Kossan ... Sep10

S & P Results Review & Earnings Outlook

• Kossan’s 1H10 results were within expectations when net profit of MYR60.4 mln accounted for 48% of our 2010 estimate.

• Revenue was strong in 1H10 (+30% YoY), aided by higher sales volume (+19% YoY) and average selling price (+10% YoY). Due to the strong demand in 1H10 and higher production of its nitrile gloves, Kossan was able to fully pass on the higher latex cost (+74% YoY) and expand margins to 15.2% from 10% in 1H09.

• 2Q10 revenue fell 2.4% QoQ, hindered by the weaker USD. Nevertheless, margins are still decent, as the soft USD (-4% QoQ) helped offset the higher latex price (+3% QoQ), which is quoted in
USD.

• The 2H10 outlook is for the industry to remain stable and resilient. The demand-supply situation has normalized, and the summer lull - coupled with the high latex price - has caused some buyers to delay
orders. We expect these buyers to start purchasing soon after running down inventory. Meanwhile, the average latex price is down 4% QoQ in 3Q10 and we expect the trend to continue, which should help to
contain costs.

• We maintain our 2010-2011 earnings estimates.

Recommendation & Investment Risks
• We maintain our Strong Buy call on Kossan with an unchanged 12-month target price of MYR4.50 (adjusted for bonus issue).

• We retain our target PER at 9x against our projected 2011 EPS and add our 12-month net DPS of 6.8 sen. The target multiple is in line with Kossan’s historical average.

• We like Kossan as we believe industry fundamentals continue to be sound. Its new capacity (1.7 bln glove pieces) will come in by October 2010, targeting the nitrile glove segment, which carries higher margins.
Meanwhile, demand for gloves remains stable and with expectations of lower latex prices in 2H10, we believe these positive factors should support share price performance.

• 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) is derived from exports, while about 70% of its costs are in USD.