PublicInvest Research

Author: PublicInvest   |   Latest post: Fri, 17 May 2019, 10:33 AM


Rubber Gloves - Let The Dust Settle

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Share prices for the glove makers under our coverage have seen PE contraction with Top Glove, Hartalega and Kossan retracing by more than 18% YTD. We expect PE contraction to continue, considering a more challenging operating landscape for the glove makers in near term, mainly due to additional capacity coming on stream and ASP pressure on latex gloves due to growing competition from Thailand. As such, we downgrade our rubber gloves sector from Neutral to Underweight. Despite the recent selldown, we believe the sector is still trading at unattractive PE valuations and could potentially contract closer to historical average of 21-26x (previously we pegged our valuations at 24-33x forward earnings). In addition, we cut the sector’s FY19-20F earnings forecasts by 3-14%. Consequently, we downgrade our rating on Hartalega and Top Glove to Underperform while Kossan is maintained at Neutral (refer to Recommendation Table on the sidebar). Upside risks to our call include (i) lower gas tariffs and (ii) weakening of MYR against USD.

Capacity expansion in near term. The global consumption of rubber gloves has always been growing at a steady rate of 8-10% annually. The previous vinyl gloves disruption in 2016/17 has led to glove makers expanding their capacity more aggressively in order to satisfy the sudden surge in demand for latex and nitrile gloves due to the impact of substitution effect. However, given the 1-2 years’ time lag from plant construction to actual capacity kicking in, majority of the capacity planned during the vinyl disruption will enter the market in 2HCY19 (Top Glove: c. +2.6bn pcs, Hartalega: c. +3.6bn pcs, Kossan: c. +5.5bn pcs). Thailand’s largest glove maker Sri Trang has also been aggressively expanding their capacity. As of April 2019, Sri Trang has a total production capacity of 21.1bn pcs and it should reach 23bn pcs at the end of CY2019. Sri Trang intends to increase its capacity to 30bn pcs by end of CY2020 (c. 23% of combined capacity by Hartalega, Top Glove and Kossan in CY2019). All in all, global supply for 2019 is expected to grow by 15% (based on planned capacity), outpacing demand growth (refer to Figure 1).

ASP pressure due to growing capacity. Given Sri Trang’s aggressive expansion plan and its product mix of 69% latex gloves and 31% nitrile gloves, we see Sri Trang’s expansion plan to have a stronger impact on Top Glove (49% latex including surgical gloves, 41% nitrile, 10% vinyl, CPE and TPE), compared to the more nitrile-heavy glove players like Hartalega (95% Nitrile, 5% Latex) and Kossan (76% Nitrile, 24% Latex). We understand that Sri Trang has been cutting ASP in order to gain market share. We also believe that Hartalega could be facing stronger ASP pressure as opposed to Top Glove and Kossan due to Hartalega’s premium pricing and in times of excess capacity, greater bargaining power is in the hands of buyers. Hence, we might see margin compression for Hartalega in the coming quarters.

Source: PublicInvest Research - 18 Apr 2019

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Chart Stock Name Last Change Volume 
TOPGLOV 4.94 +0.04 (0.82%) 5,595,000 
HARTA 5.10 0.00 (0.00%) 3,867,400 
KOSSAN 3.73 +0.01 (0.27%) 201,700 

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