• Upgrade to NEUTRAL from Underweight; Top Picks: Hartalega (HART) and Kossan Rubber (KRI). We expect gradual improvements in the industry demand-supply dynamics by 2H23 with a more disciplined approach by industry peers in scaling back new capacity plans. ASPs may soon bottom out too, as we gather that China peers recently started talks with clients to raise ASPs. A weaker-than-expected demand outlook leading to sub-optimal industry utilisation may continue to haunt glove makers if the pace of inventory drawdowns disappoint.

• Cost pass-throughs came into the picture. Industry-blended ASPs were said to have moderated slightly to USD20-21/1,000 pieces from c.USD20- 22 during the previous quarter. The pace of ASP declines stayed at low single-digits, which also suggests that ASPs may have bottomed already. According to our channel checks, Blue Sail Medical was said to have revised its ASPs recently to USD15-20 from USD14-15. We also observed domestic glove makers engaging in cost pass-throughs, with HART already raising ASPs twice this year while Top Glove (TOPG) raised its ASPs in Oct 2022.

• Demand remains patchy. According to our channel checks, there was a one-off uptick in client orders in Dec 2022 in association with the National Health Service tender by the UK Government. Nevertheless, recent orders received were rather patchy, as customers are still reluctant to place bulky orders. That said, Malaysia’s rubber glove exports tumbled 14% MoM to 39,479.6 tonnes in January following an 11% spike in Dec 2022. Industry players are still unable to ascertain the timing of de-stocking activities from glove distributors. We gather that the latter are expecting inventory levels to deplete over the next six months. We maintain our 2023 year-end demand target at 415bn pieces.

• Supply. Post Dec 2022’s results, we lower our 2023 industry supply assumptions to 397bn from 430bn, assuming that glove makers phase out their obsolete production lines. We expect the disciplined approach in commissioning new production lines could provide a temporary cushion to glove makers’ profitability, taking into account the current low industry utilisation rate of 30-40%.

• Upgrade to NEUTRAL. We expect demand to only pick up by 2H23 under our bull case scenario. Following the recent quarterly results, we upgraded our individual company ratings to NEUTRAL for HART, KRI, TOPG, and Supermax (SUCB). Key considerations for our sector upgrade were underpinned by rationalised capacity commissioning, normalised cost pressures by 2H23, and re-initiated cost pass-through mechanisms (collectively carried out by local and Chinese glove makers).

• Sector risks. Increase/decrease in gloves ASPs, slower-/faster-than- expected capacity expansions, higher-/lower-than-expected utilisation rates, and lower-/higher-than-expected raw material prices.

Source: RHB Research - 27 Mar 2023