Demand still growing. We think that the global demand for rubber gloves remains positive, with an expected annual growth rate of 8% p.a., mainly driven by rising global public awareness of hygiene standards. Even without imputing any 'unpleasant catalysts' (i.e. pandemic breakouts), we think the resilient demand for gloves is mainly due to the following: i) post-H1N1 breakout, consumers have continued using gloves after having gotten used to them, ii) the stringent hygiene requirements in the developed nations, and iii) escalating hygiene awareness in developing countries.

Operating environment favourable for glove makers. We think that the operating environment is in favour of glove makers and thus, we remain upbeat on the sector. This is mainly due to: i) the demand for rubber has stayed sluggish due to the slow recovery in global vehicle sales, and therefore, the price of latex will remain weak, ii) weakening crude oil prices have led to lower butadiene prices and hence, lower nitrile prices, and iii) the stabilised USD/MYR exchange rate. We still think that the increment in labour costs and gas prices may not significantly impact the earnings of the glove makers.

Total capacity to hit new highs in 2013 and thereafter. The Big Four under our coverage - Top Glove, Supermax, Kossan and Hartalega - have rolled out their expansion plans to increase their production capacities and achieve better product mixes to capture larger shares in both the natural rubber and nitrile gloves markets. By 2013, Top Glove is expected to hit a total capacity of 44.8bn pieces per annum and focus on expanding its nitrile production; Supermax plans to produce 21.5bn pieces p.a. and has indicated plans to achieve a product mix of 52% in nitrile and 48% in natural rubber latex; and Kossan aims to achieve an annual capacity of 14bn pieces (it already has a balanced product mix). Meanwhile, Hartalega is still the largest nitrile glove producer, with an annual capacity of 11.2bn pieces, and is projected to reach total capacity of about 13.5bn pieces a year by 2013 upon the completion of the company's Plant 6. In short, by 2013, there will additional annual capacity for at least 14bn pieces from the Big Four, and we believe this figure is growing. Besides the capacity increase, Top Glove has ventured upstream into rubber plantations to secure a stable supply of raw materials. Meanwhile, Supermax is focusing on expanding its downstream distribution network, Kossan is putting efforts into niche market products that might fetch better margins, and Hartalega is creating more value through production technology innovation.

Market may continue to consolidate. In 2012, we saw two listed rubber glove companies being taken private. We think that the market will consolidate further as the smaller players are losing out to big companies in terms of capacity and efficiency as well as in terms of technology to produce better quality products.

Maintain OVERWEIGHT. We are maintaining our OVERWEIGHT recommendation on the sector due to the following factors: i) the steady easing of raw material prices, ii) USD/MYR remaining competitive and stable, iii) global demand remaining positive, and iv) escalating costs may not significantly affect glove makers. Top Glove and Hartalega have outperformed their peers while Supermax is still lagging and currently trading at an undemanding PE of 10x. This makes Supermax our Top Pick, with a FV of RM2.70, pegged to a 13x FY13 PE.

Source: OSK