PUBLIC INVESTMENT BANK

PublicInvest Research Company Update

KDN PP17686/03/2013(032117)

Thursday, July 18, 2013

KOSSAN RUBBER INDUSTRIES BERHAD

DESCRIPTION Unique from its industry peers, Kossan is Malaysias largest technical rubber products manufacturer, coupled with latex and nitrile rubber gloves. 12-Month Target Price Current Price Expected Return Market Sector Bursa Code Bloomberg Ticker RM6.61 RM5.83 13% Main Rubber Gloves 7153 KRI MK

Outperform

Staying Ahead Of The Game

We visited Kossan Rubber Industries Berhad (Kossan)s latest rubber gloves factory in Klang which is partially powered by biomass energy. The group should not only be lauded for its growing efficiency and technological advances, but for their chemical expertise in nitrile copolymer mixing, to form high quality and cost efficient rubber products. We concede that Kossan is deserving of an Outperform recommendation, supported by its share price having risen 40% since our initiation in May. Surpassing our TP of RM4.85 and in view of the groups commendable progress and capacity expansion plans, we are revising our TP upwards to RM6.61 (13% upside) premised on our rolled-over dividend discount model for FY14F. At RM6.61, Kossan would only be trading at 12x PE based on FY14Fs EPS of 55 sen. Improving margins. i.) Through research and development of chemicals advancement, and ii.) machinery efficiency. Kossan is constantly advancing its rubber gloves formulation, including ways to eliminate risks of chemical allergies (nitrile) and reduce the weight of gloves to about 3.2g-3.5g (latex). The light-weight gloves would reduce cost per unit and hence improve margins. Kossan will maintain its old lines for small orders with high specifications to cater especially for existing clients, which will yield higher margins than high speed orders (c.10%-14%). We can assume 30%-40% of the groups production will be for small orders going forward with the balance of >60% to be operating for high speed orders. Growing efficiency. Identifying areas to improve margins by i.) reducing downtime from interchanging lines, but instead have dedicated lines for high specification orders, and ii.) produce more product variants, currently offering 3 main purpose gloves sterilize, clean-room and surgical. On track for new factories. On our visit, we saw the structure of 2 upcoming factories. 3 additional factories is expected to be completed by December FY13, March and May FY14 respectively. Designed with double former lines for higher production and supported by faster line speed and automation of machines, the number of workers per line is also estimated to reduce by about 75%. Reiterate Outperform. Kossan would maintain its performance underpinned by i.) increase in capacity expansion to c.26bn gloves by 2017 expanding on its nitrile offering, ii.) coupled with softer raw material prices, and iii.) improved production efficiency through R & D.
2011A 1,090.0 366.1 112.9 89.7 28.1 20.7 11.0 1.9% 2012A 1,234.0 454.1 138.5 102.2 32.2 18.1 9.0 1.5% 2013F 1,401.2 515.6 170.3 126.6 39.9 14.6 15.4 2.6% 2014F 1,757.5 646.7 233.6 174.8 55.1 10.6 24.7 4.2% 2015F 1,956.5 719.9 262.5 197.0 62.0 9.4 30.9 5.3% CAGR 12.4% 14.5% 18.4% 17.0% 17.1%

SHARE PRICE CHART

6.00 5.50 5.00 4.50 4.00 3.50 3.00 2.50 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13

52 Week Range (RM) 3-Month Average Vol (000) SHARE PRICE PERFORMANCE 1M 36.5 25.7 3M 55.6 47.1

2.975.84 900.4

Absolute Returns Relative Returns

6M 71.9 59.8

KEY STOCK DATA

Market Capitalisation (RM m) No. of Shares (m)

1,857.6 318.6

MAJOR SHAREHOLDERS % 51.2 5.6 5.1 5.0

Kossan Holdings SB Kumpulan Wang Persaraan Invesco Employees Provident Fund

KEY FORECAST TABLE (RM m)

