• Maintain OVERWEIGHT. The industry’s demand and supply dynamics are showing signs of recovery, as April and May order volumes seem to have picked up meaningfully. Further normalisation in gas tariff, coupled with stabilisation of ASPs, can eventually propel glove makers’ profitability in 2024. Moving forward, we expect a meaningful demand recovery trend by 2H24 before glove makers recommence capacity expansion in 2025/2026. Key downside risks include weaker-than-expected demand, inability to pass on costs to customers, and higher-than-expected operating costs.

• Industry dynamics turning favourable. Industry-blended ASPs are expected to stabilise at USD20/1,000 pieces during the March reporting quarter. We understand customers are more receptive with ASP increase in the coming months as glove makers are likely to undertake a more meaningful price hike in April/May. Chinese glove makers are expected to raise prices to USD16- 17 from USD15-16 for the coming months based on our channel checks.

• Demand expected to pick up by 2Q24. Malaysia’s glove export volume was largely flattish YoY and lower 6% QoQ in 1Q24. Positively, export value grew 5% YoY and 10% QoQ – indicating the momentum of cost pass-through mechanism is picking up. Meanwhile, China glove exports surged 21% MoM following a 15% MoM contraction in February, bringing its 1Q24 QoQ growth to 3%. All in, our 2024 global glove demand forecast is now 375bn pieces, representing 22% YoY growth after we incorporated 2023 data guided by MARGMA (Malaysian Rubber Glove Manufacturers Association).

• March quarter earnings preview. We expect glove makers to record slight positive QoQ net profit growth in the upcoming March quarterly reporting season. This is predicated by the pick-up in export value (1Q24: +10%) as well as a stabilised ASP (USD20 per 1,000 pieces) offset against 6% contraction in volume. We expect operating costs to inch up higher in 1Q24, taking into account the latest gas tariff review (+4-5% in January), cost escalations of natural rubber and acrylonitrile prices (+24% and +0.7% QoQ) offset against the strengthening of USD against MYR (+0.5%). That said, we expect Top Glove to continue registering losses for its May reporting quarter given it has the highest exposure in the natural latex glove segment.

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

Source: RHB Research - 30 Apr 2024