We dialled into MARGMA’s Industry Briefing 2020 and hung up upbeat on the sector’s prospects. Projected global glove demand for 2020 is 330bn (+20% YoY vs. usual 8-10%). The strong demand has led to an increase of lead time which we would expect to follow with further increases in ASPs. We updated our earnings for all glove companies under our coverage due to the expected increase in ASPs. Maintain OVERWEIGHT with our top sector pick being Top Glove (TP: RM31.31).

MARGMA’s held an Industry Briefing 2020, presented by Mr. Denis Low (President) and Dr. S. Supramaniam (Vice President) yesterday and here are some takeaways.

Current scene. With the Covid-19 impact, projected global demand for 2020 is 330bn gloves (+20% YoY, vs. the usual 8-10%). Malaysia’s projected export revenue would be RM21.8bn (c.60-67% of global market share). As at Mar 2020, value of Malaysia’s total glove exports rose by +16.3% YoY, while quantity increased by +14% YoY. Lead time of glove manufacturers are now at a minimum 6-8 months while there are manufacturers that are looking at more than 1 year. It is noted that blended ASPs of nitrile gloves (USD80-160 per 1000 pieces) are currently c.50-60% more than natural rubber gloves (vs. usual premium of 20-30%). MARGMA estimated an additional man power of 25k (10k Malaysians and 15k foreign workers) is required to meet the increasing demand of gloves. With the Government’s decision (on 22 Jun 2020) to freeze foreign worker intake until end of 2020, this poses some challenges for the gloves sector. However, we understand that MARGMA is working with the Government to push for further automation to overcome labour shortage.

Future growth. MARGMA sees the following key drivers for rubber gloves growth: (i) regulatory requirements, (ii) healthcare awareness, (iii) growing population and (iv) wider application of gloves (i.e. F&B, travel, janitorial, mechanical). Malaysia’s glove manufacturers have achieved much improvement as it currently only takes 1.7 workers to produce 1m gloves (vs. 2008: 9.7 workers), and with the technological advancement, manufacturers are now able to produce 42-45k of gloves per hour (vs. 2007: 30k gloves per hour).

Top Glove. We did some channel checks (since our last report in Jun), and we are now factoring in higher ASP assumption (c.+13% YoY) due to even more optimistic demand prospects. We expect stronger 4QFY20 and FY21 driven by higher demand, stronger ASPs and more spot orders (c.20% of capacity). Lead time too, has increased to c.15- 18 months (Jun 2020) (vs. pre Covid-19: c.1.5 months and Apr 2020: c.10 months). This supports our view on more upbeat ASP assumptions given the supply shortage. We raise FY20-22 earnings by 24%/33%/8%. Thus, our TP increases to RM31.31 (from RM23.91) based on 33x PE (+1SD) tagged to mid-FY21 EPS. Maintain BUY.

Hartalega. We checked in with Hartalega, and was pleased to hear that ASPs has been increasing. As such we take this opportunity to impute higher ASP assumption (c.+6% YoY) due to better-than-expected demand. Following that, our FY21-22 earnings increase by 14%/18%, our TP has increases to RM20.12 (from RM17.63) based on 47x PE (+2SD) tagged to FY21 EPS. Maintain BUY.

Kossan. Post AGM (10 Jul), Kossan shared that with the Covid-19 onslaught, its increase in ASPs would be reflected partially in deliveries in end 2Q20 and fully reflected in 2H20. Furthermore, Kossan shared on the recent acquisition of land made in Meru, Klang. The expansion will add c.5bn pieces of gloves, with 16 lines with commercialisation projected to commence in 2021. With the expectation of further price adjustments in 2H20 and new capacity coming in 2021, we increase our FY20-22 earnings by 28%/41%/17%. Post adjustments our TP increases to RM16.37 (from RM11.69) based on 31x PE (+2SD) tagged to FY21 EPS. Maintain BUY.

Maintain OVERWEIGHT. Maintain OVERWEIGHT on rubber gloves driven by a pandemic fuelled demand. Market leader Top Glove (TP: RM31.31) is our top pick for the sector, being the largest glove manufacturer globally with vast clientele, readily supporting the increasing demand.

Source: Hong Leong Investment Bank Research - 21 Jul 2020