Rubber gloves: Lacking positive catalyst

by PUBLIC INVESTMENT BANK BHD 

ALL three glove players under our coverage, namely Top Glove Corp Bhd, Hartalega Holdings Bhd and Kossan Rubber Industries Bhd, posted a weaker set of results in the recent quarter, mainly due to lower average selling prices (ASPs) and sales volume. 

We believe the operational landscape for Malaysian glove makers would still be challenging moving into the first half of 2024 (1H24). Given the prevailing price competition from Chinese’s glove players, Malaysian producers would not be able to raise ASPs meaningfully. 

Moreover, the upward trend in raw material prices would exacerbate the challenges in maintaining operational margins. 

We believe the recent positive movements in share prices have outpaced its fair valuation and as we do not anticipate any positive earnings surprises in the medium term, therefore, we downgrade the sector from ‘Neutral’ to ‘Underweight’. 

A recap of recent results. The recent results reported by the glove players under our coverage concluded with a weaker sales volume and ASPs. Top Glove remained in the red, Hartalega recorded a small core net loss of RM0.034 million while Kossan delivered a net profit of RM29 million in the recent quarter respectively. The industry continues to operate at a low utilisation rate below 50% due to an enduring oversupply of gloves. Meanwhile, the overall sales volume has declined year-on-year.

Persistent price competition from Chinese players. We gather that Chinese players are still running at near full capacity. Based on our channel checks, Chinese players are currently selling US$2 (RM9.52) per 1,000 pieces cheaper than Malaysian counterparts at US$16-US$18 per 1,000 pieces. The blended ASPs has stabilised at US$20-US$21 per 1,000 pieces for Malaysian glove players and this is expected to stay flat in 1H24. Notably, coal prices have started to ease, this may provide Chinese players with greater flexibility to reduce ASPs, further intensifying the competitive pricing landscape. 

Rising raw material cost. Raw material prices (such as nitrile butadiene and natural latex) which account for 30% of total production cost have trended upwards since October 2023. We anticipate the trend will lead to a squeeze in operating margins for Malaysia glove players in 1H24. We also note that natural gas prices (which accounts for 20% of total costs) have risen from US$2.6 per Metric Million British thermal unit (MMBtu) in August 2023 to US$3.1 per MMBtu in October 2023, which will translate to a higher gas tariff in 1H24 due to a time lag effect, but it is expected to normalise in the 2H24.

No major impact from anti-dumping investigation against export gloves. In June 2023, Brazil’s Development, Industry, Trade and Services Ministry initiated an investigation to ascertain the potential presence of dumping practices on export gloves for non-surgical procedures for healthcare originating from certain alleged countries such as Malaysia, Thailand and China. 

The petition alleged that Malaysia has an absolute dumping margin of US$3.89 per kg and a relative dumping margin of 80.8%, which surpasses those of Thailand and China by a significant margin. 

Starting from Feb 20, 2024, Brazil has imposed US$30.17 per 1,000 pieces of gloves provisional duty on Top Glove. However, we believe the impact to be immaterial, given that only a fraction of its latex gloves would be affected, and Brazil’s contribution to the group’s total sales is less than 5%. 

Downgrade the sector to ‘Underweight’. The outlook for Malaysia’s glove players appears bleak as we anticipate ASPs to remain stagnant due to customers’ reluctance to absorb additional costs amid stiff competition from Chinese glove manufacturers. 

Though recent demand has displayed some signs of improvement, we believe the operational landscape is still challenging, aggravated by escalating raw material prices. We perceive that recent upward movements in share prices have exceeded their fair valuation. All told we downgrade the glove sector from ‘Neutral’ to ‘Underweight’, with three ‘Underperform’ calls on Hartalega, Top Glove and Kossan. 

  • Extracted from a report dated Feb 25, 2024, by PublicInvest Research. 

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