Kenanga Research & Investment

Gloves - 2QCY22 Report Card: Flooded With Capacity

kiasutrader
Publish date: Wed, 07 Sep 2022, 09:06 AM

We reiterate UNDERWEIGHT on the sector. There was a slight sequential improvement in the recently concluded 2QCY22 results season (as against expectation), but earnings’ undertone remained weak on declining ASP and weakening demand. Our supply-demand forecasts are pointing towards excess capacity that will take at least two years to be completely filled. Meantime, players will have to brace themselves for low utilisation which will inevitably lead to depressed ASP. Adding salt to the wound is customers’ reluctance to commit to sizeable orders on expectations of further decline in product prices. Following the 2QCY22 results season, with the exception of SUPERMX (UP; TP: RM0.62), we cut our assumptions and earnings forecasts for all glove makers under our coverage universe, namely, HART (MP; TP: RM1.68), TOPGLOV (UP; TP: RM0.65) and KOSSAN (UP; TP: RM0.85).

2QCY22 results hit by ASP erosion and pedestrian demand growth. Slight sequential improvement in the recently concluded 2QCY22 results season was seen with 25% and 75% coming in above and below our forecasts, respectively, versus all below in 1QCY22, but the sector is still a long way from seeing the light at the end of the tunnel (see table on Page 2). Generally, all players were hit by lower ASP, sales utilization and crimped margins. The recent round of results reported by glove makers suggested that glove makers’ earnings have yet to bottom with ASP expected to continue declining, exacerbated by low plant utilization averaging 50-60% which is likely to persist over the medium term amidst intense competition. The situation is further aggravated by the softening demand as evident by the low utilization rate of glove players leading to oversupply putting further pressure on ASP coupled with customers’ reluctance to commit to sizeable orders as they expect selling prices to ease further.

Oversupply to persist. We expect ASP to remain in the doldrums in 2H 2022. As a result of massive capacity expansion by incumbent players as well as new players influx during the pandemic years — enticed by the then super fat margins that had since evaporated — we estimate that the global glove manufacturing capacity has jumped by 22% to 511b pieces in 2022 (see chart on the following page). On the other hand, as more countries come out the other end of the pandemic, we project the global demand for gloves to ease by 10% in 2022 to 387b pieces (partly also due to the destocking activities along the distribution network). This will result in an excess supply of 124b pieces (assuming, hypothetically, capacity utilisation is maximised). In 2023, we estimate that the global glove manufacturing capacity will surge by another 16% to 595b pieces (as more capacity planned during the pandemic years finally comes online) while the global demand for gloves shall resume its organic growth of 15% annually (taking our cue from MARGMA’s projection of 10-15% growth in global glove demand yearly), resulting in the excess supply ballooning further to 150b pieces. Based on our estimates, the demand supply situation will only start to head towards equilibrium in 2025 when there is virtually no more new capacity coming on-stream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness.

Post 2QCY22 results release, we cut our assumptions on ASP and utilisation for TOPGLOV, KOSSAN and HARTA.

HARTA (MP; TP: RM1.68): FY23F/FY24F net profit were cut by 17%/31%; (i) FY23F – ASP cut to USD22 from USD23 per 1,000 pieces; utilisation to 65% from 70%, and (ii) FY24F – ASP cut to USD20 from USD21 per 1,000 pieces and utilisation to 65% from 72%. Correspondingly, we downgraded our TP from RM2.90 to RM1.68 based on 21x CY23F EPS (previously 25x) in line with its bigger peers’average.

TOPGLOV (UP; TP: RM0.65). FY23F net profit was cut by 11% as we reduced utilisation rate assumption from 74% to 68%. Correspondingly, TP is cut from RM0.80 to RM0.65 based on 21x FY23F EPS, in line with bigger peers’ average.

KOSSAN (UP; TP: RM0.85). FY22F/FY23F net profit were cut by 17%/15% as we cut our ASP assumption from USD23/21 to USD22/20 per 1,000 pieces and reduced utilisation rate from 78%/81% to 70%/75%. Correspondingly, we downgraded our TP from RM1.03 to RM0.85 based on 14x FY23F EPS, 30% discount to peers’ average to reflect its smaller market capitalisation.

SUPERMX (UP; TP: RM0.62). We kept earnings forecasts and TP of RM0.62 unchanged based on 13x FY23F EPS, at 30% discount to peers’ average largely to reflect its smaller market capitalisation.

Source: Kenanga Research - 7 Sept 2022

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