WITH average selling prices (ASPs) having yet to find a bottom, the time may not yet be ripe to bottom fish glove stocks.
Further expecting interest in COVID-19 related stocks such as gloves to wane as the global vaccination rate rises has prompted Maybank IB Research to downgrade the outlook of the glove sector to “negative” (from “neutral” previously).
“We believe strong balance sheets and low operating costs are important factors that will allow glove makers to weather through the downturn and provide some financial cushion to the imminent price war,” opined analyst Wong Wei Sum in a glove sector update.
“Fortunately, the glove makers under our coverage i.e. Top Glove Corp Bhd (RM2.05 bil), Hartalega Holdings Bhd (RM3.08 bil) and Kossan Rubber Industries Bhd (RM1.64 bil) have accumulated sizeable amounts of cash during the peak cycle and are now in net cash positions.”
In Maybank IB Research’s view, the industry’s ASP which is declining fast could hit pre-COVID levels by mid-2022, ie another -42% from current level of about US$40/1,000 glove pieces in September.
“With the stiff competition from China, we believe the Malaysian glove sector is experiencing a structural change and the oversupply situation could potentially extend longer than the typical downcycle of six to nine months,” the research house pointed out.
However, Maybank IB Research expects the strong balance sheet to be able to self-fund the glove maker’s expansion capacity for the next few years.
“Our concern would be with new entrants that rushed into the glove sector during the peak cycle in end 2020,” noted the research house.
“In order to get their factories ready within very short period, we understand that these new entrants paid premium pricing for their plants, installation works, machineries, raw materials and even staffs; hence, high operating costs, making them less competitive in pricing.”
Company-wise, Maybank IB Research has downgraded Hartalega and and Kossan to “sell” (from “hold” previously) with lower target prices of RM3.99 (from RM6.74 previously) and RM1.86 (from RM3.16 previously) respectively. At the same time, it maintained its “sell” call on Top Glove with an unchanged target price of RM1.68. – Oct 11, 2021
