KENANGA Research has stood its grounds that glove stocks have already priced-in the tapering of average selling price (ASP) in 2H 2021, thus rendering current valuations palatable.
This is in contrast to the recent round of reporting season which suggests that the ASP trend is expected to soften in subsequent quarters albeit at a slow pace on the back of still robust demand.
“Glove players including Kossan Rubber Industries Bhd and Hartalega Holdings Bhd are expected to show quarter-on-quarter (qoq) ASP improvement in their June quarter, ie 2Q FY2021 and 1Q FY2022 respectively though expected to taper from September 2021 quarter,” projected analyst Raymond Choo Ping Khoon in a company update.
On the other hand, Top Glove Corp Bhd’s ASP has been tapering off since February or March this year. Due to the over ordering over the past 15 months since the pandemic started, the market is currently undergoing a phase of inventory adjustment, according to Kenanga Research.
“However, players expect orders to creep up from August and hence do not expect excessive downwards pricing pressure,” opined the research house.
“ASP trend is expected to soften albeit at a slower pace going forward as lead times have been reduced to between 90 to 120 days from 150 days previously but still high compared to pre-COVID of 30 days.”
Post COVID-19, Kenanga Research expects inventory restocking cycle to spur demand coupled with increased usage arising from new users and increased hygiene awareness.
“From the perspective of a long-term investor, we still see significant value being derived from Malaysian glove players which commands 68% global market share,” envisages the research house.
“For Top glove, the group expects volume sales to improve qoq by 10-20% in 4Q FY2021.”
However, CGS-CIMB Research downgraded the glove sector from to “neutral” (from “overweight” previously due to weaker due to weaker earnings prospects (declining ASPs and aggressive capacity build-up).
“We conducted proprietary case studies on the dynamics of global glove supply and demand,” explained analyst Walter Aw.
“While our findings indicate that glove supply surplus is unlikely to happen for the next two to three years, we note that the pace of incoming supply of gloves may be ahead of global demand growth from CY2024F onwards.”
This is in the event that (i) sector capacity growth continues at above 20% annually (ii) global glove demand grows below 10% annually; and (iii) the top seven listed glove makers’ market share of the global glove supply is at 60% or below annually. – July 1, 2021
