• On 19 May 2023, Intco Medical Technology (Intco), the largest glove maker in China,  released a result briefing record form. We have reviewed the document and compiled  4 key points along with our views.
   
  • Point 1: Intco appears to regard the average selling price (ASP) increase in the  industry as more of a medium to long-term trend than a near-term one. This could  imply that Malaysian glove makers, which have higher cost structures, are taking  the lead in ASP hikes rather than Chinese producers. To recap, Malaysian glove  makers mostly started raising ASP since Mar 2023.
    
    We believe that the country responsible for leading the ASP increase is crucial. If  Malaysian players lead the ASP increase instead of China’s (which is selling at a  discount of US$3–4/1K pcs primarily due to coal advantage), this could result in  more sales orders flowing to Chinese players and Malaysian operators losing  market share, as Intco continues to prioritise market share over profitability  despite 2 consecutive quarters of losses. This clouds sustainability prospects of  ASP hikes in Malaysia given lack of sales volume support for domestic players.
     
  • Point 2: Intco’s nitrile medical rubber gloves plant utilisation rate (PU) approached  100% in April 2023. Similarly, Blue Sail’s PU runs at >90% (Exhibit 2), whereas  local glove makers under our coverage encountered some QoQ sales volume  weakness post-ASP increase in Mar 2023. This supports our belief that customers  migrated their orders to Chinese competitors in response to Malaysian ASP hikes.  For now, we continue to assume QoQ ASP improvement 2Q2023 onwards in our  forecasts.
    
    Notably, coal prices, the primary fuel used by Chinese glove manufacturers,  plunged by 65% from their peak, with the majority of the decline occurring in 1Q 2023. However, natural gas is expected to moderate at a more gradual pace in  2Q2023 onwards, positioning Chinese players ahead of domestic competitors in terms of cost structure improvement. Furthermore, this may discourage Chinese  peers from following suit with Malaysia’s ASP increase.
     
  • Point 3: On top of cheaper ASP, Intco continues to be aggressive in securing  sales/market share by subsidising customers with longer credit terms. Based on  our channel checks, domestic glove players do not offer such incentives to  customers. All in, we believe the competition from China remains intense.
     
  • Point 4: Intco guided those inventories of downstream customers entered their final stage of depletion. Assuming Chinese players do not increase capacity, any  incremental orders could flow to Malaysian players given that the majority of  Chinese players are running at almost full PU.
    
    However, we discovered that Malaysian players in 2QCY23 are not receiving any  significant orders but are instead exhibiting some sales weakness due to the ASP  hikes. For now, we maintain that 3Q2023 could mark the beginning of inventory  replenishment among Malaysian glove manufacturers, albeit a more gradual recovery.
     
• Maintain UNDERWEIGHT after share prices spiked 30%-66% over the past 2 months despite glove makers’ financial results likely to remain weak in FY23-24F. While losses  are likely to narrow in 2Q2023 onwards thanks to moderating natural gas prices, the  sector’s prospective earnings do not yet support current high valuations.

Source: AmInvest Research - 29 May 2023