A YEAR ago today, the glove sector was thriving with glove stocks soaring to phenomenal heights while the founders of the Big Four glove makers practically laughed to the bank, so to speak.
Fast forward to today, Isaac Newton’s universal law of gravity – what goes up must come down – seems to be very much reflected in the share prices of the Big Four glove makers.
Maybank IB Research and TA Securities Research have become two latest local research houses to downgrade the prospects of the glove sector with the former labelling the outlook as “neutral” (from “positive” previously) over concerns of declining average selling price (ASP) trend and lack of strong catalysts over the medium term.
“ASP has peaked in 1H 2021 and earnings upcycle seems to have been cut short with faster-than-expected decline in ASP in 2H 2021, and shorter lead time due to moderated demand for gloves on rising vaccination rates,” Maybank IB Research’s analyst Wong Wei Sum summed up the glove sector’s prospects in the coming days.
“The US CBP’s (Customs and Border Protection) withhold release order (WRO) on Top Glove (Corp Bhd) has also accelerated the decline in ASP as the world’s largest glove maker is diverting orders away to other regions with lower ASPs.”
Based on Friday’s (July 2) closing price, the stocks of all the Big-Four glove makers are now hovering near their 52-week lows with Top Glove shedding 6 sen or 1.47% to RM4.01 (four-week range: RM3.99 – RM5.09).
Hartalega Holdings Bhd was down 12 sen or 1.68% to RM7.02 (four-week range: RM6.94 – RM8.59) while Kossan Rubber Industries Bhd retreated 11 sen or 3.45% to RM3.08 (four-week range: RM3.08 – RM3.79) and Supermax Corp Bhd edged down 8 sen or 2.42% to RM3.23 (four-week range: RM3.21 – RM3.99).
In downgrading the glove sector to “neutral” (from “overweight” previously), TA Securities Research highlighted potential oversupply risk in 2022 with a surplus of 40.3 billion gloves flooding the marketplace due to additional capacity from (i) existing players; (ii) new entrants; and (iii) threat from expansion plans by China manufacturers.
“In our 2022 supply/demand forecast, we estimate that the Big Four will supply a total of 208.6 billion gloves, assuming an utilisation rate of 75% of the estimated 2022 ending capacity of 278.1 billion gloves,” projected analyst Tan Kong Jin.
“Meanwhile, other smaller Malaysian companies are expected to supply 111.5 billion gloves in 2022 (assuming 15% growth). In total, Malaysia is expected to supply 320.1 billion gloves in 2022 as compared to 230.4 billion gloves in 2020.”
While this will translate to a lower market share of 54.7% vs. 64% in 2020, the research house is also expecting Sri Trang (Thailand), Intco (China) and Blue Sail (China) to supply a total of 167.6 billion rubber gloves in 2022, assuming 70% utilisation rate of end-2022 estimated capacity and a product mix of 68% of rubber gloves.
Besides that, other overseas glove companies are expected to supply a total of 77.6 billion gloves while new entrants would supply circa-20 billion gloves to our estimated 2022 total supply forecast.
“In short, there will be a surplus of gloves in 2022 if the existing glove players do not slow down their expansion plans,” justified TA Securities Research.
“Note that historically, Malaysian glove players tend to adjust their expansion plans accordingly to prevent an oversupply situation. Also, an oversupply situation tends to last about six to nine months before demand catches up.” – July 3, 2021
