KENANGA Research has reiterated its “underweight” rating on the glove sector premised on expectation of a tough operating environment to persist over the immediate term plagued by overcapacity, predatory pricing by certain overseas players, weak demand and the high cost of inputs.

Taking the cue from the still weak earnings undertone in 1Q 2024, the research house said the situation is further aggravated by sustained high operating cost and poor economies of scale from less-than-optimum sales volume despite some recovery in orders

“While some players have returned to the black, the tepid profitability does not support the lofty valuations,” opined analyst Raymond Choo Ping Khoon in a sector update.

“The industry will continue to face massive over-supply, predatory pricing by certain overseas players (ie selling below cost over an extended time period to eliminate competitors), weak demand and the high cost of inputs such as nitrile butadiene rubber and latex.”

Generally, Kenanga Research expects industry players to continue grappling with high operating cost and sustained poor economies of scale from less than optimum sales volume despite seeing incremental orders.

“The industry expects volatile quarterly sales as distributors and buyers sees no urgency to place sizeable orders or hold substantial stocks as supply is plentiful and readily available,” reckoned the research house.

“Overall, the industry is cautious about raising prices significantly (to fully pass on the higher input cost) given the still competitive landscape in the industry. With a low industry tilisation of about 45%, this is without a doubt still a buyers’ market.”

Based on Kenanga Research’s estimates, the demand-supply situation will only start to head towards equilibrium in CY2026 when there is virtually no more new capacity coming onstream while assuming the global demand for gloves is to rise by 15% underpinned by rising hygiene awareness.

The Malaysian Rubber Glove Manufacturers Association (MARGMA) has projected global demand for gloves to grow by 12% to 15% annually from CY2024 following an estimated 25% contraction to 300 billion pieces in CY2023.

“We project the demand for gloves to rise by 30% in CY2024 to 390 billion pieces on re-stocking before moderating to its organic growth of 15% annually,” noted Kenanga Research.

“This will still result in an excess capacity of 212 billion pieces in CY2024. The persisting overcapacity means low prices and depressed plant utilisation will continue to plague the industry throughout CY2024.”

As such, the research house has accorded an “underperform” rating on Malaysia’s Big-Four glovemakers, namely Hartalega Holdings Bhd (target price: RM2.33), Kossan Rubber Industries Bhd  (TP: RM1.48), Top Glove Corp Bhd (TP: 75 sen) and Supermax Corp Bhd (TP: 83 sen) “as tepid profitability does not support their current lofty valuations”. - July 23, 2024

https://focusmalaysia.my/kenanga-pessimistic-of-glove-sector-recovery-with-global-oversupply-situation-to-persist-till-2026/