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TA Securities Bhd

28 Jun 2004

28 Jun 2004
Sector : INDUSTRIAL PRODUCTS Bloomberg : ADV MK For Internal Circulation Only

TA SECURITIES BHD
Participating Organisations of Malaysia Securities Exchange Berhad

Adventa Berhad
Hand In Hand With Surgeons

RM0.35 (+16.7%)

Fair Value
KLCI
SHARE INFO Stock Code ADVENTA Listing 2nd Board Enlarged Share Cap (m) 450.0 Market Cap @ RM0.35 (RMm) 157.5 Par Value (RM) 0.10 IPO (m) 67.5 Issue Price (RM) 0.3 Estimated Free Float (%) 45.0% Listing Date 29 June 2004 Major Shareholders (%) Low Chin Guan - 45.0% Wong Koon Mei @Wong Kwan Mooi - 10.0%

824.23

NEW LISTING

Adventa stands out from other listed rubber gloves manufacturer due to its surgical glove business, which contributes 60% to Groups' gross profit. Globally, Adventa is among the top 5 surgical glove manufacturer whilst locally it is the largest manufacturer. Surgical glove business has an edge over other rubber gloves due to its high margins and high barriers of entry. According to Frost & Sullivan Research Report, the estimated US and Europe 6-year CAGR for surgical gloves demand ending 2008 is at 5.1%. MARGMA record, however shows Malaysia's exports of surgical glove has been contracting by 7.5% for the past 6-year on a compounded basis. Given the lower demand growth for surgical gloves as compared to examination gloves we are valuing Adventa at 15% discount to our estimated rubber glove industry average of 15.0x PER. Fair value is RM0.35 based on 12.7x FY05 EPS or a potential upside of 16.7% from issue price. Going forward, Adventa will intensify its marketing push for branded surgical gloves, launch new products & processes, enhance business synergy with diversification and implement cost saving strategies.

RATIO & ANALYSIS NTA/shr (Post IPO) (RM) Price to NTA (x) ROE - '04 ROA - '04 Net Gearing - after IPO ( x ) 0.20 1.9 15.0% 5.7% Net Cash of RM28.7m

Adventa, A Glove Manufacturer Adventa Group is mainly involved in manufacturing and distribution of sterile surgical & examination gloves. In addition to its core business, Adventa also distributes non-glove medical & hospital-related products as well as generate energy and electricity via biomass technology. Adventa's product range includes:
Key Product Categories Surgical Gloves Detail Product Range Latex Surgical, Latex Surgical Powder Free, Synthetic, Surgicals, Orthopaedic and Microsurgery Powdered, Powder Free, Nitrile and Procedures Surgical Masks, Gowns, Tapes, Shoes Covers & Head Dress

UTILISATION OF IPO PROCEEDS (RMm) Capital Expenditure 14.7 Repayment Of Borrowings 10.0 Research And Development 0.5 Working Capital 29.8 Estimated Listing Expenses 2.0 57.0 (%) 25.8 17.5 0.9 52.3 3.5

Examination Gloves Non-Glove, Related Hospital Products

EARNINGS SUMMARY (RMm) YE 31 Jan 2000 2001 2002 2003 Revenue 39.6 43.9 51.5 63.5 Pretax profit 6.2 4.4 2.8 4.5 Net profit 5.6 3.8 2.2 3.8 EPS * (sen) 2.1 1.5 0.9 1.5 EPS Growth (%) 0.0% -31.2% -41.3% 70.0% PER @ RM0.35 (x) 16.5 24.0 40.9 24.1 Div (sen) 0.0 0.0 0.0 0.0 Div Yield (%) 0.0 0.0 0.0 0.0 * - FY00 - FY04 based on weighted average share capital of 260m FY05 based on enlarged share capital of RM371m 2004 92.1 7.4 5.1 2.0 33.6% 18.0 0.0 0.0 2005E 123.7 12.4 10.3 2.8 41.7% 12.7 0.6 1.6

