PETALING JAYA: The rubber products sector faces renewed concerns over potential supply overcapacity, recent strengthening of the ringgit and a potential downside risk from China’s environmental policy.
Manufacturers have been given a longer grace period to convert coal-based burners to the more environmentally friendly gas-based burners. However, Affin Hwang Capital believes that the China government is still keen on improving the country’s air quality, and opines that the conversion will resume.
“The change has helped ease the shortage in vinyl gloves and reduced the overall selling prices for vinyl gloves.
“We still expect prices for vinyl gloves to rise, expediting the switch from vinyl gloves to latex or nitrile gloves,” said Affin Hwang Capital in a sector update report.
If trade tensions escalate and a 25% tariff is imposed on all items imported from China, manufacturers from other countries like Malaysia are potential beneficiaries.
China’s medical glove export market share to US is around 30%, and 70% of those gloves are vinyl based.
US is the world’s largest medical glove consumer, consuming 30% to 35% of global production.
The research house expects Malaysian manufacturers to raise capacity by around 15% to 18% for 2019.
While the capacity growth may outpace the demand growth of 8% to 10%, Affin Hwang Capital is of the opinion that there will not be an overcapacity issue as older production lines will be phased out to cater for speciality gloves. Additionally, manufacturers are venturing into the non-medical sector, which shall provide additional avenue for growth.
Apart from that, the research house is not too concerned over the strengthening of the ringgit against the US dollar, as it has assumed an exchange rate of RM3.90 per US dollar by end-2019.
“We believe that manufacturers are able to pass on the rising production cost to customers, within a reasonable period of two to four weeks.
The research house’s top buy ideas for Malaysia and preferred picks for the sector are Kossan Rubber Industries Bhd and Supermax Corp Bhd , which offer a cheaper alternative to its peers Top Glove Corp Bhd and Hartalega Holdings Bhd , as the valuation gap will eventually narrow.