• Maintain OVERWEIGHT; Top Picks: Riverstone, Hartalega, and Kossan Rubber. Operating dynamics remain in favour of the glove manufacturers on the back of better demand visibility, supply rationalisation, and stabilisation of ASP. We learnt that the current production run rate has improved tremendously as order volumes in 2Q24 are expected to be higher vs 1Q24. Moving forward, we expect a meaningful demand recovery trend by 2H24 as well as pick up in ASP to propel glove makers’ profitability in 2024.

• ASP. Industry-blended ASPs are currently hovering at USD20-21/1,000 pieces from USD20 in 1Q24. According to our channel checks, Chinese glove makers’ ASPs are now ranging between USD17-18 from USD15-16 in 1Q24. We think the continued narrowing of the ASP gap would mean the prolonged price war is approaching its tail-end, which ultimately allows Malaysian manufacturers to compete via product quality rather than price.

• Demand. Malaysia’s glove exports volume spiked 3.6% MoM and 46% YoY (its steepest ever YoY gain post-pandemic) in April. Still, exports value contracted by 3.8% MoM (+39% YoY) at MYR1,094.6m. Meanwhile, China glove exports contracted by 12% MoM in April, following a 21% MoM growth in March. All in, we maintain our 2024 global glove demand growth at 22% (Figure 3) premised on the recovery of glove restocking activities in 2H24. That said, Malaysian Rubber Glove Manufacturers Association or Margma expects global glove demand to chart a CAGR growth of 10% to 450bn pieces from 2023-2027.

• Supply. Current industry plant utilisation rate has seen encouraging improvement post production plant rationalisation undertaken in 2023. We learnt that local manufacturers are running within the range of 60-80% (vs 40- 70% in the previous quarter). That said, we expect a marginal change in global industry supply of 4.3bn pieces in 2024, on the back of planned capacity replenishment by Hartalega (4bn pieces as a result of relocating production lines to NGC1.5 by end-2024) as well as 0.3bn planned capacity by Sri Trang Gloves (STGT TB, NR).

• Stay OVERWEIGHT. Moving forward, sequentially higher sales volume from more balanced demand-supply dynamics should lead to an improvement in glove makers’ profitability in 2024. As the industry’s excess capacity is phasing out, we should see the industry achieve its demand-supply equilibrium by the end of 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. The recent announcement of a 25% tariff on Chinese-made medical grade gloves is expected to result in a trade diversion towards the Malaysian-made products. With that, Hartalega is expected to be the prime beneficiary owing to its largest business exposure to North America (50% of its revenue), follow by Kossan Rubber, Supermax, and Top Glove Corp.

• Key risks to the sector. Decrease in gloves ASPs, slower-than-expected demand recovery, lower-than-expected utilisation rate, and higher-than-expected raw material prices.

Source: RHB Research - 18 Jun 2024