MARGMA projected that the global glove demand will grow at a stronger rate of 12-15% post-pandemic (vs pre-pandemic 8-10%), with total glove demand in 2022 reaching 452bn pcs. The stronger growth projection is expected to be supported by (i) better hygiene awareness, (ii) higher glove consumption in countries with low per capita consumption of gloves, as well as (iii) increasing usage of gloves in more sectors and industries. That said, we are still concerned over the headwinds faced by the glove makers currently (i.e. weak ASPs due to strong competition and higher production costs) and we do not expect the headwinds to dissipate in a short period of time. In our view, glove makers’ inability to fully pass on higher costs (due to stronger competition) would also compress margins further. Given the downside, we downgrade our rating on Kossan to SELL (from Hold previously), and consequently our rating on the glove sectors is also downgraded to UNDERWEIGHT.

We attended a briefing held by the Malaysian Rubber Glove Manufacturers Association (MARGMA) with the following key takeaways:

MARGMA expecting solid demand growth. MARGMA is projecting global glove demand of 452bn pcs in 2022, which represents a growth of 12-15% YoY (vs pre pandemic annual growth of 8-10%). Main driver for the demand growth is expected to come from (i) better hygiene awareness, (ii) higher glove consumption in countries with low per capita consumption of gloves, as well as (iii) increasing usage of gloves in more sectors and industries. It is important to note that more than 85% of the rubber gloves produced are used in the medical industry currently. While MARGMA is positive that increased glove usage in non-medical industry (i.e. F&B, tattoo parlour, semiconductor) would help to lift overall glove demand, we opine that it is unlikely to contribute a significant boost, as we expect the medical segment to continue dominating overall glove consumption.

Impact of higher minimum wage. Starting 1 May, the Malaysian government will be implementing a minimum wage policy of RM1,500/month (from RM1,200 currently). Despite the 25% increase in minimum wage, MARGMA members are supportive of the new policy as it would improve the workers’ living standards. We note that some of the MARGMA members are already paying above the minimum wage required by law currently (due to higher number of years of experience of the workers). Case in point, prior to the government’s decision to raise the minimum wage to RM1,500, Top Glove has already taken the initiative to raise minimum basic salary to RM1,400. With the 25% increase in minimum wage, MARGMA estimates the overall production costs for glove makers to increase by 1-3%, depending on the workers’ profile in each respective glove maker.

On foreign labour. Based on a survey conducted in late-2021, the Malaysian rubber glove industry hires c.40k foreign workers, which accounts for 1.7% of the total documented and undocumented foreign workers in Malaysia. With the reopening of labour market to foreign workers, we understand that glove makers have submitted applications to collectively bring in another 30k foreign workers. Nevertheless, the industry remains committed to continue reducing its reliance on human labour by automating more of its manufacturing processes. Currently c.83% of the glove manufacturing process is automated and the industry plans to raise it to c.90% in the next couple of years. The industry’s “automation push” has also led to a huge reduction in the number of workers per output. Industry data suggests that it takes c.1.6 worker to produce 1m pcs of gloves currently, from a high of 9.7 workers per million pcs of gloves in 2009.

Downgrade to UNDERWEIGHT. Although MARGMA has projected for global glove demand to grow at a higher rate of 12-15% post-pandemic, we are of the view that the headwinds faced by glove makers currently (declining ASP due to intense competition and higher production costs) are unlikely to ease in a short period of time. With the heightened competition, we think that it would also be challenging for glove makers to fully pass on the cost increase, hence this might lead to margin compression. Given the downside, we take this opportunity to downgrade our rating on Kossan to SELL (from Hold) as share price has moved ahead of our TP (RM1.53). Consequently our rating on the sector is also downgraded to UNDERWEIGHT.

Source: Hong Leong Investment Bank Research - 1 Apr 2022