FYE Dec (RM m) Revenue Gross Profit Pre-tax Profit Net Profit EPS (Sen) P/E (x) DPS (Sen) Dividend Yield

Research Team T 603 2031 3011 F 603 2272 3704 E research@publicinvestbank.com.my

Source: Company, PublicInvestResearch estimates

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Figure 1: Progress of Kossans Upcoming Factories Commissioning in March and May 2014

Source: Company

Figure 2: Expansion Plans

RM m 2000.0 1800.0 1600.0 24.0 1400.0 21.0 1200.0 1000.0 800.0 600.0 9.3 400.0 200.0 0.0 FY08 FY09 FY10 FY11 FY12 FY13F FY14F FY15F 9.3 10.3 11.0 13.0 10.0 16.0 15.0 20.0 25.0 Capacity Revenue PBT bn pcs 30.0

5.0

Source: Company, PublicInvest Research

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Figure 3: Dividend Discount Model

Beta Expected market return Risk-free rate Cost of equity Cost of debt Weightage of equity Weightage of debt WACC Terminal Growth Rate

0.8 9.9% 3.5% 8.6% 2.5% 80.0% 20.0% 7.4% 2.0%

Year Dividend Forecast DDM Y1 Y2 Y3 Y4 Y5 Terminal value NPV

2014F 24.7

2015F 30.9

2016F 33.1

2017F 35.2

2018F 40.0

0.23 0.27 0.27 0.26 0.28 5.30 6.61

Source: PublicInvest Research estimates

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KEY FINANCIAL DATA

INCOME STATEMENT DATA
FYE Dec (RM m) Revenue 2011A 1,090.0 2012A 1,234.0 2013F 1,401.2 2014F 1,757.5 2015F 1,956.5

Cost of sales Operating Profit Other Gains / (Losses) Finance Costs Pre-tax Profit Income Tax Effective Tax Rate (%) Minorities Net Profit Growth Revenue Operating Profit Net Profit
Source: Company, PublicInvest Research estimates

-723.9 150.2 -7.5 112.9 -21.8 19.3 -1.4 89.7

-779.9 185.5 -29.9 -6.4 138.5 -33.7 24.3 -2.6 102.2

-885.6 214.3 -40.7 0.8 170.3 -41.4 24.3 -2.3 126.6

-1,110.8 286.4 -44.8 -5.0 233.6 -56.8 24.3 -2.0 174.8

-1,236.6 318.8 -47.8 -4.9 262.5 -63.9 24.3 -1.7 197.0

4% -16% -21%

13% 23% 14%

14% 16% 24%

25% 34% 38%

11% 11% 13%

BALANCE SHEET DATA

FYE Dec (RM m) Property, Plant & Equipment Cash and Cash Equivalents Receivables, deposits and prepayment Other Assets Total Assets Payables Borrowings Deferred tax Other Liabilities Total Liabilities Shareholders Equity Total Equity and Liabilities
Source: Company, PublicInvest Research estimates

2011A 473.2 51.6 157.6 170.2 852.7 102.7 160.0 40.2 18.7 321.6 531.2 852.7

2012A 514.4 99.8 217.0 158.7 989.9 114.6 199.0 49.8 21.9 385.3 604.6 989.9

2013F 499.6 134.7 246.4 174.2 1,055.0 130.2 167.6 49.8 36.7 384.2 670.7 1,055.0

2014F 480.5 146.0 309.1 217.3 1,152.8 163.3 171.5 49.8 34.4 419.1 733.7 1,152.8

2015F 457.0 194.6 344.0 241.3 1,237.0 181.8 175.5 49.8 38.1 445.2 791.9 1,237.0

PER SHARE DATA AND RATIOS

FYE Dec Book Value Per Share NTA Per Share EPS (Sen) DPS (Sen) Payout Ratio (%) ROA (%) ROE (%)
Source: Company, PublicInvest Research estimates

