We remain upbeat on the sector’s 2021 outlook, as we see high demand and ASPs to persist. Although there may be gradual dent in gloves demand post vaccine discovery, we do not see it being too damaging, considering past trends showed only mild tapering in growth. That said, the appreciation of ringgit against USD presents a slight negative impact. Overall, maintain OVERWEIGHT on the sector as current sold down levels look attractive, with Top Glove (BUY, TP: RM10.54) remaining as our top pick.

Capacity. We estimate the top 4 Malaysian glove players will increase capacity by c.18.5% in 2021 (lion’s share being nitrile capacity). For CY21, there will be an estimated addition of c.34.9bn pieces vs 29.3bn pieces in CY20. However, in view of the still un-abating pandemic, it is expected to continue to fuel near term glove demand and thus, also leading to the possibility of a quicker capacity expansion.

Catalysts. We expect CY21 earnings to be fuelled by the continuous surge in demand for gloves, with new sectors using gloves apart from medical. Along with the Covid-19 impact, we opine the strong demand to persist in CY21 (with MARGMA projecting +25% YoY). Post Covid-19, we opine the normalised global glove demand growth would be at circa 13%-15%; higher than the usual 8%-10% pre-pandemic. The sector now sees longer lead time of more than 18 months (vs. 6 months in the beginning of pandemic, vs. 2 months pre-Covid-19). Spot orders too have been increasing, from the humble c.5% of total capacity to the current of c.15-30%, thus giving the opportunity for further upside to ASPs. ASPs have increased by c.+200% since the beginning of the outbreak . It is noted that blended ASPs of nitrile gloves are high between USD90-160 per 1000 pieces, with spot orders ASPs potentially hitting USD180. Elevated utilisation rates of above 95% (vs. 80%-85% pre Covid-19) is expected to be maintained for the whole CY21 to increase production to meet the global bullish demand, driven by both the still escalating pandemic and vaccine rollout.

Ringgit view. We anticipate ringgit to appreciate in 2021 to average at USD/MYR4.00 in 2021 (2020 average: USD/MYR 4.21) (Figure #2). Ringgit has continued on its recovery trend given persistent USD weakness, hopes of a vaccine and reopening of economy, especially in major economies in 2021. As such, we imputed the assumption of USD/MYR4.00 into our models and the earnings was impacted -5%-8%.

Raw materials. In 2020, the price of butadiene (for nitrile manufacturing) has been increasing since May and reached its peaked in Nov at USD1,345/MT. We foresee this to continue rising as petroleum price increases, and given high demand from glove manufacturers. We expect the price of natural rubber (NR) to range between RM5.00- 6.00/kg in 2021, (2020 average: RM4.91/kg) assuming no further supply disruptions. Furthermore, with real economy healing, the automotive sector is expected to recover as well, which in turn would add to the supply competition. To note, the price of NR has consistently maintained below RM5.00/kg threshold up till Oct 2020, before it started to increase.

Vaccine development. While news flow on vaccines for Covid-19 has been positive, we do not see it to be too damaging to the sector, with past experience showed demand did not fall immediately. Furthermore, (i) gloves will still be needed for testing and administrating the vaccine, (ii) global Covid-19 count is still high, (iii) potential hiccups in vaccine supply and demand for mass immunisation, and (iv) permanent structural shift in hygiene awareness.

Karex. Karex’s faced hiccup in 3QFY20 during the implementation of MCO where there was a halt in operations for 14 days. Again in Dec, catheter facility had to close for 14 days for sanitisaiton and disinfection procedure caused by 35 positive Covid-19 cases among Karex’s employees. As the largest condom maker in the world, we remain optimistic on Karex’s FY21 earnings, with improving production capacity, increase in demand and upward trending ASPs. Also, seeing the closure of other condom factories (global lockdowns), we expect shortage of condoms to loom, which hence potentially benefiting Karex, via higher ASPs; we understand Karex has been receiving increasing orders from NGOs and customers to fulfil orders that their existing manufacturer could not. Moreover, higher sales is evident since 1QFY21, and ASPs has shown an uptrend since Jan 2020, which gives a promising outlook for FY21. Also, Karex is hopeful on their branded segment to expand into new markets in the South East Asia region. Karex’s plan to manufacture gloves is on track with expectation to commence by Jun 2021. Post reflecting assumption of MYR/USD4.00 into our model, our TP is reduce to RM1.19 (from RM1.21) based on 2.42x FY21 BVPS of RM0.50 (-0.25 SD below 5Y mean).

Maintain OVERWEIGHT. Maintain tactical OVERWEIGHT on the rubber glove sector despite the positive vaccine developments as current sold down levels appears attractive. Market leader Top Glove (TP: RM10.54) 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 - 7 Jan 2021