Review of 1H24

The Malaysian rubber glove industry has been contending with post pandemic downcycle due to a combination of oversupply issues, weak demand resulting from excess inventory accumulation as well as intense competition from Chinese and Thailand manufacturers. Positively, demands for rubber gloves are showing signs of improvement with sustained gradual recovery in sales volume amid the depletion of excess pandemic stockpiles. In addition, the current industry consolidation and capacity adjustment have also eased the challenging situation.

In 1Q24, the big 4 rubber glove companies’ cumulative net loss reduced substantially to RM5.3mn as compared to a net loss of RM548.7mn in 1Q23. We attribute this to: i) higher sales volumes, ii) cost efficiency and iii) absence of impairments. On the top-line, 1Q24 revenue slipped 1.7% to RM1.67bn.

With that, the YTD share price performance of Top Glove (+13.4%), Hartalega (+12.2%), Kossan (+17.6%) outperformed the market while Supermax (-15.7%) underperformed the FBMKLCI.

Improving Demand Outlook

With gloves being a necessity to the healthcare industry, we expect demand to eventually return to pre-pandemic levels and increase over the long term, driven by stricter standards and higher hygiene awareness in medical and industrial sectors. Currently, sales volumes for glove companies under our coverage are still 30-50% below pre-pandemic levels and is on track to revert back to norm by end-25. In addition, Malaysia gloves sales are expected to grow as the Chinese manufacturers are already running at full capacity. Capacity expansion in China is not intended following a steep tariff increase on medical gloves from China, effective 2026.

Within our glove coverage, Hartalega’s production plant in NGC (currently 32bn capacity) is expected to run at 90% in 2H24 as compared to 45% in Oct- 23, after shutting down Bestari Jaya facility (12bn gloves) in 1Q24. For Top Glove, we expect its utilisation rates to improve to 58% in 2H24 (vs. 45% in 1H24). Similarly, we also expect Kossan and Supermax’s capacity utilisation rates to improve by c. 10%-pts in 2H24 as customers have started replenishing inventory.

ASP Still Below Pre-Pandemic Levels

As at 2Q24, nitrile glove ASP has dropped to UDS16.8/1000 gloves from USD19/1000 gloves in 2Q23 due to the intense competition from China glove manufacturers. Note that this is below pre-pandemic ASP levels of c. USD20- 22/1000 gloves. Currently, we gather that the ASP differential between China and Malaysia is at around USD2 per 1000 gloves. As such, we expect the ASP of Malaysia gloves to improve moving forward due to: i) hike in raw material cost in 2H24, ii) cut-throat price competition is unlikely as Chinese manufacturers are running at full capacity and iii) US customers may start to diversify to Malaysian glove producers. Barring any unforeseen circumstances, we expect the industry to turnaround in 2H24, driven by better operating efficiency, higher volumes as well as ASP.

Raw Materials and Natural Gas Cost

Given that raw material prices account for 40% of production costs, the fluctuations of raw material will affect sector earnings. Increases in raw material and natural gas prices would result in short-term margin compression as manufacturers are unable to fully pass on the higher operating costs to customers amid the ongoing supply-demand imbalance. The prices of both nitrile and latex raw material have increased by 18.9% and 40.7% YoY in June 2024. Positively, natural rubber and nitrile latex are expected to soften moving forward. Based on our sensitivity analysis, every 5.0% change in raw material price would impact the sector earnings by 3.8%-4.5%.

Meanwhile, the natural gas price will depend on the fluctuation in crude oil price. Thus far, the natural gas cost has increased by 6% in 2Q24 to RM51.7MMBtu (vs. RM48.9MMBtu in 1Q24). Positively, we believe that the natural gas tariff will decline by around 3% in 3Q24. For every RM1/MMBtu change in natural gas tariffs, our sensitivity analysis suggests an earnings impact of 2.5%-3.7%.

As far as forex are concerned, the USD has strengthened against the Ringgit by 2.7% to RM4.72/USD at its latest closing and averaged at RM4.73/USD. Assuming no cost pass-through mechanism, our sensitivity analysis suggests a 4.5% negative impact on earnings for every 5sen appreciation in Ringgit against the dollar.

Recommendation

All in all, we downgrade the rubber glove sector to Neutral from overweight as we believe that the market has priced in the recovery. Note that we believe earnings performance would only revert back to pre-pandemic levels in 2026.

Our top pick for the sector is Hartalega (TP: RM3.68 based on 2.6x FY26 PB) due to: i) decent management quality and ii) healthy balance sheet a with net cash position of RM1.4bn. In addition, we believe the group will emerge stronger following the decommissioning of Bestari Jaya facility in 1Q24. Key risk would be lower-than-expected average selling price and higher-thanexpected operating costs.

Source: TA Research - 2 Jul 2024