ON the back of unfavourable reward-to-risk pay-off, UOB Kay Hian Research has urged investors to minimise their exposure to the glove sector in which it has downgraded to “underweight” (from “market weight” previously) over concerns that a moderation of earnings over 2022-2023 would drag on sentiment.
Moreover, the research house is also wary that the current lofty average selling prices (ASPs) could revert sharper than expected while inventory levels in the US are said to have almost re-stocked to pre-COVID-19 levels.
“We think this could be a bellwether indicator for other key developed countries with similar successful vaccination roll-out programmes which reflect a moderation in demand,” justified analyst Philip Wong in a sector update.
“2Q 2021’s sector earnings should be largely sustained on a quarter-on-quarter (qoq) basis but will subsequently normalise following that.”
According to UOB Kay Hian Research, Top Glove Corp Bhd’s ASPs were among the earliest to encounter ASP weakness by declining in April. This was attributed to the glove maker commanding among the highest ASPs among its peers combined with the dispensation of COVID-19 vaccines.
“The ASP differential has significantly narrowed as Top Glove was hit by the tightening of its WRO (withhold release order) by the US CBP (Customs and Border Protection),” justified the research house.
Since April, UOB Kay Hian observed that ASPs have declined by 35% or 8% on a month-on-month (mom) basis to US$65-70 per 1,000 pieces in July. Going forward, it expects ASPs to decline by 5% mom which translates to an ASP of US$80/40 per 1,000 pieces for 2021 and 2022 respectively.
“Alongside normalising ASPs, we expect sector net profit to grow by 91% followed by -59% yoy in 2021 and 2022 respectively,” suggested the research house.
In the interim, however, the research house expects capacity of the Big-Four glove makers (Top Glove, Hartalega Holdings Bhd, Kossan Ruber Industries Bhd and Supermax Corp Bhd) to realise above-industry volume growth with collective growth of 21.8% and 26.1% over 2021 and 2022 respectively.
In addition, new entrants could collectively add up to 50 billion pieces of gloves annually in production capacity. Meanwhile, China glove manufacturers – Blue Sail Medical and Intco Medical – aim to add a combined 123 billion pieces to nitrile glove capacity by end-2022 or more than double its existing capacity.
“It is highly apparent that there is an anticipated influx of capacity over the coming years,” projected UOB Kay Hian Research. “Ultimately, should demand normalise sooner than expected, we expect expansion plans to be scaled back.” – June 29, 2021
