Glovemakers are under pressure on declining ASP

The sector is also facing lower utilisation rates and additional operating costs on stricter SOPs, as well as labour shortage


LOCAL glovemakers can expect the average selling price (ASP) of rubber gloves to return to preCovid-19 level having been guiding for a weaker ASP outlook since the second quarter of 2021 (2Q21).

Maybank Investment Bank Bhd (Maybank IB) analyst Wong Wei Sum said Kossan Rubber Industries Bhd’s ASP is expected to decline 8% to 10% month-on-month (MoM) and could return to pre-Covid levels of US$23/per k pcs-US$24 (RM100.08)/per k pcs by mid-2022, representing a 42% decline from the current level.

Elsewhere, the sector is also facing other challenges such as lower utilisation rates and additional operating costs on stricter standard operating procedures (SOPs), as well as the labour shortage.

The research house downgraded Kossan to ‘Sell’ with a new target price (TP) of RM1.86 from RM3.16 on a lower 17.7 times calendar year 2023 (CY23) price earnings ratio (PER), in line with its valuation basis for Top Glove Corp Bhd and Hartalega Holdings Bhd.

“We believe Kossan’s strong first half of 2021 (1H21) earnings performance will not be sustainable as ASP has been trending down since May 2021 on rising competition, especially in the nitrile glove segment. We lower our financial year 2021 (FY21)-FY23 earnings forecasts by -1% to -76% on lower utilisation rates and ASP assumptions,” said Wong in a research report yesterday.

Kossan’s FY22/FY23/FY24 earnings forecast was lowered by -1.3%/75.8%/-33.4% respectively to factor in lower utilisation rate of 70% for 4Q21, 80% for FY22 and FY23 from 85% and 93% respectively and lower FY22/FY23 blended ASP assumptions to US$26.40/US$22.70 per k pcs.

Separately in another report, Wong said Hartalega’s ASP is expected to decline 30% between 1Q22 and 2Q22 and may only normalise in early 2022, returning to pre-Covid levels by mid-2022.

Due to the stricter SOPs, the company is currently operating at only 70% of its capacity, utilising 60% of its workforce.

The unexpected two week shut down of operations in early July and stricter SOPs under the National Recovery Plan Phase 1 led to lower production which led to some of its buyers’ shifting orders to China to mitigate the supply risks, said Wong.

Hartalega has also been downgraded to ‘Sell’ with a new TP of RM3.99 from RM6.74 on an unchanged 19.4 times CY23 PER. Its FY22-FY24 earnings forecasts were also lowered by -1% to -62%.

Wong noted that on the strong competition from the Chinese glovemakers, citing aggressive capacity expansion by them would likely lead to oversupply by 2023.

“To seize market share, the Chinese glovemakers are pricing their gloves competitively in Europe. According to industry players, the Chinese glovemakers are expected to contribute to 23% of the world’s glove supply by 2022 (from 16% now) while Malaysia’s market share is expected to shrink to 60% in 2022, from 67%,” he said.