PETALING JAYA: A pick-up in average selling prices (ASP) and sustained restocking activities in the second half of the year (2H24) should help local glove makers have a profitable year.
RHB Research stated its channel checks reveal ASPs and exports by local glove makers rose in the second quarter (2Q24) as production run rates increased in the period on improving demand, all of which indicates the companies are likely to deliver a stronger set of 2Q24 results.
“We gathered the current production run rate has shown improvements with order volumes in 2Q24 set to grow by at least 10% quarter-on-quarter (q-o-q).
Moving forward, we expect a meaningful demand recovery trend to manifest in 2H24, coupled with an ASP pick-up, to propel glove makers’ profitability in 2024,” the research house stated in a report on the sector.
On the ASP front, the research house noted local glove producers were enjoying industry blended ASPs of about US$20 to US$21 per 1,000 pieces (1Q24: US$20) helped partly by American buyers opting to source from non-China based producers.
“We also see minimal risk of another price war, as customers have a greater acceptance for price increases given the heightened emphasis on product quality,” RHB Research wrote.
The uptick in demand is reflected in glove export volumes, which rose 8% q-o-q (up 29% on-year) in 2Q24 while by value it rose 10% q-o-q to RM3.6bil.
“We now expect 2024 global glove demand growth of 22%, premised on the recovery of glove restocking activities in 2H24. The Malaysian Rubber Glove Manufacturers Association expects global glove demand to chart a 2023-2027 compound annual growth rate of 10% to 450 billion pieces,” the report stated.
RHB Research added the excess production capacity issue plaguing the industry in the past few years is set to end with demand-supply equilibrium expected to be achieved by the end of 2024.
It found local manufacturers were now running utilisation rates in the 60% to 80% range versus 40% to 70% previously.
While geopolitical tensions have led to rising freight costs and shipping time to destination markets, which are a concern, the research house believes orders could be rolled over into subsequent months, leading to a minimal impact on the sector overall.
Rising exports to the United States could counter some of those concerns as well. Noteworthy is the action by the US Food and Drug Administration’s move to issue 14 import alerts on China-based glove producers which could benefit local glove makers.
The trade diversion away from China-based producers by US buyers is expected to benefit companies like Hartalega Holdings Bhd
given its large exposure to the North American market (50% of revenue), as well as Kossan Rubber Industries Bhd, Supermax Corp Bhd and Top Glove Corp Bhd, RHB Research forecast.
The impact could be more pronounced when the new tariff on gloves sourced from China come into force in 2026 by the United States.
RHB Research has thus maintained its “overweight” call on the sector based on the improving cost-pass-through model, restocking activities and easing price competition from China. At current price levels it noted the sector is trading at a compelling forward price to book value of 1.5 times against the pre-Covid-19 five-year mean of 3.8 times, more so in view of the potential sectoral earnings recovery by 2024-2025.