Analyst E-*

Tai Jen Nee jntai@ta.com.my 20721277 ext 1612 [ 1]

TA Securities Bhd (16029-V)


Menara TA One, 22 Jalan P Ramlee, 50250 Kuala Lumpur. Malaysia Tel : 603 - 2072 1277. Fax : 603 - 2032 5048

Adventa Berhad

TA Securities Bhd

28 Jun 2004

Group Of Companies Companies within the Adventa group are:


Name Of Subsidiary Effective Equity Interest 100% Principal Activities

Terang Nusa S/B (TNSB)

American Health Care Malaysia S/B (AHSB) 100% Profit Point Manufacturing S/B (PPM) Ulma International GmbH (Ulma) 100% 100%

Nusaco S/B (Nusaco)

100%

Manufacturing and distribution of sterile surgical gloves and medical examination gloves. Manufacturing and distribution of sterile surgical gloves Manufacturing and distribution of medical examination gloves Distribution of medical and other hospital related products. Incorporated in Germany, act as stocking warehouse, service point and marketing division for the group's European market. Generation and supply of energy and electricity using biomass technology

A Leading Surgical Gloves Manufacturer Adventa is among the top 5 application surgical glove manufacturer in the world and the largest surgical glove manufacturer in Malaysia. Adventa holds approximately 8% global market share for surgical gloves after Ansell's 35% share and before WRP (Asia Pacific's) 5% share. Unlike most of its listed rubber glove makers, Adventa's niche lies in its surgical gloves business. Currently more than 50% of Adventa's earning are generated from manufacturing and sales of surgical gloves. Since FY00, gross profit contribution from the surgical gloves has been on an up-trend.
Products Contribution To Revenue FY00 FY04 23% 52% 77% 36% 12% Contribution to Gross Profit FY00 FY04 27% 60% 73% 26% 14% GP Margin (%) FY04 26% 16% 26%*

Surgical Gloves Examination Gloves Other


* - Distribution

As a relatively new player compared to Ansell (an experienced player for estimated 60 years), Adventa has successfully penetrated into surgeons' preferred product list. Locally Adventa has 60% of surgical glove market share as compared to Ansell's 40% share. The latter used to dominate the Malaysia market. Adventa's surgical gloves will continue to receive strong demand, given acknowledgements from surgeons, recognised bodies and corporations.

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Adventa Berhad

TA Securities Bhd

28 Jun 2004

Year 1997

Key Achievements/Recognitions First Malaysian owned company to achieve TUV European certification for ISO 9002 and EN 46002 for its surgical glove production 2001 Commenced supply to USA Defence Department 2001 Inspected by US FDA and certified compliant to FDA requirements 2002 Maritex Duplex Orthopaedic Glove accepted by Christus Hospital Group, USA 2003 Maritex Duplex accepted and used by hospital of Special Surgeries, New York, a major reference for orthopaedic products in USA 2003 Products accepted by SingHealth, Singapore public hospital group, enabling supply of surgical gloves to its hospitals 2003 Products accepted by Ministry of Health in Malaysia, to supply to government hospitals 2003 Invited to bid and be a supplier for Novation, Healthtrust and Premier, 3 largest Group Purchasing Organisation in USA 2003 New certification ISO 9001:2000 and EN13488:2000 by SGS Yardsley, United Kingdom 2004 Awarded acceptance by Veteran Administration Department of US Government as their supplier Source : Prospectus Surgical gloves are used for general and specialised surgeries. The former comprise of basic surgeries which are less critical while the latter includes neuro-reconstructive surgery, orthopaedic surgery, involving specialised and microwork.

