INDUSTRY operating dynamics remain in favour of the local glove manufacturers on the back of better demand visibility, supply rationalisation, and average selling price (ASP) stabilisation.
“That said, the recent weakening USD remains a key hindrance. However, we expect the flow through impact from trade diversion arising from the hike in US import tariff on China (from 2025) to have a net positive effect on the earnings of rubber products companies under our coverage,” said RHB in the recent Regional Sector Update Report.
Industry-blended ASPs are currently hovering at USD20-21 per 1,000 pieces (pcs), improved slightly from USD20 per 1000 pcs in quarter two 2024 (2Q2024).
According to RHB channel checks, China glove makers’ ASPs now range between USD18- 19 per 1,000 pcs, higher from USD17-18 from the previous quarter.
“That said, we understand that local glove makers are in discussions to pass on the effects of a weakening USD to customers of at least USD1. This would result in the ASP range of within USD21-22 by 4Q24,” said RHB.
Malaysia’s gloves export volume surged 66% month-on-month (MoM) and 105% year-on-year (YoY) in August, outpacing the growth in July (+12% MoM; +43% YoY). Export value surged 15% MoM and 51% YoY to MYR1,583mil.
Meanwhile, China’s gloves exports grew 5% in August following a 3% MoM contraction in July.
“That said, we expect 2024 global glove demand growth of 22% premised on the recovery of glove restocking activities in second half 2024 (2H24),” said RHB.
That said, Malaysian Rubber Glove Manufacturers Association expects global gloves demand to chart a compounded annual growth rate of 10% to 450bil pieces from 2023-2027.
RHB gathered that local manufacturers are running within the range of 70-80% according to their latest channel checks.
That said, RHB expects a marginal change in global industry supply of 6bil in 2024 on the back of planned capacity replenishment by HART.
Then there was 3bil by Top Glove Corp (TOPG) on the resumption of previous capacity that was decommissioned temporarily.
Also, there was the 0.3bil planned capacity expansion by Sri Trang Gloves (Thailand) offset against by 1.3bil decommission exercise by RSTON.
“We maintain our OVERWEIGHT call on the sector premised on improving cost-pass-through model and restocking activities materialising in 2H24,” said RHB.
The hike in US import tariff on China made products is icing on the cake as we expect this could escalate trade diversion outside China, eventually benefitting Malaysia manufacturers.
RHB favours gloves manufacturers which demonstrate strong earnings resilience, solid balance sheet profile, and higher exposure to nitrile products as latex prices remain volatile due to recent flooding in Thailand.
With that, RHB’s sector Top Picks are HART and KRI. They also like RSTON thanks to its above-peer margin performance, unique exposure to cleanroom gloves, which should benefit from the recovery of semiconductor sales, and consistent dividend payout.
Key risks are labour shortage, weakening of the USD against MYR, higher-than-expected raw material prices, and slower-than-expected demand recovery. – Oct 7, 2024
Main image: nikkeiasia
