Maintain OVERWEIGHT. Rubber glove stocks under our coverage have gone through share price volatility over the past months on concerns that investors are looking at earnings beyond FY21. Based on our analysis presented in this report, we can conclude that: (i) ASP is going to be stubbornly high at least till mid 2021 which supports exponential QoQ earnings growth over the next few quarters, (ii) tight supply situation following nitrile raw material and glove formers shortage will lead to longer production lead time, and (iii) 2020 to 2022 estimated incoming capacity are indicating demand to continue outpacing supply. All in, we are excited with the sector prospects over the next few quarters due to supply tightness amid strong demand. Specifically, industry trend of rising weekly and monthly ASPs is expected to boost bottom-lines. Amplifying the growth are restocking and inventory-building activities creating a supernormal demand spurt leading to acute supply shortage, due to the prolonged pandemic. We have OUTPERFORM calls on HARTA (OP; TP: RM26.22); KOSSAN (OP; TP: RM17.10) SUPERMX (OP; TP: RM12.75) and TOPGLOV (OP; TP: RM10.68). Our Top Pick for the sector is HARTA (OP; TP: RM26.22) since ASP catchup is expected to be reflected in 3Q 2020 onwards implying strong earnings growth.

ASPs still rising and prospects are looking bright. We highlight that industry ASP for months of Sept to Dec is rising monthly by between 10% to 30% indicating supply tightness have further propelled ASP higher. We highlight that TOPGLOV’s ASP for months of Sept/Oct/Nov is higher by 30%/30%/15% m-om further indicating supply tightness. With a diverse customer base, we expect TOPLGOV to have better pricing power and hence potentially above-average industry prices. We expect hike in raw material prices due to supply constraints which flows to higher ASPs. We do not expect supply to flood the market at least in the first three quarters of 2021 despite growing concern amongst investors that a number of Malaysian listed companies’ have announced new ventures into the gloves manufacturing segment.

2020 to 2022 estimated incoming capacity indicates demand > supply keeping ASP high. We have done an analysis to quash any concerns of oversupply. In anticipation of higher demand due to the pandemic, stock piling and new users following the pandemic, players are raising capacities to meet the surging demand. Our analysis (see table overleaf) suggests that acute supply shortage and supernormal demand could persist over the next two years. Interestingly, players are getting orders for new users that include airlines, restaurants, retail apparel chains and hotel operators. If we look at the capacity expansion numbers in isolation, it looks overwhelming. Juxtaposed against the annual demand growth and new pandemic-led demand, the additional capacity is not a concern.

Limited raw material and glove formers to further cap oversupply concerns and underpin sustained high ASPs. We expect hike in raw material prices due to supply constraints to present a potential potent combination for higher ASPs. We do not expect supply to flood the market at least in the first three quarters of 2021 despite growing concern amongst investors that a number of Malaysian listed companies’ have announced new ventures into the gloves manufacturing segment. Furthermore, the typical timeline to complete a plant takes 12-15 months from land acquisition to obtaining approvals in terms of audit checks by clients and regulatory approvals to commissioning the first line.

Nitrile gloves' market share to gain further momentum with potential 30% growth. Based on our analysis, we expect nitrile gloves to continue growing and expropriating market share from latex gloves. The growth in nitrile segment is evident. For illustration purposes, going forward, assuming nitrile:latex breakdown of 80:20 (currently at 67:37) and based on estimated global demand of 324b pieces in 2020 (forecast for 2019 is 300b pieces and assuming 8% growth rate in 2020), this implies nitrile growth rate of 20% or an additional 42b pieces from switching to nitrile gloves.

HARTA (OP; TP: RM26.22). We expect Hartalega’s ASP to play catch up and expect subsequent quarterly earnings to rise exponentially. We like Hartalega for: (i) its solid management, (ii) constantly evolving via innovative products development, and (iii) its booming nitrile gloves segment.

TOPGLOV (OP; TP; RM10.68). We highlight that TOPGLOV’s ASP for months of Sept/Oct/Nov is higher by 30%/30%/15% mo-m further indicating supply tightness. With a diverse customer base, we expect TOPLGOV to have better pricing power and hence potentially higher-than-expected industry average prices.

Source: Kenanga Research - 4 Oct 2020