Glove sector continues to rise in prominence Overweight ◄►

• Strong global glove demand has led to the industry experiencing longer order lead time (9-12 months vs 1-2 months pre-Covid19) and anticipating higher ASPs of up to 10%/month starting June. This will contribute to stronger earnings in subsequent quarters.

• Long term prospects remain unwaveringly positive, growing c.10% yoy backed by higher healthcare awareness, ageing population and global healthcare spending.

• We adjust our forecast for glove companies under coverage. Overall, we estimate sector earnings for FY20/FY21 to increase substantially by 73.4%/58.5% yoy.

• Maintain OVERWEIGHT. Supermax and Top Glove our new top picks for the sector.

Glove stocks share performance outperformed the KLCI

Glove companies have outperformed the KLCI with share prices appreciating more than 100% YTD and market cap of the Big-4 companies exceeding RM10bn. This relentless ascend is on anticipation of stronger earnings in subsequent quarters backed by i) higher demand; and ii) increasing ASPs from Covid-19 outbreak. The star performer has been Supermax which has seen its share price up by 539% YTD.

Covid-19 causing disparity between demand and supply

Unabated global spread and gravity of the Covid-19 pandemic have caused escalation and substantial imbalance in glove demand and supply with actual demand growing faster at 30-50%. Capacity now lags demand with Malaysian glove producers reporting order lead time stretching to 9-12 months (vs pre-Covid 1-2 months). We gather that current demand is mostly for immediate use against Covid-19 and less for inventory stocking. This should help reduce the risk of a price war post COVID-19, unlike the previous outbreak where sales dropped drastically post outbreak, in our view.

Higher ASPs to drive sequentially stronger earnings

Continued strong demand provides ample room for ASPs to be revised higher and we expect this to peak sometime between 2H2020 and early 2021. Together with spot/adhoc orders which command higher ASPs of up to 3 times higher than normal ASPs, greater earnings could be generated by glove producers. We gather that average anticipated ASPs in the industry is now increasing up to 10%/month (previously c.5%), which could possibly stretch from June to Dec 2020.

Outlook: Long term prospect turning increasingly positive

Long term prospect is highly positive with expected demand growth c.10% yoy post Covid- 19 based on i) lingering Covid-19 fear factor create greater healthcare awareness, ii) increase ageing population, and iii) higher global healthcare spending. Additionally, there will be a new norm for higher glove use in other industries like F&B and manufacturing.

Maintain OVERWEIGHT on the sector

We turn more bullish on the sector as we are expecting stronger earnings performance in subsequent quarters. We have made earnings revision yet again on the sector, as new developments discussed above are imputed into our assumptions, i.e. sustained higher volume and rise in ASP and hence resulting in increased profit margins. Overall, we estimate sector earnings for FY20/FY21 to increase by a substantial 73.4%/58.5% yoy respectively. Maintain sector OVERWEIGHT with BUY call on Supermax (TP: RM11.00), Top Glove (TP: RM20.50) and Kossan (TP: RM11.30). Hold call for Hartelega (TP: RM12.40). Our top picks for the sector are Supermax and Top Glove.

Source: BIMB Securities Research - 9 Jun 2020