Kenanga Research said producers are taking the opportunity to shut down older plants or production lines that are no longer efficient and speed up industry consolidation.
PETALING JAYA: Amid the overcapacity environment, Kenanga Research says the glove industry is showing the first sign of transitioning into a rationalisation and consolidation phase.
The research house said indications were pointing towards an improvement in supply-demand equilibrium as players take the opportunity to shut down older plants or production lines that are no longer efficient and speed up the industry consolidation.
Specifically, Hartalega Holdings Bhd
is decommissioning its Bestari Jaya (BJ) production facility, and consolidating operations at its Next Generation Integrated Glove Manufacturing Complex in Sepang, Selangor, it added.
The BJ facility consists of four production plants with 40 production lines or 13 billion pieces per annum.
“The decommissioning will reduce its production capacity by 30% to 31 billion pieces per annum and is expected to be completed by end-2023,” Kenanga Research said in a note to clients yesterday.
Similarly, Top Glove Corp Bhd is decommissioning two plants with estimated five billion pieces of capacity or 4% of its 100 billion installed capacity.
Supermax Corp Bhd has also decommissioned three older plants, taking out an estimated three billion pieces per annum from its total capacity, it noted.
Given the first sign of industry consolidation, Kenanga Research said it now applied a smaller discount to the sector’s average historical price-to-book value.
“We are now attaching a 20% to 45% discount compared with 50% to 60% previously to the sector’s average of 1.7 times during previous downturns from 2008 to 2011 and 2014 to 2015 due to the faster-than-expected industry rationalisation,” the research house explained.
In the recently concluded first quarter of 2023 (1Q23) results season, Kenanga Research said glove players dipped into their second consecutive quarterly losses.
Out of the four companies under its coverage, the research house noted Hartalega has beaten its forecast, Kossan and Top Glove results were disappointing, while Supermax came in within its forecast.
All players generally continue to be hit by excess capacity leading to reluctance of customers to commit sizeable orders and holding substantial stocks on expectations of further price decline, margin erosion as costs remains elevated, including energy and labour costs.
This is against the falling average selling price (ASP) of US$20 (RM92.10) per 1,000 pieces versus cost of US$21 (RM96.70) per 1,000 pieces and reduced economies of scale arising from volume that is less than optimum, particularly, due to poor cost absorption.
“The recent round of results suggested that glove players are likely to continue to face a challenging and competitive business landscape due to elevated costs, subdued average selling price and massive capacity leading to suppressed industry utilisation rate,” noted Kenanga Research.
Its channel checks found most players were still unable to raise ASP for shipments in April and May.
Players also believes selling prices have bottomed out at US$20 (RM92) per 1,000 pieces, which is Kenanga Research’s FY24 assumption and will likely attempt to raise prices in FY24.
“However, be mindful that the prospect of raising ASP is challenging due to the current massive overcapacity situation, with only a handful of customers agreeing thus far,” said the research house.
Players had received mixed responses in terms of customer inventory levels.
Some customers are still stuck with high inventories, while others are beginning to slowly restock.
Generally, there is no urgency for buyers to place sizeable orders or hold substantial stocks as supply is plentiful and readily available.
“Any attempt to raise the ASP could cause a reduction in sales volume, in our view,” said Kenanga Research.
Its 2023 forecast assumed that an ASP per 1,000 pieces of US$20 (RM92) will translate to an estimated 10% decline over 2022 and an average plant utilisation of 50% versus an estimated 60% in 2022.
Hence, Kenanga Research has reiterated an “underweight” rating with no top picks for the sector.
It, however, raised the target price for Hartalega to RM1.90 a share, Top Glove 90 sen, Kossan Rubber Industries Bhd RM1.28 and Supermax to 96 sen a share respectively.
