• Most glove players have shown improvement with some returning to profitability in 2H2023, thanks to improvement in sales volume and lower operating costs. 
• We anticipate a gradual recovery driven by a slight improvement in sentiment, and foresee it moving closer to normalization.
• We upgrade our recommendation from UNDERWEIGHT to NEUTRAL, reflecting the sector’s positive recovery and a gradual improvement in sentiment.

Swinging into profit. Most glove players have shown improvement with some pivoting into profitability in 2H2023. This was underpinned by higher sales volume and lower operating costs. Earnings recovery was observed for some gloves players with Hartalega, Kossan, and Supermax recording operating profits on QoQ level. These players have shown notable increases in their sales volume, thanks to improvement in customer glove orders. Nonetheless, ASPs for all the glove counters still experienced a deterioration due to weaker demand amid stiff market competition. We believe ASPs has now reached its trough, hovering at USD20-22/1k pieces. In addition, China manufacturers' pricing gap with local players has narrowed from USD4/1k pieces to USD2-3/1k pieces. Cost’s structure wise, the delayed impact of lower natural gas prices which was down by 21% in 3Q2023 (versus 1H2023 averages) have resulted in improved margins. Additionally, nitrile and latex prices have eased to c.RM4.80/kg and RM3.50/kg (from RM5.10/kg and RM4.20/kg in 1H2023) respectively, contributing to better operating margin. Overall, though we observed a modest silver lining in the industry, the overall performance remained subdued due to persistent supply and demand imbalance that is still impacting the industry adversely.

Recovering cautiously. Rubber glove industry is expected to experience a gradual recovery driven by improved sentiment, foreseeing a shift toward normalization. In the near term, key catalysts for potential rerating include the overall consistency of order replenishment, a gradual improvement in industry utilization rates, and the stabilization of average selling prices (ASPs). Customers have marginally increased their stockpiles through small orders, driven by concerns about product expiration, particularly among healthcare customers. Despite utilization level being maintained at 40-50%, we anticipate its sustenance to be driven by consistent sales volume orders. The commendable initiative of local glove players in decommissioning facilities deserves acknowledgment, addressing supply and demand concerns and expected to enhance the utilization rate further. Though current blended ASPs remain below the pre-COVID-19 levels, we anticipate pricing to stabilize at the current level throughout 2024, supported by steady global demand. Nonetheless, persistent challenges in the sector, particularly potential disruptions from China's aggressive market share acquisition efforts, pose a hurdle to the industry's recovery process.

Upgrade to NEUTRAL. The sector is now a NEUTRAL, as we anticipate positive recovery that will underpin a gradual improvement in investors’ sentiment. We maintain a HOLD rating for KOSSAN (TP: RM1.33), Top Glove (TP: RM0.74), and Hartalega (TP: RM2.08), while Supermax remains Non-Rated. On that score, we favor Hartalega for its leading profitability in the glove industry, driven by superior operating efficiency and effective cost rationalization

Source: BIMB Securities Research - 22 Jan 2024