Highlights

Rubber gloves counters have been heavily traded, pushing share prices to their 52-week high ever since the first report of H7N9 outbreak in China. Going forward, we opine that there is limited fundamental catalyst to share price due to:

Endemic, not yet a pandemic. Outbreak is confined to China’s eastern region while no cases outside of China have been detected. The more prepared and experienced Chinese government in fighting crisis is expected to better contain the disease while prompt actions were taken to mitigate the impact. China’s transparency would greatly help and accelerate international joint effort in developing the vaccine.

No exceptional spike in demand due to past plagues. Even with such disastrous pandemic of H1N1 with death toll amounted to few multiples of the previous two events; the industry only commanded a growth rate of 9.0%. As we were already forecasting the demand for rubber gloves to continue growing at an annual rate of 10% in FY13-15, hence we do not think that H7N9 would further drive worldwide rubber glove demand surpassing our expectations.

No shortage of supply on the back of heavy CAPEX on capacity expansion, unlike during H1N1. We are rather concern on the likelihood of rubber glove glut if demand growth falls below 10% causing ASP to plunge.

Stable raw material pricing. Drop in natural latex price has already been priced in earlier. Both natural latex and nitrile prices are expected to gain marginally going forward and will not revisit their lows during H1N1 pandemic.

Uneventful MYR/USD. To hover between the range of 3.05 and 3.10 and will not reclaim its high during H1N1 outbreak.

Catalysts

Surge in demand in the event of a disease outbreak; appreciation of the USD against the MYR; more stringent requirements and increased spending in the healthcare sector; and lower rubber prices to boost profitability and increase demand for gloves.

Risks

Uptick in natural and/or synthetic latex prices will inevitably erode profitability, depreciation of USD against MYR, natural gas price hike and price undercutting.

Forecasts

Unchanged.

Rating

Neutral

• Positives: Latex prices have fallen significantly, production efficiency to continue improving and production shift to nitrile gloves from NR gloves will lead to better cost management.
• Negatives: Weakening of USD against MYR.

Valuation

• Until we see further H7N9 deterioration and turning into a pandemic, we are maintaining our NEUTRAL stance.
• Hartalega (HOLD, TP: RM5.59);
• Top Glove (HOLD, TP: RM6.05); and
• Kossan (HOLD, TP: RM3.84).

Source: Hong Leong Investment Bank Research - 11 Apr 2013