KUALA LUMPUR (April 13): The path to profitability of Malaysia’s glove sector still lacks visibility, according to JPMorgan Asia Pacific Equity Research.

In a note on Wednesday (April 12), the research house reiterated its bearish stance, as overcapacity-led average selling price (ASP) weakness will continue until at least end-2024.

“Information asymmetry was the main cause of the recent momentum-led 30% to 60% rally, in our view, as glove ASPs are traded over the counter.

“Optimistic ASP guidance by Top Glove Corp Bhd of 5% to 10% near-term hikes in its latest result briefing sparked the rally,” it said.

JPMorgan said its channel checks suggest that ASP hike requests by Malaysian players had been met with reduced orders, while Chinese players maintained their discounts to Malaysians.

It said excess capacity, the main factor that caused industry losses, should take two years to digest, even if expansions are halted and old capacity is retired.

It said at current price-to-book value (P/B) valuations of 1.4 times to 1.6 times, stocks appear to be pricing in more than profit normalisation.

“We therefore retain our cautious stance on the sector,” it said.

Overcapacity

JP Morgan said overcapacity may take another three full years to hit equilibrium.

It said applying the Malaysian Rubber Glove Manufacturers’ Association's (Margma) assumption that global glove demand will increase 10% to 15% in calendar year 2022 to 2023 versus pre-pandemic levels, the annual incremental demand would be about 30 billion pieces per year.

“Comparing this figure against the overcapacity situation, we calculate it will take three years for excess supply to be absorbed by the incremental demand,” it said.

Kossan

JPMorgan said Kossan Rubber Industries Bhd is best positioned to weather the storm.

It said Kossan’s net cash stands at RM2 billion, making up about 57% of its market capitalisation.

“P/B remains palatable at 0.9 times, versus Top Glove (1.6 times) and Hartalega Holdings Bhd (1.4 times).

“Kossan avoided the reinvestment trap post-Covid supernormal profit, and presents upside risk should its cash be deployed intelligently. We maintain overweight,” it said.