In gloves we trust

• Maintaining Overweight on the sector, as we believe share prices will continue to re-rate as earnings continue to deliver; Top Glove and Hartalega are our preferred picks for the sector
• Despite hitting record profits in 2Q20, the glove companies are still guiding for a stronger 2H20 as ASP is still on an upward trajectory
• Share prices have taken a breather due to the news on the vaccines, but we believe it will take some time before vaccines will be made available to the general public, hence demand will likely remain elevated

Earnings have yet to peak

Although the glove makers under our coverage reported record profits in 2Q20, we believe that they should be able to deliver a stronger performance in 2H20, as they have guided that they are able raise selling prices by around 10%-50% qoq in 3Q20. Given that the current lead times for normal orders have stretched to more than 18 months, we believe that the elevated ASPs can at least sustain until June 2021. Given that new capacity from the new entrants is only likely to start in 2H21, and existing players are already operating at utilization rates of >95%, the overall supply is still insufficient to meet with current demand. The reopening of economies around the world has also spurred demand from the non-medical sectors, like F&B, Retail and Aviation.

Too early to be worried about vaccines

We are not surprised that the share prices for the glove sector have reacted negatively to the news of COVID-19 vaccines. Although the US CDC plans to start distributing vaccines to states starting in November 2020, the overall availability will be relatively scarce and would only be made available to healthcare professionals, essential workers, and those in the high-risk group. Notably, these vaccines have yet to complete Phase 3 trials, and hence it is highly unlikely that they will be made available to the general public. Even with all the healthcare workers immunized against the virus, the usage of gloves is still needed to prevent cross contamination among patients. As such, we are not overly concerned about the impact of vaccines on demand just yet.

New competition unlikely to be a threat for now

Apart from existing players who are in the midst of expanding their capacity to benefit from the current shortage, there are also new players who have expressed their interest in expanding into the sector as well. Based on their plans, most of these new capacities are only likely to start producing by 2H21. Although the FDA does not require the new manufacturers to acquire a 510(k) premarket notification (regulated under Class 1 reserved medical devices) for now, due to the ongoing pandemic, they would still be required to obtain such qualification post the pandemic. We believe these gloves might not be well received by the medical sector, but certainly will be able to meet the needs of the non-medical sector, albeit at a lower price.

Source: Affin Hwang Research - 3 Sept 2020