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PublicInvest Research

Author: PublicInvest   |   Latest post: Wed, 11 Dec 2019, 9:46 AM

 

Rubber Gloves - The Dust Has Settled

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Operating environment for the glove players in Malaysia has started to turn more positive, with demand picking up since the month of June. Oversupply concerns that weighed down the sector previously have also subsided. We believe the stronger nitrile glove demand was partly due to additional tariffs imposed on nitrile gloves imports from China, by the US government in September. While the glove makers in Malaysia were clear winners in the previous round of tariff hikes, we are not expecting them to benefit significantly when the next wave of tariffs come into effect on December 15th as it only affects vinyl gloves. We upgrade our rating on the rubber gloves sector from Underperform to Neutral, in view of the operating environment turning more favourable. Our top pick for the sector is Kossan, as we like it for its additional production capacity that will enable it to capture the increasing demand.

  • Demand uptick for medical gloves. In August 2019, US President Donald Trump announced an additional 10% tariff on USD300bn worth of Chinese imports, of which it will be implemented in two tranches, via List 4A and List 4B. The 10% additional tariff was later raised to 15%. Rubber made medical gloves (in List 4A) and vinyl gloves (in List 4B) are among the affected goods. The tariff hike on List 4A came into effect on 1st September, hence, Malaysian glove makers experiencing an uptick in demand for nitrile gloves from June onwards, for orders scheduled for delivery in September and beyond. The pickup in sales was partially due to some Chinese manufacturers diverting orders to Malaysian glove makers, in an attempt to avoid the additional tariffs imposed. Note that approximately 10% of the world’s nitrile glove supply comes from China. The trend was rather apparent in Hartalega, where it saw a 12.7% QoQ sales volume growth in 2QFY20. Hartalega also saw its average utilization rate rising to 85% in 2QFY20, from 76% in 1QFY20, signifying stronger demand for its gloves.
     
  • Next wave of tariffs kicking in. The second phase of the additional tariff, List 4B, will only be effective from 15th December onwards. However, we are of the view that Malaysian glove makers will not benefit significantly from the next wave of tariff hike, given that it only affects the vinyl glove imports and price differential between vinyl gloves and latex gloves is huge. We gather that market prices for vinyl gloves now hover around USD10 per thousand pieces, while latex gloves are selling for c.USD17 per thousand pieces. Due to the 70% premium in pricing for latex gloves, we do not expect vinyl glove users to switch to latex gloves, as it still cheaper for buyers to pay for the additional tariffs.

Source: PublicInvest Research - 14 Nov 2019

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