• We observed an improvement in 1H24 performance at the topline by rubber gloves players, driven by increased sales volumes. Nonetheless, elevated raw material prices and higher operating costs have squeezed margins for some, offsetting the benefits from improved sales. This indicates that while demand recovery is contributing to revenue growth, cost pressures remain a significant challenge.

• 2H24 outlook is likely similar to 1H24 due to elevated raw material and natural gas prices which are expected to offset the gradual recovery in demand.

• We maintain an UNDERWEIGHT recommendation on Rubber Gloves sector, anticipating a prolonged oversupply situation.

Mixed bag performance. Several rubber gloves manufacturers reported improved earnings during 1H24 driven by favorable cost structure following the decommissioning of certain production lines. However, some companies continued to experience losses impacted by elevated raw material prices and increased operating costs. Despite ongoing challenges, most glove manufacturers experienced revenue growth attributed to improved sales volumes driven by continuous small orders from customers. Average selling prices (ASPs) have bottomed out and hovering around USD 20-22/1k pieces while utilization rate stands at 55-60% following the decommissioning of inefficient production capacity. As for cost structure, prices for nitrile and latex have surged 21.9% YoY and 10.3% YoY respectively (as of May’24). Nonetheless, natural gas prices declined by 19.4% YoY during 1H2024.

Knee jerk reaction on share price. The share prices of rubber gloves companies have rallied in the 1H24, with year-to-date gains approaching 30%. This reflects market optimism that the worst is over for the industry with expectations that demand will recover. Apart from that, recent news on tariff increases on Chinese products unveiled by the U.S. have produced an unexpected winner for Malaysia's rubber glove makers. The focus was on the tariffs imposed on rubber gloves for medical and surgical use which will rise from 7.5% to 25% in 2026. We are of the view that there is a risk of Chinese glove makers shifting their focus to the European markets and relocating their operational plants to other countries while maintaining their current utilization rate of 90%.

Not out of the woods. Moving into 2H2024, we foresee challenges for the overall industry due to overcapacity. Though there has been a gradual recovery in demand for small orders, it remains significantly below pre-COVID levels. This is largely due to Chinese manufacturers overcapacity condition which had join into the band wagon during the COVID-19 time and still operating at near full capacity at this level. On top of that, we do not expect margins to increase substantially due to increases in raw material and natural gas prices during 2Q24, and therefore potentially squeeze the overall margin given the lagged impact (particularly on natural gas). Besides, some glove makers have indicated plans to implement a cost-passing approach to offset rising operational expenses. However, we believe this strategy will be challenging to execute effectively due to the intense competition within the industry. The oversupply situation and aggressive pricing by Chinese manufacturers exacerbate the difficulty of passing on increased costs to customers. Consequently, maintaining profitability while attempting to raise prices could prove difficult for many glove makers.

Sector call. Maintain UNDERWEIGHT call on the sector given headwinds as aforementioned. We have a Sell call for KOSSAN (TP: RM2.03), Top Glove (TP: RM0.85), Hartalega (TP: RM2.60) though a Non-Rated for Supermax.

Source: BIMB Securities Research - 17 Jul 2024