- Yesterday, the rubber glove counters staged another rally led by Top Glove Corp which climbed 14% to close as the day’s top gainer. Average gain for the sector was 7% with YTD outperformance over the FBM KLCI of 12%. Since the first case was made known, the sector has risen by 13.5% on average.

- We believe the increased interest was due to rising concerns over the threat of the H7N9 bird flu. The Chinese state news agency yesterday reported that 14 new cases (largest one-day total) were identified and that 2 more people have died, bringing the total number of known cases to 77, including 16 deaths. This puts the death rate at one in every 5 persons infected.

- Over the weekend, the virus had also spread to Beijing in the North and Henan in Central China from its previous cluster in Eastern China.

- Adding to the jitters was a statement by the World Health Organisation (WHO) which stated that a number of people who were infected did not appear to have had any poultry contact. According to Reuters, a top Chinese scientist had earlier put this figure at 40% of infected persons.

- Conflicting reports have also emerged over the occurrence of human-to-human transmission. Officials are at present investigating four cases which could have come about from very close contacts. Nonetheless, they have assured that even if the virus had mutated to result in human transfers, it was not sustainable. The authorities have also not ruled out the possibility of a common environment source as a factor as they have yet to pinpoint the source of infection.

- In our view, the jump in the stock prices at this juncture appears to be speculative still. Although we believe this outbreak to be positive for the sector, our channel checks have revealed that customers have yet to place any additional orders but have only shifted their focus to order deliveries from price negotiations.

- Given the reduced price sensitivity, we note that glove manufacturers may be able to raise their ASPs should the H7N9 threat escalate as most rubber glove manufacturers are running at close to full capacity. Based on figures from the last three pandemics, we put the possible surge in global glove consumption at 11% to 24%.

- All in, we are maintaining our OVERWEIGHT recommendation on the sector as incremental earnings are difficult to quantify while the full impact has yet to be determined. Our top sector picks, which are also the prime beneficiaries of this situation, are still Top Glove and Kossan. However, with the steep run-up in Top Glove’s share price, we are putting our fair value for the group under review.

Source: AmeSecurities