We gathered that all the three glove players under our coverage, namely Top Glove, Hartalega and Kossan Rubber, have depicted positive QoQ trends driven by increased sales volume and lowered raw material costs. However, industry's operational capacity remains suboptimal as Malaysian gloves players are still running at low utilization rates of c.50% or below. Moving into 1HCY24, we anticipate Malaysian gloves players to secure higher orders and sales volume, due to customers’ low inventory levels. However, ASPs are not expected to rise meaningfully, given the prevailing pricing competition from Chinese gloves players. We believe the recent positive movements in share prices are reflective of anticipated earnings improvement. Nonetheless, we remain cautious on the Chinese players which are currently running at near capacity and should they continue to expand, Malaysian gloves players’ market share would be eroded. All told, we upgrade our sector rating on rubber gloves from Underweight to Neutral, as we believe the worst is over with the glove makers returning to the black. We recently raised our call on Hartalega and Kossan from Underperform to Neutral, while maintaining Underperform for Top Glove.

• A recap of recent results. The recent results reported from the gloves players under our coverage reflect improvements on a QoQ basis, indicating positive momentum in their performance mainly attributable to higher sales volume and lower raw material costs. Both Hartalega and Kossan have turned profitable while Top Glove remained in the red. We observed that the industry continues to operate at a low utilization rate due to a prolonged oversupply of gloves. Nevertheless, sales volume improved QoQ, given customer’s existing low inventory levels.

• Chinese players expanding capacity. We gather that Chinese players are running at near full capacity and notably, Intco Medical has increased production capacity by c.7% from 75 bn pcs/annum to 79 bn pcs/annum in 2QFY23. Based on our channel checks, Chinese players are currently selling at USD16-18/1k pcs. The blended ASPs has stabilised at c.USD20-21/1k pieces for Malaysian glove players. Nevertheless, we observed that the pricing gap between Malaysian and Chinese players have narrowed from 4USD/1k pcs to 2-3USD/1k pcs. This was partly attributed to the rising coal prices on stronger China’s power demand (refer Figure 1), which limited the Chinese players’ ability to further decrease ASPs.

Source: PublicInvest Research - 27 Nov 2023