We downgrade our sector rating to UNDERWEIGHT from NEUTRAL. While players have returned to the black, their tepid profitability will not support the current valuations. In addition, earnings quality is lacking as well, with their profits driven largely by decommissioning of older plants and lower input costs while demand and hence plant utilisation have remained depressed. This is unlikely to significantly change in CY24. We avoid TOPGLOV (UP; TP: RM0.75) (cut from MARKET PERFORM), KOSSAN (UP; TP: RM1.34), and SUPERMX (UP; TP: RM0.85), but maintain our neutral view on HARTA (MP; TP: RM2.33). We do not have any top pick for the sector.

Still challenging, no V-shaped recovery with lofty valuations moving into CY24. While some players have returned to the black since 3QCY23, albeit small profit, we believe the sector will continue to face volatile earnings ahead. We expect the challenging and competitive business landscape currently to extend into CY24, plagued by subdued ASP and massive oversupply amidst intense competition, especially from Chinese producers. Despite mild sequential improvement in utilisation rate in 3QCY23 by 3-5 ppts to 35%-40%, the industry’s earnings visibility remains weak as distributors or buyers see no urgency to stock up as supply is plentiful and prices are stable. In addition, given the low capacity utilisation, economies of scale are out of reach for the industry. Despite glove players returning to profitability in the recently announced 3QCY23 earnings season, this was largely underpinned by easing cost pressures and savings emanating from decommissioning of older plants. Moving into CY24, we believe low utilization and weak demand amidst persistent oversupply will continue to prevail, which will not support players’ lofty valuations of >80x forward PER.

Expect higher input raw material price in 1HCY24 but natural gas price tapering off. Moving into 1HCY24, we expect input latex price to rise because of low production during the wintering months (between Dec till May), while nitrile butadiene rubber prices have moved up since 4QCY24. On a brighter note, natural gas (3QCY23: -17% QoQ) which accounts for 15%-20% of total cost has eased. Overall, all players are mindful that the prospect of raising ASP further in subsequent quarters is challenging due to the current massive overcapacity situation, with only a handful of customers agreeing thus far. Due to the current competitive pressure emanating from massive oversupply and low industry utilisation averaging 40%, customers can walk away and choose to buy from other players whenever there is an attempt to raise prices. We gathered that Chinese manufacturers are still selling at below USD20 per 1,000 pieces, at USD16−18 per 1,000 pieces, which means any attempt by Malaysian producers to raise ASP are likely to result in a reduction in their sales volumes.

Oversupply to persist moving into CY24. We expect the operating environment to remain challenging in subsequent quarters, plagued by massive oversupply. Based on our estimates, the demand-supply situation will only start to head towards equilibrium in CY26 when there is virtually no more new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness. MARGMA projects 12%−15% growth in the global demand for rubber gloves annually from CY23, following an estimated 25% contraction to 300b pieces in CY23. We project the demand for gloves to rise by 30% in CY24 to 390b pieces (due to a low base effect in CY23) and resume its organic growth of 15% thereafter. On the supply side, we are now factoring in a reduction of 20b pieces of gloves in the system by endCY24 as we gathered from channel checks that new or existing smaller players have exited. This will result in an excess capacity of 212b pieces in CY24. The overcapacity still persists which means low prices and depressed plant utilisation will continue to plague the industry in CY24.

Our CY24 forecasts assume: (i) an ASP per 1,000 pieces of USD20 similar to CY23, and (ii) an average plant utilisation of 45% vs. an estimated 40% in CY23. In the meantime,we do not have any top pick for the sector.

Downgrade the sector to UNDERWEIGHT from NEUTRAL.

Source: Kenanga Research - 11 Dec 2023