Complimentary Products The sales of examination glove and other related product compliments Adventa's surgical gloves business. The added product range increases customer's purchasing convenience. This encourages sales demand with minimal cost incurred as sales network for surgical gloves is tapped onto. Best Of Both World The Group is both an original brand manufacturer (OBM) and original equipment manufacturer (OEM) at a ratio of 55%:45% respectively. Being a surgical glove manufacturer, brand reputation is highly important. Good brand reputation among surgeons qualifies your products' value add, quality and comfort. This in- turn ensures sales growth. Going forward the Group targets to increase its OBM contribution to 80%. Adventa's in-house brand includes SENSIFLEX Plus, MAXITEX, SUR-G GLOV, NUZONE, Maxitex Duplex, Maxitex Duplex PF, Maxitex Neuro PF and NUGARD. These brand names have been registered as Adventa's trademarks except for Depro and SUR-G GLOV which are pending approval. As an OBM, Adventa has better control over its business and earns additional profit from distribution.

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Adventa Berhad

TA Securities Bhd

28 Jun 2004

Research And Development Paying Off Adventa had invested heavily on R&D. Over the last 3 years, a total of RM1.34b or an average of 1% per annum of turnover was spent on R&D. Their efforts have paid off with new application surgical gloves such as :
Products X-ray surgical glove Details Year Of Launch The only x-ray protective range of surgical gloves, a stand alone glove do not require additional protective sheaths for x-ray surgery. 1999 Synthetic surgical glove for surgeons who are latex sensitised and have adverse reaction to natural latex based materials. Powder-free glove, all sensitivity needed by surgeons for use in surgery & extended shelf life. Innovative orthopedic & trauma glove, unique double gloving concept. Application glove for neurological and ophthalmic procedures. High sensitivity and tactillity for ease in conducting precision microsurgery

Maritex Nuzone

2000 2001 2002

SENSIFLEX Plus Maxitex Duplex Maxitex Neuro

2004

On top of the above, Adventa has several new products pending official launch. These include G2 Synthetic Surgical, G3 WD Powderfree Surgical, Laminated 3-Layers Surgical and Synthetic Orthopaedic & Trauma. Management will introduce these products at the right time, likely upon exhaustion of premium value from existing product range.

History And Outlook Of Surgical Gloves Global market demand for disposable surgical gloves in 2002 is estimated at USD650m, or 1.4b pieces of gloves. The 4-year compounded annual growth rate (CAGR) ending 2002 for sales revenue and quantity combining both USA and Europe market amounts to 2.2% and 3.8% respectively.
Going forward, management estimates 6-year CAGR for revenue and quantity ending 2008 to register 2.2% and 5.1% respectively. Demand growth will be driven by rising illness per head, changing legislation & work practices that pro-rubber gloves usage. The growing affluence in Middle East and Pacific Rim is expected to lead to improved healthcare services that will in turn results in higher demand for surgical gloves. Malaysia's export of disposable medical gloves in FY03 amounts to RM3.4b or 54.9b pieces. Other (examination, industrial & household) and surgical gloves contribute approximately 96% and 4% to Malaysia's export quantity respectively. Malaysia's exports of surgical glove contracted for the past 6 years compounded ratio of 7.5% and 2.5% in terms of quantity and value respectively. In fact, the contribution of surgical gloves exports to total glove exports for Malaysia has been declining for the past 4 years. Year Contribution of surgical gloves (quantity) to total Malaysia rubber gloves export 1997 16.7% 1998 21.8% 1999 22.6% 2000 13.1% 2001 9.0% 2002 9.9% 2003 4.0% Source : Malaysian Rubber Glove Manufacturers' Association (MARGMA) newsletter

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Adventa Berhad

TA Securities Bhd

28 Jun 2004

High Barriers of Entry Demand for Adventa's surgical gloves is protected from near term market saturation due to the industry's high barrier of entry. The high barriers of entry is due to : i. High Quality Required Given the critical nature of work which surgical gloves' end users are involved in, quality standards and usage effectiveness is highly regarded. ii. Long Gestation Period Before new value added surgical gloves can be introduced to the market, manufacturers need to go through tedious process which involves:
a) b) c) d) evaluation of existing product and end users needs research &development prototype testing patent search and application of approval from US FDA and other relevant standards & regulatory bodies e) feedback from various local and overseas medical bodies on product viability f) extended trial evaluations carried out by overseas hospitals g) launching of product upon favourable comments h) patent application in both local and overseas countries It takes approximately 2-3 years for a conceptual design to hit the market.

