• Stay OVERWEIGHT; Top Picks: Riverstone, Hartalega, and Kossan Rubber. Industry demand and supply dynamics are showing recovery signs, as April- May order volumes look to have picked up sturdily. We think further gas tariff normalisation and ASP trend stabilisation could eventually propel profitability in 2024 and now expect a meaningful demand recovery trend by 2H24 before capacity expansions recommence by 2025/2026. Key downside risks include weaker-than-expected demand, inability to pass on costs to customers, and higher-than-expected operating costs.

• ASP. Industry-blended ASPs have held up at USD20/1,000 pieces from USD19-20 previously (although nitrile ASPs were relatively lower at USD17- 18 vs latex gloves’ USD20). According to our channel checks, Chinese glove makers’ ASPs are expected to increase to USD16-17 from USD15-16. The continued narrowing of the ASP gap means the prolonged price war is approaching its tail-end, in our view, which ultimately allows Malaysian manufacturers to compete via product quality rather than price.

• Demand. Malaysia’s glove export volumes spiked 6% MoM (+2% YoY) in February, continuing its positive MoM growth for two consecutive months. Export value grew by 7% MoM (11% YoY), of which MoM growth surpassed export volume growth, indicating that cost pass-throughs are picking up gradually. Meanwhile, China glove exports contracted by 15% MoM in February following a 4% MoM growth in January. All in, we maintain our 2024 global glove demand growth of 7%, which is premised on the recovery of glove restocking activities in 2H24.

• Supply. Following a period of consolidation, we estimate global glove effective capacity to have reduced by 53.4bn in 2023 (40bn, 13bn, 3bn, and 5bn from Top Glove Corp, Hartalega, Kossan Rubber, and Supermax – offset by 3bn in newly added capacity from Chinese glove makers like Intco Medical Technology and 4.6bn in planned capacity expansions from Thailand). We see marginal changes in global industry supply to 2bn planned capacity replenishment by Hartalega (commissioning of NGC 1.5 production line by 2H24) and 1.1bn planned capacity by Sri Trang Gloves.

• Maintain OVERWEIGHT. Moving forward, we expect sales volumes to pick up sequentially in view of a more balanced demand-supply dynamic by 2H24. This, in turn, should lead to an improvement in glove makers’ profitability. With the industry’s excess capacity gradually phasing out, we should see the sector achieving demand-supply equilibrium by end 2024. We also expect the risk of price competition from Chinese peers to gradually subside, premised on: i) Arising quality concerns resulting in higher rejection rates from the US Food & Drug Administration (US FDA) and ii) Chinese players’ pivoting stance towards sustainability. Our sector Top Picks are Riverstone, Hartalega, and Kossan Rubber. Sector risks: Decrease in gloves ASPs, a slower-than-expected demand recovery, lower-than-expected utilisation rate, and higher-than-expected raw material prices.

Source: RHB Research - 2 Apr 2024