• Stay OVERWEIGHT; Top Picks: Riverstone, Hartalega, and Kossan Rubber (Kossan). Glovemakers are set to deliver a stronger set of 2Q24 results in August, predicated by an improving operating environment on better demand visibility and strengthening ASPs. We gathered that the current production run rate has shown improvements with order volumes in 2Q24 (set to grow by at least 10% QoQ). Moving forward, we expect a meaningful demand recovery trend to manifest in 2H24, coupled with an ASP pick-up, to propel glovemakers’ profitability in 2024.

• Industry-blended ASPs are now hovering at USD20-21/1,000 pieces (1Q24: USD20). Based on our channel checks, China’s glovemakers’ ASPs are now in the USD17-18/1,000 pieces range (1Q24: USD15-16), which implies a narrowing pricing gap of USD3 from USD5 between Malaysian and Chinese glovemakers. At this time, we see minimal risk of another price war, as customers have a greater acceptance for price increases given the heightened emphasis on product quality.

• Demand. Malaysia’s glove export volumes rose 8% QoQ (+29% YoY) in 2Q24, outpacing 1Q24’s growth (-6% QoQ, -0.3% YoY). Export value climbed 10% QoQ (+29% YoY) to MYR3.6bn vs 1Q24’s MYR3.3bn (+10% QoQ, +5% YoY). Conversely, China’s glove exports were flattish QoQ following 1Q24’s 3% QoQ growth. We now expect 2024 global glove demand growth of 22% (Figure 3), premised on the recovery of glove restocking activities in 2H24. That said, the Malaysian Rubber Glove Manufacturers Association (MARGMA) expects global glove demand to chart a 2023-2027 CAGR growth of 10% to 450bn pieces.

• Supply. The industry plant utilisation rate now is seeing encouraging signs of improvement post 2023’s capacity rationing exercises. We gather that local manufacturers are now running utilisation rates in the 60-80% range vs 40- 70% previously. We now expect global industry supply to increase by 7.3bn pieces from 4.3bn in 2024 on planned capacity replenishments by Hartalega (4bn pieces from the relocation of production lines to NGC1.5 by end 2024), Top Glove Corp (3bn pieces from the resumption of production lines), and 0.3bn pieces planned capacity increase by Sri Trang Gloves (Thailand).

• Keep OVERWEIGHT. We retain our view that the sequentially improving sales volume (on a more balanced demand-supply dynamic) should lead to an improvement in glovemakers’ profitability in 2024. As the industry’s excess capacity is phased out, we expect to see industry demand-supply equilibrium by end 2024. We also expect the risk of price competition from Chinese peers to subside, premised on: i) Arising quality concerns resulting in higher rejection rates from the US Food & Drug Administration (FDA) and ii) China players’ pivoting stance towards sustainability. The recent announcement of a 25% tariff on China-made medical grade gloves is set to see a trade diversion towards Malaysian-made products. With that, Hartalega is expected to be the prime beneficiary given its large exposure to North America (50% of revenue), followed by Kossan, Supermax, and Top Glove.

Source: RHB Securities Research - 31 Jul 2024