• Keep NEUTRAL, new TP of MYR0.85 from MYR0.88, 8% downside. We expect gradual improvements in the market dynamics to offer favourable tailwinds for the local glove manufacturers amid the continuous challenge in raising ASP. With client inventory depletion expected to come towards its end by 1H23, we expect a better order consistency moving into 2H23. Our call and TP on Supermax Corp incorporates 15% ESG discount (from 11% previously) after we updated our ESG scoring framework.

• ASP. Industry-blended ASP has stabilised at USD20 per 1,000 pieces – in line with our expectation that ASP may have already bottomed. Positively, the local and regional glove makers collectively increased their ASPs since the start of the year, of which the price gap between Chinese and local glove makers had narrowed to USD3 (from USD5).

• Demand. Malaysia glove export rebounded 8% and 10% MoM during Feb and Mar. This is the second consecutive MoM increase following -14% decline in Jan – suggesting demand for gloves are gradually gaining traction. Nevertheless, we understand that customers are still reluctant to place bulky orders, and advance orders have been shortened to 1 month from pre-COVID-19 period’s 3 months. Industry players are expecting client inventory rationalisation by 2H23 – underpinned by glove inventories built up since 2020 are reaching expiry dates (typical shelf life of 3-5 years). Hence, we maintain our 2023 year-end demand target at 415bn pieces, representing 4% YoY growth from 2022.

• Supply. We expect muted-to-negative industry supply growth for 2023, in view that glove makers are contemplating phasing out obsolete production lines. We expect capacity rationing exercises (given the low industry utilisation rate of 30%-40%) that could lead to better operating efficiencies, as the obsolete plants are less energy and manpower efficient.

• Earnings revision and valuation. We maintain our earnings estimates. We took this opportunity to downgrade SUCB’s ESG score to 2.25 from 2.44 after lowering its G score (E and S scores unchanged) – in view of the recent dispute between the founder and the executive director, who happens to be the former’s daughter.

• Key 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 represent the upside/downside risks.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for more details.

Source: RHB Research - 15 May 2023