• During the quarter under review, three of the rubber glove counters in our coverage were below our estimates, while only one stock was within the estimate. This was attributed to lower ASPs and sales volume, coupled with higher operating costs.

• In a nutshell, there is a glimmer of hope on the supply side following the capacity cut by the local glove players. However, downside risks persist due to the spillover effect from Chinese capacity, which may prolong the oversupply situation.

• Meanwhile on the demand side, we foresee consistent continued small order replenishments to support the growth of the company though overall weak in industry demand.

• We have a NEUTRAL call for the sector, reflecting its positive recovery and a gradual improvement in sentiment despite cautious is still lingering.

Slipped back after improvement

Three rubber glove counters under our coverage, namely Top Glove, Kossan, and Supermax, fell below our in-house projections primarily due to lower ASPs and sales volume coupled with higher operating costs. However, Hartalega's results were in line with our in-house projections. This quarter, we observed a decline in the performance of most players despite improvements in the previous quarter. The decrease in ASPs can be attributed to intense competition especially from Chinese manufacturers, capitalising on low utility costs. Additionally, a surge in natural gas costs has squeezed margins, despite the stability in raw material prices.

Anticipating industry consolidation yet still a slow recovery in 2024

We foresee a mixed outlook for rubber glove industry in 2024 driven by (i) an improving utilisation rate, (ii) manageable cost pressure, and (iii) sluggish recovery in average selling price (ASP) amid the current persistently weak demand and intense competition from Chinese players. The recent actions taken by most glove manufacturers to close their production facilities are expected to contribute to the resolution of the overcapacity issue in the market. This coupled with the potential departure of smaller players from the market is due to operational strains in the face of weak demand. Besides, we are the view that while there is glimmer of hope on the supply side, the downside risk persists due to spillover effects from Chinese capacity which may prolong the oversupply situation. Meanwhile on the demand side, we foresee consistent continued small order replenishments to support the growth of the company though overall weak in industry demand.

Rallied in glove share prices during 4Q23

The share prices of glove players have rallied amidst full optimism that the worst is over for the industry. However, we foresee limited upside to stock price from current level as we view the sector is traded at relatively stretched valuation against historical average.

NEUTRAL on the sector

We anticipate a positive recovery that will underpin a gradual improvement in investors’ sentiment. Nonetheless, downside risk persists such as over production by Chinese players that could prolong the imbalance supply-demand dynamic within the industry. We maintain a HOLD rating for Top Glove (TP: RM0.90) and a SELL call for Hartalega (TP: RM2.08) and Kosssan (TP: RM1.33) while Supermax remains NON-RATED.

Source: BIMB Securities Research - 7 Mar 2024