Yesterday, stock prices of rubber glove manufacturers rose by an average of 6.72%, reacting to news that The World Health Organization (WHO) is considering declaring an international health emergency on the China pneumonia outbreak (2019-nCoV; the coronavirus), which was first discovered in Wuhan. Although there has yet to be any spike in glove demand arising from the latest incident (human-to-human transmission), we believe this would help raise the awareness for the need of a proper protection barrier for medical professionals. Maintain Overweight, with Top Glove and Kossan as our top picks for the sector.

Share Prices Sensitive to Outbreak

Although the share-price performance for the rubber glove manufacturers tends to react positively on the news flow of virus outbreaks (either pandemic or epidemic), share prices also correct subsequently, as the incremental real demand varies from case to case. Nonetheless, we believe that news about an outbreak is good for the sector (demand) in the long run, as it helps to raise the awareness for the need of a protection barrier for medical professionals. It was reported by some news sources that 15 Chinese medical workers were infected with the coronavirus.

Who Will Benefit the Most?

As most manufacturers are already operating at close to their optimal utilisation rates (close to 90%), a sudden surge in demand will likely push ASPs higher, which will lead to an improvement in the manufacturers’ margins. We believe that Top Glove (BUY) is likely to benefit the most as the company is only operating at around 85%. However, it is still too early to determine whether the current outbreak would spur demand similar to SARS in 2002/03. China currently accounts for 2% of Malaysian rubber glove sales, but the incremental sales (if any) are more likely to arise from the other regions, which could be impacted by the spread of the virus. Thailand, Japan and South Korea have reported confirmed cases of the coronavirus.

What to Look Out For?

The WHO will make its decision on Wednesday as to whether to declare the current outbreak as an international public health emergency similar to what they did with the swine flu and Ebola. We believe that there could be a potential spike in glove demand if the current outbreak is declared a pandemic or epidemic. However, our current Overweight call on the sector is not dependent on the incremental demand from this outbreak. We are expecting stronger earnings growth in CY20E, supported by stronger demand and a recovery in profit margins.

Source: Affin Hwang Research - 22 Jan 2020