PETALING JAYA: The recent improved export data and a steady average selling prices (ASPs) for glove manufacturers point to a positive recovery in demand.
In addition, glove manufacturers could turn profitable this year boosted by further normalisation of gas tariffs and various cost discipline measures in place.
RHB Research has upgraded its call to “overweight” from “neutral” for the sector as it expects a meaningful demand recovery trend by the second half of 2024 before glove makers reinstate capacity expansions by 2025 and 2026.
The brokerage said Malaysia’s monthly glove exports saw a year-on-year (y-o-y) growth trend for two consecutive months following a 2% y-o-y increase in November and 33% y-o-y gain in October 2023.
Despite export volumes contracting by 25% on a month-on-month (m-o-m) basis, export value was 1% m-o-m higher in November 2023.
“We believe this may indicate cost pass-throughs starting to kick in and a better product mix in November.
“On this front, we believe the ability to initiate cost pass-throughs will serve as a crucial catalyst to drive profitability moving forward, more so as it also indicates the risk from a price war has gradually dissipated,” RHB Research said.
It said while domestic glove makers experienced a weaker ASP in the third quarter of 2023, the pick-up in export value could substantiate the management teams’ guidance and expectations of a stabilised ASP trend, which could gradually materialise in 2024.
RHB Research said that for the first half of this year, local glove makers will still have the ability to run on a temporary demand shift to Malaysia amid China’s Lunar New Year holiday break and have ample room for capacity expansion.
In line with that, the research house upgraded Hartalega Holdings Bhd
, Kossan Rubber Industries Bhd and Supermax Corp Bhd, but maintained Top Glove Corp Bhd’s “neutral” rating due to its weaker-than-peers balance sheet and plant utilisation.
“We expect improvements in demand visibility and favourable cost outlooks in 2024 to propel profitability.
“The consistency of order replenishments, ability to implement cost pass-throughs, and gradual improvements in utilisation rates remain the key statistics to watch out for and ensure earnings sustainability,” it said.
On the demand side, the 2024 industry supply is sitting at 376 billion compared to last year’s 373 billion, taking into account one billion in new capacity from Thailand and Hartalega’s progressive capacity transition plan.
“We raise our 2024 demand assumptions to 397 billion from 386 billion previously, which indicates 7% y-o-y growth from 4% growth previously compared to the pre-Covid five-year average growth of 14%,” it said.
On raw material prices, RHB Research said natural latex is expected to trend higher in the coming months as Thailand enters its winter season, thus producing lower yields.
“As such, natural latex costs are expected to surge 11% quarter-on-quarter in the fourth quarter of 2023. Nonetheless, prices are expected to normalise by March and April 2024, based on historical data,” it said.
Meanwhile, RHB Research said the product quality from Chinese glove makers were on a subpar level, also evident from the multiple import alerts by the United States Food and Drug Administration (US FDA).
“According to the latest import alert dated Dec 26, 2023 issued by the US FDA, 10 Chinese firms were issued import alerts by the agency in the fourth quarter last year, given that the shipment of medical gloves was found to be in violation of defects detected by the US FDA,” it noted.
Incidentally, the US agency has become more stringent in imports assessments, causing more rejects in the fourth quarter of last year, while Malaysia saw only one firm being issued an alert.
“In view to that, we expect concerns over product quality will take precedence over ASPs in the mid-to-longer term.
“This, in turn, will benefit Malaysian makers – not forgetting that the country is still the largest gloves producer in the world with established historical presence and business relationships with western customers,” RHB Research said.
