The Malaysian Rubber Glove Manufacturers Association (MARGMA) hosted an industry briefing, discussing the prospects and challenges of the rubber glove industry. MARGMA speakers are of the view that the current shortage will be prolonged until 2H21, longer than Macquarie Equities Research (MQ Research) expected. MQ Research maintains Outperform on the sector, with Top Glove (target price: RM30.40) as its top pick.

Event

• MARGMA hosted an industry briefing with sell-side analysts and fund managers. The speakers, President of MARGMA Mr Denis Low and Vice President Dr S. Supramaniam, discussed the prospects and challenges of the rubber glove industry. Both speakers pointed out that current shortages are acute and will likely be prolonged until 2H21, which is longer than MQ Research expected. To recap, Macquarie views the shortages lasting until 1H21 with the assumption that a vaccine will be available in 1H21.

Impact

• Reaffirmed global demand growth. MARGMA expects COVID-19 to drive global glove demand to grow 20%-25% to a total of 330bn pcs in 2020E, which is in line with Macquarie’s view. Both speakers reaffirmed that the current shortages are acute and will likely to be prolonged until 2H21. MQ Research notes that most of the demand is skewed towards nitrile gloves given that the biggest rubber glove consumer, the United States, prefers to use nitrile gloves due to the fear of Type I latex protein allergies. Hence, this has widened the price difference between nitrile and latex gloves from ~30% to ~60%. This suggests to MQ Research that the company with a higher nitrile mix and more flexible pricing will experience a higher average selling price (ASP) and stronger margin expansion.
• View of post-COVID-19 ASP. This has been one of the key concerns of investors. MARGMA thinks the overall ASP will normalise post the pandemic, however, it is unlikely to return to pre-COVID-19 levels given likely higher glove consumption post COVID-19. Historically, with higher glove demand, manufactures have had better negotiating powers with customers. MQ Research calculates every 1% increase in ASP would raise sector earnings by 4%-5%.
• Chinese players are unlikely to be a long-term threat to the Malaysia glove industry, MARGMA believes. This topic is also one of the key concerns of investors since Blue Sail and Intco Medical are looking to expand aggressively in the next 3-5 years. MARGMA highlighted that Malaysia still has a better cost advantage in terms of energy and labour costs. They expect natural gas tariffs to drop in 2021 following lower international gas pricing. MQ Research calculates every 5% drop in the natural gas tariff would lift the sector earnings by 2-3%, assuming no cost pass through.

Outlook

• MQ Research reiterates its overweight stance on the Malaysia rubber gloves sector as it views gloves as staples within the healthcare industry and COVID-19 driven demand continues to drive sector earnings growth until 1H21E. MQ Research’s top pick is Top Glove (target price: RM30.40) on wider customer exposure and higher capacity additions in 2020-2021.

12-month Target Price Methodology

• TOPG MK: RM30.40 based on a price to earnings ratio (PER) methodology
• HART MK: RM17.00 based on a PER methodology

Source: Macquarie Research - 15 Jul 2020