The escalation in Covid-19 cases worldwide is not show any signs of abating. Furthermore without concrete vaccine timeline, demand for gloves should sustain. We envisage greater earnings to follow into CY21 for glove makers paired with strong fundamentals. We maintain OVERWEIGHT on the sector with Top Glove (TP: RM13.00) as our top pick.

No signs of slowing down. As at 7 Oct, the reported number of Covid-19 cases worldwide was 36.1m with 7.9m active cases and a death rate of 3.7%. The spread rate per subsequent 1m cases currently hovers between 3-4 days, more rapid than the initial 2 weeks when the pandemic first broke out (Figure #1). Highest active cases thus far would be from the US with 7.7m cases to date, with a death rate of 4.2%; moreover US being the largest glove consumer (c. 150 pieces per capita), we can use this as an indicator for demand of gloves to rise. In US, while Covid-19 cases declined in Jul, it started to pick up again in the early-Sep. This coincides with the beginning/ transitioning of season to autumn in the Northern Hemisphere (Figure #2), which also usually marks the beginning of flu season (especially come winter, more cases are expected). Risk of rising Covid count amid the colder weather, alongside the “flu season” should sustain the upward demand trajectory for gloves.

Vaccine development. Researches are currently testing 44 vaccines in trials on humans with at least 91 preclinical vaccines are under active testing on animals. While work on vaccine started back in Jan 2020, and more intensely in Apr, there are still none that have yet to receive full use approval (Figure #3). Even big pharmaceutical giants like AstraZeneca faced hiccups and had to halt vaccine trials due to an unexplained illness in their voluntary study. While optimists expect a vaccine discovery by year end, we reckon that this seems like a longshot. Looking back in history, the fastest vaccine to be developed and approved was for mumps, which took 4 years. Past experience has shown that even with vaccine discovery, demand for gloves did not fall immediately, as rollout for mass immunisation would take time. In addition, gloves will still be needed for testing and administrating the vaccine.

Key drivers. With Covid-19 cases showing no signs of slowing down paired with no concrete vaccine timeline, we expect CY21 earnings to be fuelled by (i) the continuous surge in demand for gloves, (ii) spill over to an expected higher ASP on increased orders, and (iii) elevated utilisation rates of above 95% (vs. 80%-85% pre Covid-19); and we see it to maintained till at least 1HCY21. Some channel checks showed that the lead time of glove manufacturers are now at a minimum 8 months while there are manufacturers that are looking at >1 year. It is noted that blended ASPs of nitrile gloves are high between USD90-160 per 1000 pieces. Furthermore, we reiterate the catalyst for rubber gloves growth to be: (i) more stringent regulatory requirements, (ii) higher healthcare awareness, (iii) growing population and (iv) wider gloves users beyond medical (i.e. F&B, travel, janitorial, mechanical). With the Covid- 19 impact, projected global demand for 2020 is 330bn gloves (+20% YoY, vs. the usual 8%-10%) (Figure #4). Post Covid-19, we opine the normalised global glove demand growth would be at circa 13%-15%; higher than the usual 8%-10%.

Maintain OVERWEIGHT. We reiterate OVERWEIGHT on rubber gloves enhanced by the pandemic fuelled demand. Market leader Top Glove (TP: RM13.00) 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 - 8 Oct 2020