY18E, but we note that all 4 companies under our coverage have a much larger production capacity and stronger track record of earnings delivery. Earnings & Valuation Summary FYE 31 Dec (RMm) 213 (1) 213 (2) 214 215 216 Revenue 97.4 14.8 152.1 19.3 229.4 EBITDA 9.3 12.9 2.2 3.1 26.3 Pretax profit 2.8 3.1 7.6 12.9 5.2 Net profit 3. 1.4 3.3 5.9.2 EPS (sen).8.4.9 1.6. PER (x) 47.4 1.5 43.2 24.4 913.9 Core net profit 3. 1.4 3.3 5.9.2 Core EPS (sen).8.4.9 1.6. Core EPS growth (%) 4. (52.8) 132.8 76.6 (97.3) Core PER (x) 47.4 1.5 43.2 24.4 913.9 Net DPS (sen).3 -.3.3 - Dividend Yield (%).6 -.6.8 - EV/EBITDA (x) 18.9 14.9 9.9 7.3 1.1 Company Note Careplus Group CPG MK Sector: Rubber Products RM.45 @ 6 July 217 Not rated Upside: n/a Price Target: N/A Previous Target: N/A (RM).65.6.55.5.45.4.35.3.25.2 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17 Jun-17 Price Performance 1M 3M 12M Absolute.% +3.6% +2.9% Rel to KLCI +1.3% +28.6% +12.9% Stock Data Issued shares (m) 483.3 Mkt cap (RMm)/(US$m) 195.7/45.5 Avg daily vol - 6mth (m) 3.2 52-wk range (RM).25-.45 Est free float 41.7% BV per share (RM).2 P/BV (x) 2.2 Net cash/ (debt) (RMm) (16.2) ROE (216A).2% Derivatives No Shariah Compliant Yes Key Shareholders Kwee Shyan Lim 2.8% Thinking Cap Sdn Bhd 11.8% Ng Shu Si Source: Affin Hwang, Bloomberg 6.% Loh Jia Ying (63) 2146 7546 jiaying.loh@affinhwang.com Chg in EPS (%) - - - - - Affin/Consensus (x) - - - - -, Bloomberg Notes: (1) For the 12-month period January 212 to January 213, prior to the change of year-end from January to December (2) For the 11-month period of February 213 to December 213, as a result of the change of year-end from January to December Page 1 of 8

2 years of glove-manufacturing experience Careplus was listed on the ACE Market of Bursa Securities in 21 with a niche focus on latex gloves backed by over 2 years of experience in the glove business. With a total annual production capacity of 3.9bn gloves, Careplus is a relatively small player within the glove manufacturing space, where the four incumbents, ie Top Glove (TOPG MK, RM5.8, BUY), Hartalega (HART MK, RM6.87, BUY), Kossan (KRI MK, RM6.6, HOLD) and Supermax (SUCB MK, RM1.96, HOLD) control more than half of the global gloves production. Fig 1: Capacity comparison against major glove manufacturers Company Annual capacity Top Glove 48bn Hartalega 24bn Kossan 22bn Supermax 22bn Careplus 4bn Source: Affin Hwang, Companies Fig 2: Careplus capacity breakdown Subsidiary Types Annual capacity Remarks Rubbercare Products Factory 1 Latex gloves.42bn 1% owned Factory 2 Warehouse Careglove Global Factory 3 Latex & nitrile gloves 2.16bn 5% + 1 share (JV with Descarpack) Careplus (M) Factory 4 Latex & nitrile gloves 1.32bn 1% owned Total 3.9bn Source: Affin Hwang, Company OEM and OBM manufacturer Careplus runs on a hybrid OEM and OBM business model, but still predominantly manufactures more OEM gloves. It has an in-house brand Rubbercare, which distributes both nitrile and latex gloves, but is comparatively smaller than its OEM mix. Careplus also has a joint venture business with Descarpack Descartaveis do Brasil Ltda (Descarpack), in which both jointly own Careglove Global. Careplus runs 3 factories situated within close vicinity to each other in Negeri Sembilan (Malaysia) with one warehouse designated for raw material and inventory management. JV partner for Brazilian exposure Descarpack came into the picture in 211, where it formed a JV business with Careplus under Careglove Global. Prior to the JV, we understand that Descarpack was a long-time business customer with a good and cordial relationship. As part of the JV agreement, Careplus agrees to lend its glove manufacturing expertise while Descarpack plans to commit to certain manufacturing volumes for its onward distribution into Brazil, where it has a strong foothold and wide distribution network. Careglove Global is a highly profitable subsidiary, but its joint ownership means significant profit dilution at the PATAMI level, as evident in the high minority interest charge. Page 2 of 8

