The Malaysian glove sector is showing promising signs of recovery, evidenced by increased sales volumes and rising ASPs, which has been a driver of sequential revenue growth. In response to improved utilisation rates, key players are adding production capacity to meet rising demand. We expect raw material costs to normalize and natural gas price to trend downward in 2HCY24, giving room to sustain operating margin. Prices of glove stocks have shed c.25% since end July 2024 due to global market correction, we view this as a good opportunity to accumulate as we expect earnings to improve sequentially. All told, we upgrade the rubber gloves sector from Neutral to Overweight.

• Higher sales volume and ASPs. Recent results from the glove manufacturers under our coverage indicate an uptick in sales volume, driving sequential QoQ revenue growth. While Top Glove remains in a loss-making position, Hartalega reported a core net profit of RM36.7m, and Kossan achieved a core net profit of RM26.8m. We gather that customers are more receptive to upward adjustment in ASPs as inventories deplete. Currently, the industry’s blended ASPs are hovering around USD20-21/1k pcs of gloves.

• Ramping up capacity. Hartalega is ramping up its new NGC1.5 production capacity, which is expected to increase by c.16%. This expansion is supported by encouraging demand trends, as evidenced by the current NGC1.0 facility operating at a healthy 78% utilisation rate. Similarly, Kossan is adding six new production lines slated for completion by FY24, aimed at reducing labor costs and improving overall operational efficiency.

• Raw material costs and currency trend. We observed that the raw material prices, i.e. nitrile butadiene has been rising albeit slightly, while latex price has dropped since April 2024. We anticipate that overall raw material price to normalise in 2HCY24, giving room to sustain operating margin. Additionally, natural gas prices are expected to trend downward during the same period. Meanwhile, the weakening of the USD is likely to have minimal impact on the bottom line, as the normalization of USDquoted raw material costs creates a natural hedge against fluctuations in glove pricing. Consequently, we do not foresee any significant impact on operating costs or profitability due to currency movements.

• Upgrade to Overweight. We are optimistic on the Malaysian glove sector's outlook, driven by increasing sales volumes, rising ASPs, and improving operational efficiency due to better economies of scale. With raw material costs expected to normalize in 2HCY24, we forecast margin expansion leading to greater profitability. Our preferred picks are Kossan and Hartalega.

Source: PublicInvest Research - 2 Sept 2024