YESTERDAY’S bearish trend on the Big-Four glove stocks – in particular Top Glove Corp Bhd – was instrumental in dragging down the FBM KLCI.
With mostly all glove stocks currently trading at their 52-week low, what does the future hold for glove counters which a year ago today were not only star performers on Bursa Malaysia but were also instrumental in lifting the stature of the local bourse as a top regional performer?
In its latest assessment of the glove sector, Hong Leong Investment Bank (HLIB) Research expects demands to sustain or unlikely to suffer from a sharp decline given the COVID-19 situation in some of the major glove consuming markets has improved.
However, average selling prices (ASPs) will decline from here on considering better vaccination coverage can help prevent severe illness while resulting in lesser urgency for distributors to replenish inventories back to its usual two to three months level.
“Besides, buyers are currently holding back on purchases, in order to avoid stocking up at high prices where glove makers are expecting ASPs to gradually decline by circa 30% quarter-on-quarter (qoq),” observed analyst Chan Jit Hoong in a glove sector update.
To further justify its downgrade of the sector to “hold” (from “overweight” previously), HLIB Research pointed to intensified competition from China.
Supported by the pandemic-led demand spike, China-based Intco Medical and Bluesail Medical have revealed aggressive capacity expansion plans with both glove makers targeting installed capacity of 120 billion and 52 billion pieces by 1Q CY2022 and end-CY2021 respectively which implies a capacity growth of 130% and 30% for both in the next three to six months, hence raising concerns over a potential oversupply situation.
“Given the current headwinds, we believe the short term prospects of the glove makers are no longer as rosy as the projected lower ASPs, higher compliance costs and intensified competition are seen to weigh down on glove makers’ profitability,” projected HLIB Research.
“We lower our sector earnings forecast by 1-58% as we impute a lower ASP assumption.”
Following this, the research house downgraded its rating on Kossan Rubber Industries Bhd (target price: RM2.65) and Hartalega Holdings Bhd (target price: RM6.50) to “hold” (from “buy” previously) but kept its “buy” recommendation on Top Glove (target price: RM4). – Sept 14, 2021