iii. Patents Surgical gloves which are unique in terms of designed, chemical composition and functionality, are patented both in Malaysia and overseas. Adventa's patented product increases barriers against duplication by new entrants.
Besides the long gestation period in recovering initial investment, cost incurred during the period also post another barrier. Brand loyalty among end users or surgeons also makes it hard for new player to penetrate market.

Managing Ansell Locally only approximately 25% of the 80 MARGMA rubber glove manufacturers are involved in surgical gloves. Adventa Group has a dominant position as production volume of surgical gloves for the rest of the manufacturers are fairly small. Among the listed rubber glove manufacturers only Supermax, Top Glove and Kossan produces surgical gloves. Surgical gloves revenue only account for 5.0% and 0.6% of Supermax and Top Glove's group revenue respectively. We do not expect Adventa to experience any threat from local players. In the global arena, Adventa faces head-on competition from Ansell, an old timer in the surgical glove industry. Nevertheless Adventa has been successful in penetrating into Ansell's existing customers base.

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Adventa Berhad

TA Securities Bhd

28 Jun 2004

INDUSTRY COMPARISON AMONG LOCAL LISTED PLAYERS


FYE Share Price @ 23/06 Revenue Net Profit EPS (sen) NTA/Share PER (x) PBV (x) Dividend Yield ROE ^ (%) ROA ^ (%) Net Gearing ^ ^ (%) Profit before tax ^ (%) CAGR - Revenue (FY00-FY03) - Net Profit (FY00-FY03) EPS Growth FY04 * ** # ## ^ ^^ n/a APLI Dec '04 ## 0.55 229.0 23.1 6.7 0.3 8.3 1.9 0.0 3.8% 2.4% 39.1% 9.2% 2.7% -74.2% 333.9% Kossan Dec. '04 # 3.74 235.5 20.8 31.3 1.9 11.9 2.0 0.8% 13.5% 8.3% 26.5% 10.4% 19.8% 88.7% n/a Latexx Dec. '04 # 0.66 35.6 -13.1 net loss 0.2 n/a 3.9 0.0 net loss net loss 281.9% net loss -17.8% net loss n/a Rubberex Dec. '04 # 2.17 105.7 9.6 21.2 1.6 10.2 1.3 7.8% 10.4% 7.2% 11.3% 9.9% 3.3% -13.3% n/a Supermax Dec. '04** 3.86 248.3 29.4 36.8 1.5 10.5 2.6 1.2% 15.4% 9.2% 19.6% 12.8% 31.0% 32.5% 70.5% Top Glove Dec. '04 ## 7.10 437.2 42.6 45.9 1.6 15.5 4.6 1.7% 17.8% 10.7% 22.0% 10.9% 37.0% 29.5% 48.3% Seal Polymer Feb. 05 ** 1.35 212.1 23.5 16.7 0.8 8.1 1.6 0.0% 32.3% 13.3% 28.1% 8.3% 31.7% 34.7% 7.2% Adventa Jan. '05 ** 0.30 123.7 10.3 2.8 0.2 7.9 1.5 2.0% 15.0% 5.7% Net Cash 10.4% 28.0% 33.3% 41.7%

actual results estimated results calenderised actual results calenderised estimated results derived from latest financial year derived from latest quarter except for Seal Polymer based on proforma results not available

Ambitious Plans Ahead I Further Penetration Into Existing Market Adventa will continue its effort to convert surgical glove users towards purchasing the Groups' surgical gloves. At this moment, 4 of Adventa's branded surgical gloves records a penetration rate of 10% or less while Maxitex brand has up to 30% share among existing surgical glove users. Vast market expansion awaits Adventa. Currently products are mainly exported to USA, Europe, South America, Middle East and Africa. Sales contribution from USA and Europe for surgical gloves amounts to 42% and 32% respectively. Meanwhile examination gloves are sold mainly to Europe (48%) and USA (33%).

