The firm is hopeful that selling prices for glove products have bottomed out and will attempt to raise prices in February and March 2023
GLOVEMAKER Hartalega Holdings Bhd, which fell into the red in the third financial quarter ended Dec 31, 2022 (3Q23), plans to raise prices in these two months may not be viable given the continued dumping by Chinese producers in the international market.
In a recent briefing with analysts, the world’s largest nitrile glovemaker said it was hopeful that selling prices for glove products have bottomed out and will, therefore, attempt to raise prices in February and March 2023.
However, Kenanga Research analyst Raymond Choo Ping Khoon is uncertain if Hartalega’s plans for a price hike is viable as he has gathered from sources that Chinese players are still undercutting by selling as low as US$14-US$16 (RM69.28) per 1,000 pieces.
“Furthermore, the prospect of raising average selling price (ASP) is challenging due to the current massive overcapacity situation,” Choo said in a recent note.
Due to the current competitive pressure emanating from massive oversupply and low industry utilisation which is averaging at 40%, Choo said ASP of US$23 per 1,000 pieces in 3QFY23 is expected to trend lower in subsequent quarters towards US$20 per 1,000 pieces.
Choo noticed that there has been an uptick in orders for delivery in 4Q23. However, he is unsure if this is sustainable given the massive overcapacity out there and buyers generally are still unwilling to place sizable orders or hold substantial stocks on expectations of further decline in prices.
Hartalega slipped into the red 3Q23 with a net loss of RM31.91 million compared to a net profit of RM259.06 million a year ago, while revenue for the quarter fell 21% due to 8% and 145 drop in ASP and volume sales.
Hartalega’s Ebitda plunged to RM10 million due to excess capacity, the sale of high-priced inventory at falling market prices which could well mean that certain shipments were sold at a loss, and lastly, reduced economies of scale, particularly, poor cost absorption, as its utilisation rate fell to 42% from 49% three months ago.
On the rubber gloves industry outlook, Choo has cast doubt that the supply-demand equilibrium may return in six to nine months as believed by the Malaysian Rubber Glove Manufacturers Association (MARGMA).
MARGMA also projected a 12%-15% growth in the global demand for rubber gloves annually from 2023, following an estimated 19% contraction to 399 billion pieces in 2022.
“However, we beg to differ, expecting the overcapacity situation to persist at least over the next two years.
“Based on our estimates, the demand-supply situation will only start to head towards equilibrium in 2025 when there is virtually no more new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness,” said Choo, adding that he still expects capacity to widen further in 2023.
On another note, Choo also projected the demand for rubber gloves to rise by 15% in 2023 following an estimated 19% contraction to 399 billion pieces in 2022 — consistent with MARGMA’s forecast.
However, he cautioned that this will do little to ease the overcapacity situation as the global glove production capacity will grow by 16% to 595 billion pieces during the year as more capacity planned by incumbent and new players during the pandemic years — enticed by super-fat margins that had eventually evaporated — finally comes online.
“This will result in the excess capacity rising by 22% to 137 billion pieces from 112 billion pieces in 2022,” he said.
According to Choo the widened overcapacity means low prices and depressed plant utilisation will likely persist in 2023. This, he added, is not helping the already dire situation where there is the reluctance of customers to commit to sizable orders and hold substantial stocks on expectations of further decline in prices.
Based on his estimates, Choo believes the demand-supply situation will only start to head towards equilibrium in 2025 when there is virtually no more new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness.
Kenanga Research downgraded Haralega’s FY23 net profit by 86% as it reduced the glovemakers utilisation rate to 45% from 50% and Ebitda margin to 9% from 16%.
“We now project a net loss of RM24 million in FY24 (instead of a profit of RM200 million) as we reduce our utilisation assumption to 40% from 55% and Ebitda margin to 8% from 18%,” it said.
Believing that the current downturn in the rubber glove market could be one of the deepest ever, Kenanga Research reiterated it’s ‘Underperform’ call on Hartalega and reduced its target price by 3% to RM1.35 from RM1.39 previously.
“We are cautious on the stock due to: (i) Oversupply to persist in the sector over the next two years as a result of massive capacity expansion by incumbent as well as new players during the pandemic years means low prices and depressed plant utilisation will likely persist in 2023; and (ii) ASP yet to bottom out,” it concluded. — TMR / pic Bernama
- This article first appeared in The Malaysian Reserve weekly print edition