We came away from a meeting with Kossan Rubbers’ (Kossan) Group MD/CEO, Tan Sri Lim Kuang Sia feeling downbeat on the long-term outlook of the Malaysian rubber glove industry. Kossan is currently selling at a blended ASPs of USD16/1k pcs, and management expects limited growth in ASPs moving into 2024, owing to persistent pricing competition from China and normalisation of raw material prices. While we anticipate Kossan to exhibit resilience in the short term, a note of caution is warranted for the long term as China's on-going expansion is likely to further solidify its dominance in the global market, at the expense of Malaysian glove makers’ market share. Hence, Kossan’s utilisation rate is not expected to improve significantly in FY24F. We believe the recent surge in share price reflects the current rise in Covid-19 cases and the pricing in of anticipated improvement in sales volume in 2H23. We believe it is an opportunity to take profit and hence, we downgrade our call on Kossan from Neutral to Underperform, with unchanged TP of RM1.38 based on 0.9x (near 1-year historical mean) CY24F BVPS.

• ASPs to remain stable with limited upside. Kossan is currently selling at a blended ASPs of USD16/1k pcs. Moving forward, management does not expect significant hike in ASPs mainly due to stiff pricing competition from Chinese glove makers that are selling at c.2USD/1k pcs cheaper than Malaysian players. We observed that the price gap between Malaysian and Chinese players have narrowed from 4USD/1k pcs to 2-3USD/1k pcs, partly due to rising coal prices (refer Figure 1) on stronger China’s power demand, which limits the Chinese players’ ability to further decrease ASPs.

• Utilisation rate remains suboptimal. Kossan is currently running at 50% utilisation rate based on 25bn pcs/annual installed capacity (3QFY23: 40%- 50%). Kossan had decommissioned 2 plants (3bn and 6bn capacity respectively) in FY22. For this, a total of RM35m will be written off in FY23. The Group has no plans for plant decommissioning going forward. Instead, Kossan is set to revamp its old machines and invest in automation, with an anticipated cost >RM100m in FY24F.

• Nomalisation of raw material prices. We observe a downward trend in nitrile butadiene prices, coupled with a slight uptick in natural latex prices since Sept 2023. Looking ahead, we anticipate raw material prices to remain stable (refer Figure 2). Meanwhile, natural gas cost is expected to climb higher in 1QCY24 (refer Figure 3), attributed to a time lag effect, but it is expected to normalize in the 2HCY24. Kossan has also implemented workforce reduction, cutting its headcount by c.33% to 4,000 from a total workforce of 6,000 in FY22. We are positive on this strategic initiative as it is expected to contribute to an improvement in Kossan's operating margin going forward. Notably, the operating margin for 3QFY23 at 12.18%, has returned to near the prepandemic level.

Source: PublicInvest Research - 20 Dec 2023