• SELL, TP drops to MYR0.50 from MYR0.75, 25% downside. While the negatives are in the price, we believe risks for Supermax remain tilted towards the downside – since the industry is now operating at sub-optimal levels, on top of a further round of share price corrections likely related to Top Glove (TOPG MK, SELL, TP: MYR0.49) being potentially excluded from the KLCI (with passive fund rebalancing post index re-constitution). This report marks the transfer of coverage to Oong Chun Sung.

• ASP back to pre-pandemic levels. As per our channel checks, local glovemakers should not engage in a price war with their China counterparts, even though the latter is selling gloves at c.USD19 per 1,000 pieces (local ASP: USD24 per 1,000 pieces as of August, marking a difference of 21%). Note that gloves from China are still subjected to a 7.5% import tariff from the US – although this is expected to expire in end-November. There could be a potential downside risk of ASP erosion, if the United States Trade Representative abolishes the tariff on Chinese glove imports.

• Demand unlikely to pick up yet. The inventory levels of some prominent glove distributors were still high as of June (higher than pre-pandemic levels by c.30-50%) despite seeing some signs of depletion recently. We think that the glove distributors’ inventory drawdown may take at least a year before easing to pre-pandemic levels – taking into consideration normalised demand and the lofty inventory levels of the glove distributors (inventory on hand could still last for another six months). As such, we expect global demand growth to remain sluggish, at 4% and 6% for 2023 and 2024.

• Supply. Industry supply remains elevated – estimated at 429bn pieces by end-2022, with the Malaysian top four producers accounting for 47% of global market share according to effective production capacity (or 201.7bn pieces). This also builds in our assumption of a delay in capacity commissioning towards 2H23, given the current low industry utilisation rate of 50-60%. Encouragingly, the top four players’ inventories had depleted by 9% (on average) in the recent Jun/Aug 2022 quarter. However, the percentage of finished goods vs total inventories remains elevated, as per data from the companies’ annual reports.

• Earnings revision and valuation. We cut FY23-24F revenue by 28% and 20%, and corresponding net profit by 57% each year. This comes after we lowered our assumptions on its utilisation rate and capacity expansion, even while we expect raw material costs to pick up ahead. Our DCF-derived TP of MYR0.50 also has a 13% ESG discount to our intrinsic value built in.

• Key upside risks: An increase in glove ASPs, faster-than-expected capacity expansion, higher-than-expected utilisation rates, and cheaper- than-estimated raw material prices.

Source: RHB Research - 28 Sep 2022