2011A 3.3 3.3 28.1 11.0 39.1 11.0 18.4

2012A 3.8 3.8 32.2 9.0 28.0 11.1 18.0

2013F 2.1 4.2 39.9 15.4 38.9 12.4 19.9

2014F 2.3 4.6 55.1 24.7 45.0 15.8 24.9

2015F 2.5 5.0 62.0 30.9 50.0 16.5 25.8

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RATING CLASSIFICATION
STOCKS OUTPERFORM NEUTRAL UNDERPERFORM TRADING BUY The stock return is expected to exceed a relevant benchmarks total of 10% or higher over the next 12months. The stock return is expected to be within +/- 10% of a relevant benchmarks return over the next 12 months. The stock return is expected to be below a relevant benchmarks return by -10% over the next 12 months. The stock return is expected to exceed a relevant benchmarks return by 5% or higher over the next 3 months but the underlying fundamentals are not strong enough to warrant an Outperform call. The stock return is expected to be below a relevant benchmarks return by -5% or more over the next 3 months. The stock is not within regular research coverage.

TRADING SELL NOT RATED

SECTOR OVERWEIGHT NEUTRAL UNDERWEIGHT The sector is expected to outperform a relevant benchmark over the next 12 months. The sector is expected to perform in line with a relevant benchmark over the next 12 months. The sector is expected to underperform a relevant benchmark over the next 12 months.

DISCLAIMER
This document has been prepared solely for information and private circulation only. It is for distribution under such circumstances as may be permitted by applicable law. The information contained herein is prepared from data and sources believed to be reliable at the time of issue of this document. The views/opinions expressed herein are subject to change without notice and solely reflects the personal views of the analyst(s) acting in his/her capacity as employee of Public Investment Bank Berhad (PIVB). PIVB does not make any guarantee, representations or warranty neither expressed or implied nor accepts any responsibility or liability as to its fairness liability adequacy, completeness or correctness of any such information and opinion contained herein. No reliance upon such statement or usage by the addressee/anyone shall give rise to any claim/liability for loss of damage against PIVB, Public Bank Berhad, its affiliates and related companies, directors, officers, connected persons/employees, associates or agents. This document is not and should not be construed or considered as an offer, recommendation, invitation or a solicitation of an offer to purchase or subscribe or sell any securities, related investments or financial instruments. Any recommendation in this document does not have regards to the specific investment objectives, financial situation, risk profile and particular needs of any specific persons who receive it. We encourage the addressee of this document to independently evaluate the merits of the information contained herein, consider their own investment objectives, financial situation, particular needs, risks and legal profiles, seek the advice of their, amongst others, tax, accounting, legal, business professionals and financial advisers before participating in any transaction in respect of any of the securities of the company(ies) covered in this document. PIVB, Public Bank Berhad, our affiliates and related companies, directors, officers, connected persons/employees, associates or agents may own or have positions in the securities of the company(ies) covered in this document or any securities related thereto and may from time to time add or dispose of, or may be materially interested in, any such securities. Further PIVB, Public Bank Berhad, our affiliates and related companies, associates or agents do and/or seek to do business with the company(ies) covered in this document and may from time to time act as market maker or have assumed an underwriting commitment in the securities of such company(ies), may sell them or buy them from customers on a principal basis, may have or intend to accommodate credit facilities or other banking services and may also perform or seek to perform investment banking, advisory or underwriting services for or relating to such company(ies) as well as solicit such investment advisory or other services from any entity mentioned in this document. The analyst(s) and associate analyst(s) principally responsible for the preparation of this document may participate in the solicitation of businesses described aforesaid and would receive compensation based upon various factors, including the quality of research, investor client feedback, stock pickings and performance of his/her recommendation and competitive factors. Hence, the addressee or any persons reviewing this document should be aware of the foregoing, amongst others, may give rise to real or potential conflicts of interest.

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