Fig 3: Corporate milestones of Careplus Increasing nitrile contribution Recognising the structural shift for nitrile gloves demand, Careplus began the production for synthetic rubber gloves beginning in 216. Although a latecomer to the game, it has continuously ramped up its nitrile capacity, leading to 15% in production mix currently, compared to just 9% in 215. Careplus also manufactures surgical gloves, although volume is minimal due to the niche nature of demand. With future expansion in mind, Careplus plans to focus more on nitrile expansion (target nitrile mix of 3% by 22E) in line with market demand, which could lead to better margins moving forward. Fig 4: Careplus product mix in 215 Fig 5: Careplus product mix in 216 Surgical 1% Surgical 1% Nitrile 9% Nitrile 14% Latex 9% Latex 85% Single region concentration risk The Central and South America market dominates Careplus sales mix, which does present significant concentration risk. This risk would be hard to mitigate, considering more than half of its existing capacity from Careglove Global is dedicated for Descarpack. Careplus management is cognisant of this and has taken a proactive approach to diversify by growing other markets, as well as boosting expansion at its Careplus (M) subsidiary. Apart from Central and South America, Careplus has a presence in other Asia Pacific markets, understandably due to its heavy latex gloves mix, which is generally the preferred and cheaper option for developing regions. Page 3 of 8

Fig 6: Careplus geographical mix in 215 Fig 7: Careplus geographical mix in 216 Others 2% Others 3% North America 8% Malaysia 1% Other Asia Pacific 18% Central and South America 71% North America 5% Malaysia 2% Other Asia Pacific 2% Central and South America 7% Commendable capacity expansion track record As per any manufacturing business, growing capacity and keeping costs in check are the two core business pillars, apart from ongoing innovation and process improvements. Careplus has a commendable capacity expansion track record, as it grew from.42bn in glove capacity from a single factory at its IPO in 21 to the current total annual capacity of 3.9bn gloves across three factories, over a six-year period. Utilisation remains firmly above the 7% region for the past four years, although it did trough at 67% in 216, but nonetheless still is a respectable utilisation rate. Volume has been growing healthily over the past few years, owing to stronger sales penetration and higher product uptake from its JV partner. Moving forward, robust global rubber gloves demand, which is expected to grow by 6-8% annually based on the company, should sustain Careplus s utilisation level at the 7-8% level, according to management. Fig 8: Careplus historical production capacity and output m pcs 4,5 4, 9% Production capacity Production output Utilisation 88% 3,9 1% 9% 3,5 3, 2,5 2, 1,5 1, 1,752 1,577 72% 2,46 2,46 1,778 2,174 67% 2,617 8% 7% 6% 5% 4% 3% 2% 5 1% 213 214 215 216 % Plans to grow capacity to 1bn gloves by 22 As part of its capacity expansion plan, Careplus has put in place strategy to grow its capacity by more than two fold to 1bn gloves by 22, capitalising on the robust demand for rubber gloves. The bulk of the expansion will be focused on its wholly-owned subsidiary Careplus (M) or Factory 4. Currently, Careplus is constructing an additional block in Factory 4 that is expected to be completed by end-217. According to management guidance, production capacity could grow by over 3% to 5.16bn gloves by end 217 on the commissioning of new lines. Page 4 of 8

