Lower ASPs ahead to trim glovemakers’ earnings significantly

The vaccination programmes in the US and EU have resulted in lesser urgency for distributors to pre-book supplies in advance 

By NURUL SUHAIDI / Pic By MUHD AMIN NAHARUL

EARNINGS of glovemakers are forecast to fall by up to 58% due to lower average selling prices (ASPs) as vaccination rollout is expedited in key markets. 

Hong Leong Investment Bank Bhd (HLIB) analyst Chan Jit Hoong stated that the vaccination programmes in glove consuming countries like the US and European Union (EU) have resulted in lesser urgency for distributors to pre-book supplies in advance, as their buyers are wary of locking-in glove supplies at high prices. 

“We expect ASPs to trend lower, given easing tight supply situations and stronger incoming supplies from China over the next three to six months. 

“Commitments to further improve social compliance practices are also expected to weigh down on the glove makers’ profitability in the short term,” Chan wrote in a research report yesterday. 

With Covid-19 potentially becoming endemic, he expects testing activities might become a norm going forward and sustain demand for gloves as a result. 

“Therefore, the demand for gloves is unlikely to suffer from sharp declines although the Covid- 19 situation in some of the major glove consuming markets has improved,” he wrote. 

HLIB cut the sector’s earnings forecast for financial year 2021 to 2024 (FY21-FY24F) by 1% to 58% to factor in a lower ASP assumption. 

The investment bank lowered its earnings projections for Top Glove Corp Bhd’s for FY21-FY23F by 1%-41%; Hartalega Holdings Bhd’s FY22-FY24F by 12%-58%; and Kos- san Rubber Industries Bhd’s FY21- FY23F by 1%-37%. 

It downgraded rating on Hartalega and Kossan to ‘Hold’, while keeping its recommendation on Top Glove at ‘Buy’. The rating on the rubber glove sector was downgraded ‘Neutral’. 

In the event incoming supply profoundly outstrips demand, Chan expects all glove manufacturers to cut back their expansion plans and be stricter on the commissioning of new lines. 

This is to avoid the market being swamped with excess supplies or putting downward pressure on ASPs, so rebalancing any demand-supply mismatch in rubber gloves. 

He added glove manufacturers under scrutiny such as Hartalega and Top Glove are dedicated to improving their social compliance processes, which would result in increased costs and a small margin compression in the near term if customers regain negotiating power and the cost increases are not passed on totally to them. 

With the lifting of a year-long ban against Top Glove’s products in the US, Chan expects its sales to the US market would not return to its original levels immediately because buyers would have sourced their supplies from other glove makers. 

Prior to the ban, the North American market accounts for around 25% of Top Glove’s total sales volume but has since plunged to 8% of total sales volume after the ban was imposed. 

The freed-up capacities were redirected to other markets like Eastern Europe and Latin America by Top Glove at a more competitive pricing. The move saw sales volume increased from 17% and 8% to 21% and 12% respectively, in the markets in the third quarter of FY21.