KOSSAN ... May10

S & P Results Review & Earnings Outlook

 Kossan’s 1Q10 results were within expectations as net profit of MYR30.4 mln accounted for 24% of our 2010 estimate.

 1Q10 sales volume rose 20% YoY while average selling price (ASP) was hiked up by 6% YoY. Coupled with improved demand for its technical rubber products (+36% YoY), these factors resulted in a 30% YoY rise in group revenue. However, due to the high price of latex, we see operating profit margin fall to 15.6% from 16.4% and in 1Q09
respectively.

 Kossan also achieved revenue growth of 15% QoQ, mainly due to higher ASP (+23% QoQ). 1Q10 sales volume is generally lower than the fourth quarter due lower average latex cost in 2H, which prompts customers to stock up inventory. Operating profit however, fell 19% QoQ, mainly due to an insurance compensation which boosted 4Q09
profits. Stripping this out 1Q10 operating profit was similar to 4Q09.

 Kossan is expecting 1.7 bln of new gloves capacity to come in by mid-2010 and another 1.7 bln in 3Q10. The additional new capacity would add to revenue growth in 2H10. We expect demand to continue to be strong and outstrip supply at least for the rest of the year.

 We maintain our 2010 and 2011 earnings estimates.

Recommendation & Investment Risks
 We maintain our Strong Buy recommendation with an unchanged 12-month target price of MYR9.00.

 We lower our target PER to 9x (from 11x) against our projected 2011 (rollover from 2010) EPS for Kossan and add our 12-month net DPS of 6.8 sen. The lower target multiple reflects the lower peer average.

 We like Kossan as we believe industry fundamentals remain sound. In addition, the further spread of H1N1 flu could trigger higher-thanexpected demand. Furthermore, Kossan’s new capacity will target the nitrile glove segment which carries higher margins. We believe these positive factors should support the out-performance of Kossan’s share price going forward.

 Risks to our recommendation and target price include potential delays in the commissioning of new production lines and a stronger-thanexpected appreciation of MYR as over 90% of its revenue (gloves and TRP) are derived from exports, while about 70% of its costs are in USD.