Still too early to rerate glovemakers

IT IS still too early to put your money on stocks related to rubber products. 

Recent channel checks reveal that glove-makers are not overly optimistic about a meaningful improvement in glove demand following China’s surge in Covid cases, reported a local equity research house. 

“Glovemakers within our coverage have yet to see an inflection point in average selling price (ASP) and continue to record weaker utilisation rates,” said Affin Hwang Investment Bank Bhd in a recent research note on the sector. 

It has reiterated its ‘Underweight’ stance on the sector, noting that its key upside risk to its pessimism would be the emergence of a Covid mutation that is highly contagious, causes severe symptoms, and is resistant to vaccines. 

It believes that the current spike in Covid cases within China may not be sufficient to bring about a surge in global demand for gloves just yet. 

Since China announced in December 2022 its intention of easing travel restrictions, various news portals began citing hospitals in China being overwhelmed. Several countries have also introduced precautionary testing towards travellers arriving from China. 

“We think that any increase in demand for gloves within China would possibly only benefit its domestic manufacturers, given its logistical advantage and excess capacity. We believe the severity of this outbreak will be managed, given the global vaccination efforts that have kept ICU (intensive care unit) admissions under control. Our channel checks reveal that glovemakers are not overly optimistic of a meaningful improvement in glove demand,” it said.

The research house noted some ongoing challenges that are persistently impacting the sector. 

It said glove manufacturers under cover-age continue reporting weaker utilisation levels as the industry faces an oversupply of capacity, the latest being Top Glove Corp Bhd which operated at about 25% utilisation in 1QFY23 from worsening demand. 

“We gather that Chinese manufacturers are still selling at aggressively low rates, with some as low as US$14 (RM61.60)/k pieces (compared to Malaysia’s average of high teens),” according to the report. 

In its latest update for the glove players, the research house has cut its FY23E earnings for Kossan Rubber Industries Bhd (‘Sell’, Target Price: RM1) and Hartalega Holdings Bhd (‘Sell’; TP: RM1.50) by 19% to 74%, while keeping estimates for Top Glove unchanged (‘Sell’; TP: RM0.55). 

“Our earnings estimate for the sector is much more conservative than consensus, and we expect the consensus to follow suit moving forward,” it added. — TMR / pic BLOOMBERG

  • This article first appeared in The Malaysian Reserve weekly print edition