• During the quarter under review, the rubber glove companies under our coverage reported mixed earnings results. Two of the companies met our expectations while the other two fell below our estimates. This lower-than-expected earnings trajectory was due to lower ASPs and sales volume on the back of higher operating costs.

• We are of the view thatthe broader rubber glove industry's recovery remains uncertain with structural issues like oversupply from Chinese manufacturers posing ongoing challenge.

• Demand is expected to see a slight uptick given the sustainable small customer orders. However, despite the Mpox resurgence potentially boosting glove orders, we believe the overall impact on the industry will remain minimal due to existing overcapacity in the market.

• We maintain an UNDERWEIGHT call on the sector as the industry's outlook remains clouded by ongoing overcapacity challenges.

Top Glove and Supermax Underperform, Hartalega Gains amid Pricing Pressure

Two rubber glove counters under our coverage, namely Top Glove and Supermax fell below our in-house projections primarily due to lower ASPs and sales volume coupled with higher operating costs. However, Hartalega and Kossan results were in line with our in-house projections. This quarter, we observed that Top Glove and Supermax continued to report core losses while Hartalega demonstrated significant improvement relative to its peers. The current ASPs for Malaysian players range between USD 20-22/1k pieces whereas Chinese competitors have a price gap of USD 3-5/1k pieces. This significant pricing disparity intensifies competition for Malaysian players, putting pressure on their market share and profitability.

Potential Rise in Glove Demand but Oversupply and Competition Persist

With the recent Mpox resurgence, we anticipate a potential increase in glove demand from Africa. Top Glove's market share in Africa was 3% for its 9MFY24, though other players have not disclosed their figures. However, it is crucial to consider the intense competition within the glove market particularly from Chinese manufacturers who offer lower prices. This competitive pressure is likely to limit any significant spike in demand for gloves. Additionally, we anticipate that small orders particularly from healthcare customers will likely persist and therefore will support the growth of the company. Overall, while there is glimmer of hope on the supply side following decommissioning of facilities by the glove players, the downside risk persists due to spillover effects from higher Chinese capacity which may prolong the oversupply situation.

UNDERWEIGHT on the sector

We believe the broader rubber glove industry's recovery remains uncertain due to ongoing structural issues, particularly the oversupply from Chinese manufacturers. While demand may see a slight increase from sustained small customer orders and the Mpox resurgence, the overall impact is expected to be minimal given the existing market overcapacity. We maintain a HOLD rating for Hartalega (TP: RM2.60) and Kosssan (TP: RM2.03), a SELL calls for Top Glove (TP: RM0.85) while Supermax remains NON-RATED.

Source: BIMB Securities Research - 2 Sept 2024