PETALING JAYA: Stocks of glove makers and electronic manufacturing services (EMS) sector could attract investor interest this week as Covid-19 infection numbers soar in China and global tech companies weigh merits of outsourcing contracts.
The surge in Covid-19 cases in China following relaxation of its zero-Covid policy has hit the industrial province of Zhejiang, which is also a major manufacturing base for Apple Inc.
Zhejiang alone is battling about one million new daily Covid-19 cases, which has led the local government there to warn the daily new infection numbers could possibly double to two million around New Year’s day.
Amid the skyrocketing infections, attention of investors on Bursa Malaysia has turned on the glove sector as the demand for medical-grade gloves is anticipated to rise.
Stock price of Top Glove rose 6.5 sen, or 8.6%, to 82 sen on Friday as the stock was the most actively traded counter on the exchange.
Hartalega Holdings Bhd
was up 2 sen to RM1.69 while Supermax Corp Bhd rose 4.5 sen, or 5.7%, to 83.5 sen.
Malaysian glove players, by virtue of producing about 60% of global supply, are anticipated to be a key beneficiary of the potential increase in demand and recovery in average selling prices.
Fresh demand from China and rest of the world could provide some respite for local glove makers, who have been choked by oversupply, low utilisation rates, higher costs and reduced average selling prices.
TradeView Capital chief executive officer Ng Zhu Hann expects demand for personal protective equipment like medical-grade gloves will surge in China in the near term.
“The Chinese glove makers, whose production facilities faced under-utilisation previously, will be the first to benefit from the demand.
“If the local manufacturers cannot meet the demand, then the demand will flow to other countries including Malaysian glove players,” he told StarBiz.
According to Ng, the rise in Covid-19 cases is not entirely surprising after Beijing lifted its harsh zero-Covid policy following protests in several major Chinese cities.
When asked about the long-term prospects of the glove makers, Ng said it depends on how long the higher demand for gloves can sustain.
He added that local glove makers like Hartalega stand to benefit from the lowering of gas tariff as announced by the Economy Minister Rafizi Ramli.
Rafizi said on Dec 23 that the average base tariff for the Pengerang facilities will be reduced by 9.2% to RM3.165 per gigajoule per day from RM3.485 per gigajoule per day.
The average base tariff for Petronas Gas’ distribution pipeline will also be reduced by 5.8% to RM1.063 per gigajoule per day, from RM1.129 per gigajoule per day.
When asked about the impact of China’s rising Covid-19 infections on the electronics industry, Ng said it could cause two to three months of supply disruption.
EMS are contract manufacturers in the electronics field that make products for original equipment manufacturers. They also design, test and provide repair services, among others, for electronic components.
“For those Malaysian EMS companies that produce similar or interchangeable parts like those produced in China, they will benefit from the potential supply disruption in China as the orders will instead flow to Malaysian players.
“For those electronic parts that are produced only in China, Malaysian EMS companies are unlikely to benefit, especially if the parts are difficult to replicate. But, generally, the potential disruption in the EMS sector will only be for the short term,” he said.
It is noteworthy that many EMS companies and contract manufacturers in Malaysia rely on suppliers in China for their parts.
Apart from surging infections in China, the fact that a leading EMS player, ATA IMS Bhd, has received notices of termination of contract from Dyson Manufacturing Sdn Bhd and Dyson Operations Pte Ltd may negatively affect investor sentiment on the segment.
ATA’s subsidiaries, JABCO Filter System Sdn Bhd and Winsheng Plastic Industry Sdn Bhd (WSP), were impacted by the notices of termination, effective March 31, 2023, or such later termination date as may be agreed by the parties in writing.
In a filing with Bursa Malaysia last Friday, ATA said sales of products related to the customer represent 100% of JABCO’s revenue, while sales of products related to the customer represent 82% of WSP’s revenue.
The collective sales of the customer’s products by JABCO and WSP represent 42% of ATA’s revenue for the six months ended Sept 30.
Dyson’s decision to further cut ties with ATA follows allegations of forced labour practices at ATA’s facilities.
In 2021, migrant worker rights specialist Andy Hall filed a petition to the US Customs and Border Protection to investigate ATA for forced labour practices.
In the same year, Hall had also raised concerns regarding SKP Resources Bhd’s management of its foreign workers, in particular relating to overtime work and adequate remediation of recruitment fees.
The allegations received media attention, to the extent that high-tech home appliance maker Dyson Ltd decided to cut ties with its supplier ATA.
To clear their names, ATA and SKP undertook independent audits, which did not find any forced labour practices on their premises.
Looking ahead, investment banker turned investor Ian Yoong Kah Yin said the outlook of the EMS sector is likely to be tepid in 2023.
He noted the sales for consumer electronic products have slowed down in many major countries.
“With the US Federal Reserve raising interest rates amid rising risks of recession, the demand for the sector could get softer,” he warned.
Yoong also pointed out that electronics production in China is likely to be affected further in the first quarter following the Covid-19 infection resurgence.
“This would surely affect the Malaysian EMS companies because we depend quite significantly on China’s manufacturing sector,” he said.
