With the recent vaccine news, investors are concerned about what this means for glove demand. Macquarie Equities Research (MQ Research) said the US FDA indicated shortages of medical gloves in the U.S., suggesting demand and average selling price (ASP) trend to remain buoyant in the near term. MQ Research believes the recent pullback in share prices is an opportunity to accumulate.

Event

• MQ Research was asked by investors “have they seen a turning point in glove demand or ASP trend due to the vaccine news?” While Russia approved its vaccine on 11 Aug, MQ Research believes demand should remain buoyant in the near term due to limited vaccine manufacturing capacity and various concerns on clinical trials. In addition, the first-ever published list of medical supply shortages by US FDA has reiterated MQ Research’s investment thesis that market continues experiencing severe glove shortages. Hence, it believes recent pullback in share prices is an opportunity to accumulate.

Impact

• What has market priced in? In MQ Research’s view, the market has priced in the recent vaccine news – the approval of Russian vaccine “Sputnik V’, which comes after less than two months of human trials, and promising trial results of a Chinese vaccine. Hence, the market has started to question glove demand and overall ASP trends going forward.
• What is MQ Research’s view? Undoubtedly, news on vaccines will continue giving volatility on glove share prices. MQ Research, however, reiterate its view that glove demand to remain strong into 1H21 given that 1) WHO and several countries such as the United States and Germany are striking a cautious note on COVID-19 vaccines; 2) Russia vaccine manufacturer, Sistema currently only has capacity of 1.5m doses of vaccine per year, which is not sufficient to supply worldwide; 3) resurgence of COVID-19 in Hong Kong, Japan and South Korea, suggesting countries’ healthcare systems will continue to increase their personal protective equipment (PPE) stockpile; and 4) the flu season will hit the US in Oct, which could bring a ‘double barrel’ outbreak there, and flu activity usually peaks between December and February. On top of that, the US healthcare system is already facing medical glove shortages now. Given that demand remains robust and market suppliers continues to have tight supply, MQ Research believes manufacturers will have pricing power to at least sustain the high ASP until 1H21. Additionally, Malaysian manufacturers continue to see strong spot order enquiries and are looking to raise ASP by 10%-15% MoM for September deliveries, indicating pricing power is still skewed towards manufacturers.

Outlook

• MQ Research reiterates its overweight stance on the Malaysia rubber gloves sector. MQ Research believes glove sector earnings and valuation could remain elevated in the near term, supported by current market shortages. Hence, MQ Research views the recent pullback in share prices as an opportunity for investors to accumulate. Its top pick is Top Glove (TP: RM30.40) on benefitting from higher capacity additions and leading ASP increase than the peers.

12-month Target Price Methodology

• TOPG MK: RM30.40 based on a PER methodology
• HART MK: RM19.70 based on a PER methodology

Source: Macquarie Research - 19 Aug 2020