• Rubber glove industry challenging outlook is expected to prolong and this is set to remain protracted amid various headwinds such as: - i) average selling prices  (ASPs)/utilization rate that have yet to bottom out, ii) stiff competition from peers especially from the Chinese glove makers and iii) a rise in operating costs.

• We foresee earnings to continue to bleed following an expected normalization in activity only in 1HCY24 following the exit of small players. The expected rebound in Ringgit against USD in 2H will also add to the less-than-inspiring outlook.

• No change in earnings estimates for Hartalega, Kossan and Supermax as we already factored in the downside risks. Nevertheless, we adjust Top Glove FY23F  full year losses from RM506mn to RM606mn and cut FY24-245F earnings by 19%- 53.1% respectively, as we foresee the doldrums to congest Top Glove earnings further.

• Maintain a UNDERWEIGHT recommendation on Rubber Glove sector given lack of catalyst where this may dampen earnings.

Costs-passing through is challenging

We understand that the current average selling prices (ASPs) have picked up slightly since February 2023, hovering around USD20-22/1k pieces (versus USD17-20/1k  pieces previously) for local players while USD17/1k pieces for the Chinese players  (from USD14/1k pieces). While some glove players are expected to raise the ASPs moderately to offset against rising costs, the effort could be challenging amid tepid demand and oversupply condition.

ASPs to fall below pre-pandemic level

We do not rule out the possibility of ASPs to fall below the pre-pandemic level (USD17- 20/1k pieces) given over capacity condition. This is on the back of weak demand, with  utilisation rate running below 35% (versus pre COVID-19 level c.65-75% utilisation rate).

No urgency in stock up

Inventory level is relatively high due to the build-up since COVID-19 pandemic. We foresee no sign of inventories replenishment given these circumstances. Our channel checks show that global glove players inventory level is still high though low for our local players. This could be due to massive production from global players where they have been flooding the market with excess supplies despite demand that only recently picked up. Nonetheless, lower capacity from our local players given the scaling back in expansion activity could give some calm to current market supply-demand dynamics.

Elevated inflation and margin pressure

Rubber gloves players earnings are expected to remain challenging in the near term to be impacted by costs pressure due to lower utilisation rate, hike in minimum wages as well as higher electricity tariff. Despite a drop in natural gas prices to fresh lows recently, the glove players have been impacted by higher electricity tariff and thus,  eroding profitability. Note that electricity tariff has increased by c.42% effective 1  January 2023. Price for raw material also has also rebounded, amid nitrile price that  surged by 5.7% YoY as year-to-date due to higher feedstock cost.

An Underweight Recommendation

Maintain an Underweight recommendation on the sector given challenging operating environment at least until 1HCY23. We have a SELL call on Hartalega (TP: RM1.37), Kossan (TP: RM0.95), Top Glove (TP: RM0.48) and Supermax (TP: RM0.58).

Source: BIMB Securities Research - 11 Apr 2023