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PublicInvest Research

Author: PublicInvest   |   Latest post: Tue, 27 Jul 2021, 9:33 AM

 

RUBBER GLOVES - ASPs Tapering Off

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The improving Covid-19 situation in both the US and EU has resulted in a much lesser urgency for distributors to immediately replenish inventories back to its usual level of 2-3 months, in our view. The buyers are adopting a more careful stance currently, to avoid locking-in purchases at high prices. We expect ASP for gloves to start trending lower in 2HCY21, supported by the improved Covid-19 situation as well as lower raw material prices as the tight supplies for nitrile butadiene latex continues to ease and better yield for latex concentrate after the end of wintering season in May. Glove makers’ commitment to continue stepping up on their social compliance practices will also translate to higher costs going forward and we reckon that it would take time for the glove makers to fully pass on cost increase to buyers and should result in margin compression in the near term. We lower our sector’s earnings projections for FY21-24F by 10-51%, on the back of lower ASP assumption. We downgrade our rating for Kossan to Neutral, while maintaining our Neutral call on Top Glove. Our preferred exposure for the sector is Hartalega, due to its superior margins pre-Covid and we continue to rate it as Outperform. Consequently, we also downgrade our call on the rubber glove sector to Neutral.

  • ASPs to start declining in 2HCY21. The Covid-19 situation in both US and EU has greatly improved, following the rollout of vaccines; hence there is less urgency for distributors to immediately replenish inventories back to its usual 2-3 months level. We understand that the distributors’ current inventory levels are at c.1 month and the buyers are adopting a wait-and-see approach, to avoid locking-in purchases at high-prices. On a side note, Top Glove is redirecting its capacity earlier allocated for the US to EU market, causing stiffer competition for glove makers in the EU currently. The improved Covid-19 situation in both the US and EU, as well as stiffer competition in EU, will lead to lower glove ASPs in 2HCY21, in our opinion.
  • Lead time falling, spot orders no longer. Lead time has fallen for both Hartalega and Top Glove, both at less than 120 days currently, from 150 days and 170 days respectively. Top Glove is also no longer receiving spot orders, given the readily available capacities to be taken up by buyers. As for Kossan, capacities for CY21 have been fully sold.
  • Lower raw material price. Raw material prices are expected to decline as we move into 2HCY21. Prices for butadiene and acrylonitrile (raw materials for nitrile butadiene latex) are expected to decline as tight supplies continue to ease. Better yield after the end of the wintering period in May is also expected result in lower latex concentrate price in 2HCY21. Lower raw material prices will lead to lower ASPs, as glove makers pass on the cost savings to buyers.

Source: PublicInvest Research - 21 Jun 2021

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Labels: KOSSAN, TOPGLOV, HARTA

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