We recently met with the Malaysian Rubber Glove Manufacturing Association who shared their views: (i) additional supply from China could be taken up for its local use, (ii) post pandemic ASPs expected to be 40-60% higher vs pre pandemic, (iii) new Malaysian entrants to add 6.5-10bn pieces of capacity this year and (iv) foreign labour freeze still hitting the industry. We maintain OVERWEIGHT on the sector; recent resurgence in global cases to support demand. Our top pick remains Top Glove (BUY; TP: RM7.00).

We recently met with the Malaysian Rubber Glove Manufacturing Association (MARGMA), which was represented by its President, Dr. Supramaniam Shanmugam.

Supply outlook. MARGMA estimates global disposable glove supply to increase by ~22% to 420bn pieces per annum in 2021. They shared this figure is based on data from their members in Malaysia, new entrants into the market, information from ARGMA (ASEAN rubber glove manufacturing association), as well as tracking capacity expansion in other countries. MARGMA remains sceptical of the mooted 85- 100bn increase in production capacity from China by 2023. Furthermore, MARGMA reckons even if rapid capacity expansion in China materialises, the increased supply will likely be moped up by the domestic China market from heightened hygiene awareness from the Covid-19 outbreak. We note that pre-pandemic (2019), China’s annual glove use per capita of just 6 pieces far lags behind its developed market peers (150/100 pieces in US/EU per capita).

Post pandemic landscape. While MARMGA expects the shortage in disposable glove supply to last until 2Q22, they anticipate ASPs declining before that. In the post pandemic landscape, MARGMA expects it to result in a new normal, resulting in increased hygiene awareness around the world and higher glove use in general. MARMGA compared Covid-19 to the AIDS epidemic in the 1980s when glove adoption accelerated, particularly by healthcare workers in order to avoid direct contact with open wounds. All in all, MARGMA expect ASPs to be 40-60% higher than pre-pandemic levels.

New entrants into the market. Despite the pandemic lasting for over a year, MARGMA shared that there has yet to be a single new glove producer in Malaysia that have begun production. While we understand a number of new Malaysian entrants are expected to begin production from May-21 onwards, MARGMA shared that receiving various certifications (FDA for the US, CE for the EU, PMDA for Japan etc.) will take 1-2 months and can only happen after production begins. While it may still take a few more months for newer entrants to start selling, MARGMA estimate that new Malaysian entrants will add between 6.5-10bn pieces of production capacity per annum this year.

Labour freeze still plagues the industry. To recap, the intake of new foreign workers is still currently prohibited, given the ongoing Covid-19 pandemic. MARGMA estimates that the Malaysia glove industry requires an additional 25,000 workers (in addition to the estimated existing manpower of 71,800) in order to meet current glove demand. Contrary to popular belief, MARMGA shared that the glove industry is a highly automated industry. Note that in the most advanced factories, it requires just 1.7 workers to produce 1 million gloves per month (down from 9.7 in 2008). They estimate that the lack of labour had resulted in an export loss of c. RM8.5bn in 2020.

Maintain OVERWEIGHT. Despite recent correction in prices, we expect the resurging Covid-19 cases globally (since mid-Feb) to provide support for sales demand in the short term. Our top pick remains Top Glove (BUY; TP: RM7.00).

Source: Hong Leong Investment Bank Research - 6 Apr 2021