Sales volume returning. The latest results from the glove sector entities under our coverage showed sequential improvements, highlighting positive operational momentum primarily driven by increased sales volumes. We observed an uptick in overall sales volumes, resulting in higher QoQ revenue. Hartalega’s sales volume increased by 24% QoQ, while Top Glove’s overall sales volume was up 13% QoQ. According to DOSM, Malaysia’s rubber glove manufacturing and export volume has increased MoM since January 2024. Looking ahead, we believe the overall sales volume will continue to improve, underpinned by gradual demand recovery due to depletion of pandemic stockpiles.

Improved utilisation rates. In line with higher sales volumes, Malaysian glove manufacturers have reported increased utilisation rates in the recent quarter. Hartalega’s utilisation rate rose to 73% after decommissioning capacity to 7.6bn pcs/annually, up from 43% in the previous quarter with a capacity of 10.5bn pcs/annually. Both Top Glove and Kossan are operating at c.50% utilisation rates, marking an improvement of c.25% YoY. We believe these decommissioning initiatives will enhance overall utilization rates through improved cost optimisation, resulting in better margins and lower operating costs.

Raw material prices to normalise going forward. Raw material prices, including nitrile butadiene and natural latex, which constitute c.30% of total production costs, have been on an upward trend since January 2024. We anticipate this to compress operating margins for Malaysian glove manufacturers in the 1HCY24, but expect normalization in the 2HCY24 due to seasonality. However, natural gas prices, which account for around 20% of total costs, have risen by c.34%, from an average of USD1.7/MMBtu in March 2024 to USD2.3/MMBtu in May 2024. This increase is expected to translate into higher gas tariffs in the 2HCY24 due to a time lag effect.

ASPs stabilised but expected to stay stagnant going forward. The US Government has announced a tariff increase on Chinese medical gloves from 7.5% to 25% effective in 2026, which is expected to enhance the competitiveness of Malaysian glove manufacturers by narrowing the pricing gap with Chinese players. Besides, US customers are observed to be shifting to Malaysian glove players due to higher cases of Chinese glove manufacturers being added into FDA’s import alert list. Despite this advantage, the operating landscape for Malaysian players is expected to remain challenging due to stagnant average selling prices, as recent sales volume increases have come at the expense of stagnant or lower ASPs. Furthermore, we gather that China’s thermal coal prices has dropped c.30% since Jan 2024, suggesting that Chinese producers will be benefitting from lower operating costs, thus exerting pressure on Malaysian glove ASPs to remain stagnant in the near term.

Neutral on sector. We believe Malaysian glove manufacturers are entering a recovery phase, evidenced by rising sales volumes as customers replenish depleted inventories, indicating a narrower supply-demand imbalance in the market. However, due to ongoing pricing pressure, we expect limited upside on ASPs going forward. All told, we are NEUTRAL on the glove sector.

Source: PublicInvest Research - 26 Jun 2024