Fig 9: Planned capacity growth m pcs Production capacity Production output 1, 9, 8, 7, 6, 5, 4, 3, 2, 1, 5,16 3,96 6,6 5,4 8,4 6,888 9,48 8,112 217E 218E 219E 22E (management guidance for 217-2E) Bottom-line track record has been more erratic though While sales have grown alongside the capacity increase, Careplus s bottom line has yet to exhibit similar growth qualities. This was largely due to production inefficiencies, recurring start-up losses, higher commissioning costs for new production lines, on top of the increase in raw-material prices and utility rates (ie, predominantly natural gas). Despite registering 2% yoy in top-line growth to RM229m in 216, Careplus s PAT fell 97% to RM.2m on a combination of intense competition, poor pricing management and production inefficiencies. Fig 1: Margin compression on competition and lower efficiency RMm Revenue EBITDA Margin 25 16% 229 2 13% 19 152 11% 15 141 9% 1 5 13 2 3 26 213 214 215 216 18% 16% 14% 12% 1% 8% 6% 4% 2% % Turnaround in 1Q17 Things took a turn for the better in 1Q17, when Careplus reported RM3.7m in quarterly profit, which already eclipsed the dismal performance for the whole of 216. Higher sales growth from the commissioning of new production lines led to better earnings, which were amplified by the effects of operating leverage. Our recent meeting with the CEO Mr Lim Kwee Shyan suggests cautious optimism in earnings delivery amid ongoing capacity expansion. If the company is successful in its capacity expansion efforts without incurring significant start-up costs, Careplus could be able to sustain similar levels of bottom line for the rest of the year. On top of that, raw material prices have dropped significantly, which generally benefits latex-focused glove manufacturers like Careplus. Page 5 of 8

1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 7 July 217 Fig 11: Quarterly revenue has been growing RMm Revenue Revenue growth yoy % 1 9% 9 87 77% 8% 8 69% 69 7% 7 58 6% 6 5 5 53 49 5% 5 42 45 45 37 35 37 38% 4% 4 28% 3% 3 2 19% 2% 18% 2% 15% 1 1% 1% % Fig 12: EBITDA is rebounding off a low in 3Q16 RMm EBITDA EBITDA margin % 14 25% 12 21% 2% 1 19% 18% 16% 16% 8 14% 13% 14% 15% 13% 12% 13% 6 1% 9% 4 8% 5% 2 5 6 5 6 1 8 8 5 9 7 5 8 12 %, Affin Hwang, Affin Hwang Have earnings troughed in 216? After a dismal performance in 216 (including one loss-making quarter), earnings staged a sharp rebound in 1Q17. Key factors that caused the earnings contraction such as higher-than-expected start-up losses, low production efficiency and higher raw material costs have slowly dissipated in 1H17. Natural rubber prices, a key raw-material input, have gradually trended down from a peak of RM8/kg to below RM6/kg now. With strong capacity expansion to underpin earnings, there is potential for margin expansion given the increasing nitrile contribution in its product mix, as well as benefits from economies of scale. Against the backdrop of strong capacity expansion, favourable industry dynamics, rising nitrile contribution and moderating raw material prices, Careplus management is confident about seeing brighter days ahead. Share price has rebounded significantly Careplus share price has been up sharply since the release of the 1Q17 results. We note the share price spiked from 29.5sen to a high of 43.5sen, before retreating to last close of 4.5sen. Valuation-wise, Careplus shares trade at a 64x PER based on earnings for the trailing-12-month period. However, assuming the 1Q17 run rate were to carry through for the full year, the shares would be trading at approximately a 13x PER for 217E. The sector average PER for our glove universe stands at approximately 21x for CY17E and 18x for CY18E, and we note that all four of the companies in our universe have much larger production capacity as well as a stronger track record of delivering on earnings. Fig 13: Peer comparison Stock Rating Price TP Mkt Cap Core PE (x) Core EPS Growth (%) P/BV ROE (%) DY (%) (RM) (RM) (RMm) CY17E CY18E CY17E CY18E CY17E CY17E CY18E FY17E FY18E HARTALEGA BUY 6.87 6.7 11,294. 29.7 24.6 37.4 2.5 5.4 18.3 19.9 1.2 1.5 KOSSAN HOLD 6.6 6.3 4,22.5 19.5 17.7 26.8 9.7 3.6 18.4 18.2 2.6 2.8 SUPERMAX HOLD 1.96 1.9 1,325.6 16.1 14.3 (2.8) 12.3 1. 6.4 6.6 2.4 2.8 TOP GLOVE BUY 5.8 6.5 7,285.4 2.1 16.1 4.2 24.6 3.4 17.2 19. 1.8 2.3 Sector average 21.3 18.2 11.9 16.8 3.4 15.1 15.9 2. 2.4 Source: Bloomberg, Affin Hwang forecasts; prices as of close on 6 July 217 Page 6 of 8

