• All of big four glove players registered disappointing results during 1Q22 as both topline and bottom line were hurt by declining ASP and heightening operating costs.

• Output may be dampened by transitional phase from Covid-19 pandemic to endemic on the back of compressed margin and a tough operating environment.

• Maintain a NEUTRAL recommendation on Rubber Glove sector given limited earnings growth and demanding valuation.

Results Inline

Performance by big four players in glove industry were subdued during 1Q22 amid a drop in average selling price (ASP) and higher operating costs. Overall, revenue for all top glove players namely Top Glove (-64.8% YoY), Hartalega (-58% YoY), Kossan (-68.5% YoY) and Supermax (-79% YoY) decreased during 1Q22 due to lower ASP. A few were also hit by global container shortages that led to lower sales volume. Meanwhile, net profit during 1Q22 for Top Glove (-99.2% YoY), Hartalega (-116.4% YoY), Kossan (-91.8% YoY) and Supermax (-98.7% YoY) were pressured by compressed margin arising from higher operating costs including 1) higher raw material prices, 2) a hike in natural gas and electricity, and 3) an increase in minimum wage.

Pricing Pressure May Prolong

Earnings growth for glove sector are expected to be dampened by global COVID-19 transition from pandemic to endemic phase and therefore, a tough operating environment for all players. Operating margin could also revert to below pre-pandemic level due to pricing pressure consistent with a steady rise in nitrile (May 2022: RM5.80 per kg; +50.6% YoY) and natural rubber (May 2022: RM6.70 per kg; +4.6% YoY) prices. Though we may see some pick up in ASP during 2H22 as glove players could resort to price adjustment due to escalated costs (i.e., raw materials, energy and labor), we do not foresee earnings reversal as glove players may not be able to fully pass the increase to consumer given stiff competition from the Chinese players. Sales may also slow to rise consistent with industry utilization rate that is currently below 60%. This pushed deferment in capacity expansion amid a wait-and-see approach due to uncertain outlook.

A NEUTRAL Recommendation

Maintain a NEUTRAL recommendation on the sector given challenging operating environment which is expected to prolong in the foreseeable future. We have a HOLD call on Hartalega (TP: RM4.70) and Kossan (TP: RM1.80), and a SELL on Top Glove (TP: RM1.00) and Supermax (TP: RM0.80).

Source: BIMB Securities Research - 8 Jul 2022