Rubber gloves sector to see upsides from surging US demand


  • Analyst Reports
  • Wednesday, 02 Oct 2019

KUALA LUMPUR: Kenanga research has maintained overweight on the rubber gloves sector with expectations of surging demand from the US due to the trade-war effect.

Since Sept 1, a 15% tariff has been imposed on Chinese-made medical and vinyl gloves, which should increase their pricing versus local rubber gloves.

The research house expects the positive impact to be felt from the final quarter of the year as US gloves demand switches to local glove players, where the US accounts for 28% to 55% of glove players' group sales.

Further, Kenanga said the new capacity expansion industry-wide is slower-than-expected, which should help the demand-supply equilibrium.

"From our analysis, there are nascent signs indicating that oversupply concerns appear overplayed considering that capacity expansions of the four rubber gloves under coverage are expected to be delayed and staggered," it said.

To mitigate the impact of the competition, rubber glove players are slowing new capacity expansion, taking measures to maintain margins including automation and other cost-reduction initiatives and intensifying sales efforts in emerging economies.

However, there is downside risk in the latex segment as the intense competition could negatively impact margin.

Players like Top Glove and Supermax continue to be impacted by competitive pressure from low margin latex gloves, which could offset gains in the nitrile segment, said Kenanga.

"Due to the intense competition in the latex segment, we recommend players which are largely nitrile-centric including HARTA and Kossan which product mixes hinge largely towards nitrile at 95% and 75% share, respectively.

"Conversely, TOPGLOV and SUPERMX which are largely latex-centric with product mix between nitrile and latex are estimated at 50% : 50% are expected to face margins pressure," it said.

Over the recent 2Q earnings season, Kenanga said glove makers under its coverage came in mixed with Kossan being the star performer with 30% year-on-year growth.

Hartalega saw small sequential growth while Supermax was hit by competition in the latex segment, an uptrending input rubber latex price and one-off cost. Top Glove suffered another quarterly earnings disappointment.

Hartalega is Kenanga's top pick for its highly automated production processes, innovative products development and booming nitrile gloves segment.

"Our TP is RM5.85 based on unchanged 36x CY20 EPS (at +1.0SD above 5-year historical forward mean)," said Kenanga.

Meanwhile, it maintained its outperform call on Kossan with a target price of RM5.25.

"We like Kossan because it is trading at an unwarranted 28% discount to peers’ PER average considering that its net profit growth is the highest at 23.7% compared to peers average at 7%," it said.
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