Careplus FINANCIAL SUMMARY Profit & Loss Statement Key Financial Ratios and Margins FYE 31 Dec (RMm) 213A (1) 213A (2) 214A 215A 216A FYE 31 Dec (RMm) 213A (1) 213A (2) 214A 215A 216A Revenue 97.4 14.8 152.1 19.3 229.4 Growth Operating expenses (88.) (127.9) (132.) (16.2) (23.1) Revenue (%) 75.8 44.6 8.1 25.1 2.6 EBITDA 9.3 12.9 2.2 3.1 26.3 EBITDA (%) (4,184.6) 38.5 55.9 49. (12.4) Depreciation (4.6) (6.9) (7.6) (11.6) (15.1) Core net profit (%) 54.6 (52.7) 132.8 8.3 (96.8) EBIT 4.8 6.1 12.5 18.4 11.2 Net interest income/(expense (1.2) (2.5) (2.7) (3.4) (4.7) Profitability Associates' contribution - - - - - EBITDA margin (%) 9.6 9.2 13.3 15.8 11.5 EI - - - - - PBT margin (%) 2.8 2.2 5. 6.8 2.3 Pretax profit 2.8 3.1 7.6 12.9 5.2 Net profit margin (%) 3. 1. 2.1 3.1.1 Tax (.5) (.4) (.7) (.5) 1.9 Effective tax rate (%) 16.8 12. 9.2 3.5 (36.6) Minority interest.7 (1.3) (3.6) (6.6) (6.9) ROA (%) 2.4 1. 2. 2.8.1 Net profit 3. 1.4 3.3 5.9.2 Core ROE (%) 5.5 2.4 5. 7..2 ROCE (%) 4. 1.7 3.4 5..1 Balance Sheet Statement Dividend payout ratio (%).2 -.2.2 - FYE 31 Dec (RMm) 213A (1) 213A (2) 214A 215A 216A PPE 66. 76.4 92.9 123. 159.1 Liquidity Other non-current assets.8.8.7.6 3. Current ratio (x) 1.2 1.1 1..9 1. Total non-current assets 66.8 77.1 93.6 123.6 162.1 Op. cash flow (RMm) (4.6) (.4) 19.8 17.7 4.2 Cash and equivalents 7.9 3.3 3. 4.5 6.8 Free cashflow (RMm) (22.4) (14.1) 2.2 (14.4) (26.5) Inventory 1.5 1.5 2.1 2.4 3.6 FCF/share (sen) (6.4) (4.).6 (4.) (6.2) Trade receivables.9 1.1.4 2.7 4.7 Other current assets 44.5 55. 63.8 77.6 116.6 Asset management Total current assets 54.8 6.9 69.3 87.2 131.7 Inventory turnover (days) 58.8 39. 4.5 48.8 58.8 Trade payables 14.7 14.5 17.4 22.6 28.8 Receivables turnover (day 14.8 1.4 113.8 14.7 112.8 Short term borrowings 5.9 24.7 3.9 32. 46.4 Payables turnover (days) 62.1 41.3 48. 51. 5.5 Other current liabilities 26.2 14.5 19.2 38.7 55.5 Total current liabilities 46.9 53.7 67.4 93.3 13.7 Capital structure Long term borrowings 1.7 2.7 26.3 29.8 33.5 Net Gearing (x).8 1.2 1.2 1.2 1. Other long term liabilities 1.2 5.9 4.3 3.9 7.8 Interest Cover (x) 3.9 2.4 4.7 5.4 2.4 Total long term liabilities 2.9 26.6 3.6 33.7 41.3 Quarterly Profit & Loss Shareholders' Funds 42.9 43.6 46.8 6.6 92.9 FYE 31 Dec (RMm) 1QFY16 2QFY16 3QFY16 4QFY16 1QFY17 Revenue 49.1 53.3 57.6 69.4 87. Cash Flow Statement Op costs (4.3) (46.6) (53.1) (61.3) (75.4) FYE 31 Dec (RMm) 213A (1) 213A (2) 214A 215A 216A EBITDA 8.7 6.7 4.5 8.2 11.6 PAT 2.3 2.7 6.9 12.5 7.1 Depn and amort (3.5) (4.) (4.3) (5.2) (2.6) Depreciation & amortisation 4.6 6.9 7.6 11.6 15.1 EBIT 5.3 2.7.2 3. 9. Working capital changes (13.8) (1.8) (6.8) (8.9) (22.) Net int income/(exp) (2.9) (.7) (1.6) (.9) (2.7) Others 2.3.8 12.1 2.4 4. EI - - - - - Cashflow from operations (4.6) (.4) 19.8 17.7 4.2 Inc from associates - - - - - Capex (17.8) (13.7) (17.6) (32.1) (3.7) Pretax profit 2.4 2. (1.4) 2. 6.3 Others.3.1.1.7.3 Tax (.3) (.3) (.1) 2.6 (.2) Cash flow from investing (17.5) (13.6) (17.5) (31.4) (3.4) MI (1.4) (1.6) (1.) (2.8) (2.4) Debt raised/(repaid) 26.4 7.1 (2.8) 9.4 9.7 Net profit.7.1 (2.4) 1.8 3.7 Equity raised/(repaid) 4.8 - - 8.5 33.4 Core net profit.7.1 (2.4) 1.8 3.7 Dividends paid - (.6) - (.6) (1.2) Others (2.9) (2.1).1 1.9 2.4 Margins (%) Cash flow from financing 34.1 8.7 (2.9) 15.4 39.5 EBITDA 17.8 12.6 7.9 11.8 13.3 Free Cash Flow (22.4) (14.1) 2.2 (14.4) (26.5) PBT 4.9 3.7 (2.4) 2.9 7.2 PAT 1.4.1 (4.2) 2.6 4.2 Notes: (1) For the 12 month period January 212 to January 213, prior to the change of year-end from January to December (2) For the 11-month period of February 213 to December 213, as a result of the change of year-end from January to December Page 7 of 8

