• Top Picks: Hartalega (Harta) and Kossan Rubber (KRI). The recovery trend remains to be seen for the glove makers following July’s weaker export numbers. This could potentially mean demand is still failing to catch up with industry expectations, as inventory is supposed to normalise to pre pandemic levels. Nonetheless, the gradual market dynamic improvements should offer respite for the local glove manufacturers. Key downside risks include a weaker-than-expected demand (dragged by excessive supply capacity) and higher-than-expected operating costs. Remain NEUTRAL.

• ASPs. Industry-blended ASPs stabilised at USD20-21 per 1,000 pieces, largely unchanged from 1Q23’s numbers. Attempts to raise prices were hamstrung with obstacles, given the easing of raw material prices. According to our channel checks, Chinese glove makers’ ASPs were unchanged from 1Q23 levels at USD15-17 per 1,000 pieces. Nevertheless, we think the stabilised ASP trend should bode well for glove makers in the near term, as an aggressive price hike could compromise volumes sold, given that customers remain price sensitive.

• Demand. Malaysia’s glove exports volume contracted 1% MoM in July following a 7% MoM decline in June. This is 2023’s first two consecutive months of declines in glove exports. During 2Q23, glove exports tumbled 17% QoQ vis-à-vis 1Q23’s 0.3% QoQ growth. China’s glove exports lowered by 1% MoM in July vs June’s 11% growth, with 2Q23 export growth at 2% (1Q23: -1%). As demand continues to be choppy in the near term, we now expect meaningful recovery to only happen by 2H24, as the inventory destocking pace comes in slower than expected. We now trim our 2023 global glove demand assumption to -7% from -5% YoY with a demand target of 371bn. This should be followed by 4% growth in 2024, in our view.

• Supply. We expect 2023 industry supply to contract by 50.7bn YoY in view of cuts of 40bn, 13bn, 3bn, and 5bn from Top Glove (TOPG), Harta, KRI, and Supermax Corp (SUCB). This will be offset by 3bn in newly added capacity from Chinese glove makers like Intco Medical Technology and 7.3bn in planned capacity expansions from Thailand. Our 2023 industry annual supply assumption is now 372bn – we expect the capacity rationing exercises, given domestic plants’ low utilisation rate of 30-40%, could lead to better operating efficiencies, given that the obsolete local plants are less energy and manpower efficient.

• Maintain NEUTRAL. Our sector weighting is justified based on the expectation of a normalised cost outlook by 2H23 (ie lower gas tariffs) and better operating efficiencies post capacity rationing exercises. However, we choose to remain conservative, as we have yet to see demand clarity in 2023. Moving forward, we expect the improvements in demand visibility, coupled with a favourable cost outlook in 2024, to offer headroom for margins improvement. That said, we expect glove inventory rationalisation to materialise by 2H24, which would result in a better margins outlook. We think the consistency of order replenishments and gradual improvements in industry utilisation rates will be key re-rating catalysts in the near term.

Source: RHB Securities Research - 20 Sept 2023