• Top Picks: Hartalega (HART) and Kossan Rubber (KRI). The recovery of the Malaysian rubber glove industry remains uneven, as indicated by April’s weak export data. This implies that demand has still not caught up to industry expectations of inventory normalising to pre-pandemic levels. Nonetheless, the gradual improvement in market dynamics should offer a respite for local glove manufacturers. Key downside risks include weaker-than-expected demand (dragged by excessive supply capacity) and higher-than-expected operating costs. Maintain NEUTRAL on sector.

• ASP. Industry blended ASP stabilised to USD20-21 per 1,000 pieces as ASPs began improving in 1Q23. On a positive note, local and regional glove makers are still keen to pass on their cost increases to customers, to ensure their own long-term sustainability. The quantum of ASP hikes varies across different players, so we believe that glove makers will not likely raise prices aggressively, as this would lead to them sacrificing sales volume. In the meantime, the price gap between Chinese and local glove makers has narrowed to USD3, from USD5 previously.

• Demand. Malaysia’s glove export volumes contracted 35% MoM in April, after growing by 10% MoM and 8% MoM in February and March. A similar trend was seen in China, where the export volume fell by 17% MoM. We expect the demand for gloves to pick up gradually in 2H23, as client inventory levels continue to decrease – on top of the fact that their glove inventories (that were stockpiled since 2020) are approaching their expiry dates. Rubber gloves have a typical shelf life of 3-5 years. Given the lack of clarity on demand for 2023F, we now expect global demand to contract by 5% YoY (2022: -19% YoY), to 379bn pieces.

• Supply. We expect negative industry supply growth of c.53bn for 2023 – with 40bn less pieces from Top Glove (TOPG) and 13bn less pieces from Hartalega (HART). Glove makers were said to have phased out their obsolete production line to curtail cost pressures. Our industry annual supply assumption is now 370bn, and capacity rationing (given the industry’s low utilisation rate of 30-40%) could lead to better operating efficiency; as the obsolete plants are less energy- and manpower-efficient.

• Our unchanged NEUTRAL weighting is based on the expectation of costs normalising by end-2H23 (lower gas tariff rates) and the implementation of cost pass-through initiatives. However, our outlook remains conservative as we have yet to see further clarity on demand for 2023. We expect the better demand visibility and favourable cost outlook in 2024 to provide some headroom for margin expansion. That said, we expect glove makers’ profitability to recover YoY by end-2024 (resulting in either narrow losses to single-digit margins vs losses recorded in 2023F). The consistency of order replenishment and gradual improvement in industry utilisation rates will be key re-rating catalysts for the near term.

• Upside/downside risks are: Increase/decrease in glove ASPs, slower- /faster-than-expected capacity expansion, higher-/lower-than-expected utilisation rates and lower-/higher-than-expected raw material prices.

Source: RHB Research - 28 Jun 2023