Equity Rating Structure and Definitions BUY Total return is expected to exceed +1% over a 12-month period HOLD Total return is expected to be between -5% and +1% over a 12-month period SELL Total return is expected to be below -5% over a 12-month period NOT RATED Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation The total expected return is defined as the percentage upside/downside to our target price plus the net dividend yield over the next 12 months. OVERWEIGHT Industry, as defined by the analyst s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL Industry, as defined by the analyst s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT Industry, as defined by the analyst s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months This report is intended for information purposes only and has been prepared by Affin Hwang Investment Bank Berhad (14389-U) ( the Company ) based on sources believed to be reliable. However, such sources have not been independently verified by the Company, and as such the Company does not give any guarantee, representation or warranty (express or implied) as to the adequacy, accuracy, reliability or completeness of the information and/or opinion provided or rendered in this report. Facts, information, views and/or opinion presented in this report have not been reviewed by, may not reflect information known to, and may present a differing view expressed by other business units within the Company, including investment banking personnel. Reports issued by the Company, are prepared in accordance with the Company s policies for managing conflicts of interest arising as a result of publication and distribution of investment research reports. Under no circumstances shall the Company, its associates and/or any person related to it be liable in any manner whatsoever for any consequences (including but are not limited to any direct, indirect or consequential losses, loss of profit and damages) arising from the use of or reliance on the information and/or opinion provided or rendered in this report. Any opinions or estimates in this report are that of the Company, as of this date and subject to change without prior notice. Under no circumstances shall this report be construed as an offer to sell or a solicitation of an offer to buy any securities. The Company and/or any of its directors and/or employees may have an interest in the securities mentioned therein. The Company may also make investment decisions or take proprietary positions that are inconsistent with the recommendations or views in this report. Comments and recommendations stated here rely on the individual opinions of the ones providing these comments and recommendations. These opinions may not fit to your financial status, risk and return preferences and hence an independent evaluation is essential. Investors are advised to independently evaluate particular investments and strategies and to seek independent financial, legal and other advice on the information and/or opinion contained in this report before investing or participating in any of the securities or investment strategies or transactions discussed in this report. Third-party data providers make no warranties or representations of any kind relating to the accuracy, completeness, or timeliness of the data they provide and shall not have liability for any damages of any kind relating to such data. The Company s research, or any portion thereof may not be reprinted, sold or redistributed without the consent of the Company. The Company, is a participant of the Capital Market Development Fund-Bursa Research Scheme, and will receive compensation for the participation. This report is printed and published by: Affin Hwang Investment Bank Berhad (14389-U) A Participating Organisation of Bursa Malaysia Securities Berhad 22nd Floor, Menara Boustead, 69, Jalan Raja Chulan, 52 Kuala Lumpur, Malaysia. T : + 63 2146 37 F : + 63 2146 763 research@affinhwang.com Page 8 of 8