II Expand Geographical Reach The Group also intends to sell its' products to South Korea, China and ASEAN countries. Strategies include setting up manufacturing facilities in the respective trade bloc areas to take advantage of the trade incentives available in various regions. III Commercialisation Of R&D Results New product launches which are scheduled for 3Q04, 2005 and 2006 will create new demand. Hence boosting earnings growth. New product includes:
(a) 2 nd generation synthetic surgical, 100% more elastic and 50% more resistant to tearing (b) wet donnable trilayered powderfree latex surgical (c) synthetic orthopaedic and trauma gloves, higher tear resistance Adventa has identified new materials such as synthetic polyisoprene, neoprene (urethane), multi-centrifuged irradiated natural latex, titanium (x-ray blocker). These materials will be improvised to develop new application gloves.
[ 6] Adventa Berhad

TA Securities Bhd

28 Jun 2004

The Group constantly invents new and enhances existing processes to produce higher yields and quality products. Some potential installation includes multi dipping technology, triple synthetic (natural lamination), sustained viscosity latex, microwave vulcanisation and electron beam on-line sterilization.

IV Synergistic diversification Adventa is looking to increase its medical or hospital product offerings. The Group is currently in discussion with an Argentinian company to manufacture surgical tapes and wound management products. The joint venture involves technology transfer from foreign partner to Adventa, whilst the former benefits from Adventa's cheaper manufacturing base and established client network. The new product will ride on Adventa's existing client base & distribution network and also increase market acceptance of its' brands. Cost Reduction Strategies I. Biomass Energy Generation Like most listed rubber glove manufacturer, Adventa is venturing into Biomass energy and electricity generation. The Group is in the midst of constructing a Biomass plant adjacent to its factory in Kota Bahru. The plant is approximately 80% completed and will be commisioning soon. The plant will save Adventa up to 50% of its existing energy expenditure of RM1m per annum. In addition, the plant is expected to generate an estimated RM2.0m additional revenue per annum. II. Recycling Water Treatment Facility Adventa has started recycling its used water and targets to recycle up to 80% of its water supply by 2005. This is expected to save approximately RM0.2m per annum and reduce Adventa's dependency on outside source for its water supply. Fair Value At RM0.35 We expect Adventa's earning to grow by 41.7% to 2.78sen in FY05, a conservative estimate if compared to management's estimate of 63.0% EPS growth. Management expects whopping 2.3 percentage point expansion in profit before tax margin from 9.2% (5 years average) to 11.5% in FY05. This is driven by rising sales, supported by additional capacity and lower operational cost. We believe our 0.8 percentage point profit before tax margin expansion is fair given that R&D expenditure budget remains at RM0.5m level, similar to previous years.
The rubber gloves manufacturers under our coverage are currently trading at an average of 11.4x PER. We believe these key players should be trading at least 15.0x PER due to their commendable historical CAGR growth for revenue & net profit and bright EPS growth outlook. Despite the concerns with regards to US interest rate hike, rising oil prices and slow down in China's economy, earnings for the rubber gloves companies will continue to be post double digit growth. Demand for rubber gloves will be resilient as it is a necessity. We like the industry for its resilience. We are fairly valuing Adventa at RM0.35 based on 12.7x PER. Potential upside of 16.7% from issue price. The valuation is at 15% discount to our average valuation of the industry key players 15.0x PER. This is because of lower demand growth rate for surgical gloves as compared to examination gloves. Nevertheless valuation is at 11% premium over their current average valuation of 11.4x PER.

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 BHD, Yaw Chun Soon, Executive Director - Operations

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Adventa Berhad