We reiterate our UNDERWEIGHT rating on the sector. We expect the sector’s operating environment to remain challenging, plagued by overcapacity, predatory pricing by certain overseas players, weak demand and the high cost of inputs. On a slightly brighter note, further decommissioning of older production facilities locally should help to ease supply pressure, at least bringing about more rational competition amongst local players. We avoid all names under our coverage, namely HARTA (UP; TP: RM2.33), KOSSAN (UP; TP: RM1.48), TOPGLOV (UP; TP: RM0.75) and SUPERMX (MP; TP: RM0.84), as tepid profitability does not support the current lofty valuations.

Still challenging operationally, lofty valuations. We reiterate our view that the challenging and competitive business landscape currently faced by the sector will persist throughout 2024. While some players have returned to the black, the tepid profitability does not support the lofty valuations. The industry will continue to face massive over-supply, predatory pricing by certain overseas players (i.e. selling below cost over an extended period of time to eliminate competitors), weak demand and the high cost of inputs such as nitrile butadiene rubber and latex.The industry expect volatile quarterly sales as distributors and buyers sees no urgency to place sizeable orders or hold substantial stocks as supply is plentiful and readily available. Overall, the industry is cautious about raising prices (to fully pass on the higher input cost) given the still competitive landscape in the industry. This falls in line with our view that raising ASP over the immediate term will be challenging. With a low industry utilisation of about 40%, this is without a doubt still a buyers’ market.On a slightly brighter note, further decommissioning of older production facilities locally should help to ease supply pressure, at least bringing about more rational competition amongst local players.

High input cost in 2QCY24. Moving into 2QCY24, we expect input latex price to rise because of low production during the wintering months (between Dec till May), while nitrile butadiene rubber prices have moved up since 4QCY23 (YTD CY24: +8%). Overall, all players are mindful that the prospect of raising ASP further in subsequent quarters is challenging due to the current massive overcapacity situation, with only a handful of customers agreeing thus far. Due to the current competitive pressure emanating from massive oversupply and low industry utilisation averaging 40%, customers can walk away and choose to buy from other players whenever there is an attempt to raise prices. We gathered that Chinese manufacturers are still selling at below USD20 per 1,000 pieces, at USD16−18 per 1,000 pieces, which means any attempt by Malaysian producers to raise ASP are likely to result in market share losses.

Oversupply to persist throughout CY24. Based on our estimates, the demand-supply situation will only start to head towards equilibrium in CY26 when there is virtually no more new capacity coming onstream while assuming the global demand for gloves is to rise by 15% underpinned by rising hygiene awareness. MARGMA projects global demand for gloves to grow by 12% to 15% annually from CY24, following an estimated 25% contraction to 300b pieces in CY23. We project the demand for gloves to rise by 30% in CY24 to 390b pieces on restocking before moderating to its organic growth of 15% annually. This will still result in an excess capacity of 212b pieces in CY24. The overcapacity still persists which means low prices and depressed plant utilisation will continue to plague the industry in CY24. Our CY24 forecasts assume: (i) an ASP per 1,000 pieces of USD20, similar to CY23, and (ii) an average plant utilisation of 45% vs. an estimated 40% in CY23. In the meantime, we do not have any top pick for the sector.

We raise our call for SUPERMX to MARKET PERFORM from UNDERPERFORM following the recent weakness in its share price while maintaining UNDERPERFORM for TOPGLOV, KOSSAN and HARTA. We do not have any top pick for the sector.

Source: Kenanga Research - 3 Apr 2024