• Maintaining Overweight on the sector, as we believe share prices will continue to re-rate on the back of positive earnings revisions; Top Glove and Hartalega are our preferred picks for the sector
• We believe that the recent increase in volatility in share prices has less to do with retail investors but is likely caused by the selling from local institutional investors
• We think that it is still too early to ignore the earnings of 2020/21, as there still could be earnings surprises, as ASP is still increasing

Retail investors might not be the cause of the recent volatilty

There is a common belief that the recent surge in volatility in the rubber glove share prices was due to profit-taking by retail investors, as the recent downgrades by some of our peers may have swayed overall sentiment. While there is no doubt that the sector share prices have benefited from an increase in overall retail-investor participation, we believe that the recent spike is more likely to be driven by the actions of institutional investors. Local institutional investors were net sellers, but retail investors were net buyers in the overall market, on the 3 recent days (8-10 September) when the Big-4’s market cap declined by 22% (RM34bn). We believe this overall market statistic is a relatively good indicator, as trading value of the Big4 accounted for around 35% of the overall value transacted on those days.

Too early to ignore earnings and upside of 2020/21

There is no doubt that the current rate of ASP hikes is likely to sustain, given that the spike in demand is mainly driven by COVID-19, and the WHO believes that a vaccine should be available by 2H21. Although earnings are likely to peak by then, we believe that investors should not ignore the profits and base their valuations on 2022 profits, as there could still be upside risk to the current earnings, as ASPs are still trending higher in tandem with the increase in new COVID-19 cases. Apart from that, there is also a high likelihood that the glove makers could increase their dividend payout beyond the current 45-60%, given that most of these companies are generating excessively strong positive operating cash flows.

New players will have a hard time penetrating the market

Due to the strong demand for rubber gloves, there will be more companies entering the field. However, we believe that not all of these players will be able to compete with existing players, as getting the required approvals from both the US and the EU is not an easy task and will take them at least 2-3 years. A similar situation did occur during H1N1 (2009-2010), which resulted in a spike in the number of companies being put under the red list by the FDA due to defects. Likewise, the EU will also be implementing a more stringent regime under the MDR from the current MDD starting 26 May 2021, hence making it more challenging for the new players to penetrate both the US and EU markets, which make up more than 60% of global demand.

Source: Affin Hwang Research - 22 Sept 2020