MALAYSIA’s rubber gloves sector, which boasts some of the world’s largest manufacturers, sees light at the end of the tunnel.
After a tough year, the market predicts an improved earnings prospects for the local glove players moving into 2020, supported by the continued rise in global demand for gloves.
In the current year of 2019, the sector has been dragged down by several major challenges which include heightened competition domestically due to increased capacity, labour shortage, higher production costs and the China factor that leads to reduced export market share in the United States.
In the recently-concluded third quarter earnings season, the listed glove counters’ financial results are well reflective of these challenges.
Most glove makers – particularly the Big Four – took a hit in their bottom line as a result of lower average selling prices and rise in production costs, led primarily by higher natural gas prices.
Top Glove Corp Bhd, in its latest earnings results for the June-Aug period, also posted a drop of 13.3% in net profit.
Among the smaller listed glove players, Careplus Group Bhd recorded second consecutive quarterly losses at RM4.94mil in the July-September 2019 period.
Interestingly, little-known Rubberex Corp (M) Bhd’s net profit surged 59.8% in the same period, which it says is mainly driven by favourable glove selling prices and higher profit margins.
Another company, COMFORT GLOVES BHD, whose latest result is for the May-July 2019 period, also saw a 73.8% increase in bottom line.
Affin Hwang Capital Research analyst Ng Chi Hoong, who covers the Big Four glove firms, says there is no winner in the third quarter of 2019 earnings season.
“Sector earnings for the first nine months of 2019 (9M19), down by 12% year-on-year, came in below both the consensus and our estimates, delivering around 66% of the respective forecasts.
“Apart from the increase in production cost (higher utilities cost) arising from the natural gas price hike in July, the sector also had a labour shortage since the hard cap on overtime limited the total allowable overtime in a month to 104 hours only, ” he says.
Ng, however, believes that the worst is over and earnings growth would resume in 2020.
Affin Hwang Capital Research has upgraded its view on the gloves sector to “overweight”, with Top Glove and Kossan being the top “buys” for the sector.
Kenanga Research is also “overweight” on the rubber glove sector, premised on the expected earnings growth, the US-led uptick in demand due to trade war as well as the slower-than-expected new capacity expansion industry-wide that would should help maintain the supply-demand equilibrium.
“Due to the intense competition in the latex segment, we would focus on players which are largely nitrile-centric including Hartalega and Kossan, ” it says in a note on Dec 3.
Kenanga Research’s top picks for the sector are Hartalega, Kossan and Supermax.
Meanwhile, AllianceDBS Research, which is “neutral” on the sector, expects volume growth to be supported by higher demand and capacity expansion.
“There has been a gradual shift from latex to nitrile gloves that provide protection against protein allergy and better comfort. Glove players are catching up to this trend as they focus more on nitrile gloves in their upcoming expansion plans.
“We deem this a positive development as nitrile gloves have higher margins versus latex gloves, ” it points out.
It is worth noting that Hartalega is the world’s largest producer of nitrile gloves, with a current annual installed capacity of 36.6 billion gloves.
By the financial year of 2022, the company, which is also the largest glove maker on Bursa Malaysia by market value, aims to raise its production capacity to 44.7 billion pieces.
On the other hand, Top Glove, which has intensified its focus on the nitrile glove segment, aims to surpass Hartalega by next year as the world’s largest nitrile glove producer with a production capacity of 40 billion pieces.
For context, the group has ramped up its nitrile capacity by 54% over the past two years and plans to grow further.
Challenges in 2019
Being a labour-intensive industry, the government’s decision to freeze the recruitment of Bangladeshi workers and limiting the total allowable overtime in a month to only 104 hours have caused labour shortage and dampened glove makers’ operations.
The problem is being addressed currently, and some companies have received approval from the authorities to recruit foreign workers directly.
The expected reopening of foreign workers recruitment as well as the increased automation by glove players will also help to remedy the labour shortage.
Meanwhile, the lower sales to the US market have also affected Malaysian glove makers.
China-based glove manufacturers have been increasing their market share in the glove sales to the US, which in turn has taken a toll on exporters from Malaysia, Thailand and Indonesia.
Based on the data provided by Affin Hwang Capital Research, China’s market share in the US for 9M19 rose to 14.2%, up from 10.2% in 2018.
Malaysia, while remains as the market leader, has seen its share dropping to 74.2% in 9M19 as compared to 77.6% last year.
The US market is key to Malaysian glove players as it accounts to 28% to 55% of total group sales, according to Kenanga Research.
The impact of this lower sales has also reduced Malaysia’s overall rubber glove export performance.
According to the Statistics Department, between January to October 2019, the glove export value fell by 4% y-o-y to RM14.16bil. Export volume was also down by 6.3% y-o-y to 632,740 tonne in the 10-month period.
As a result, the Malaysian Rubber Glove Manufacturers Association (MARGMA) has also revised downwards its export revenue target for 2019 to RM18.2bil, from the earlier estimate of RM19.88bil. In 2020, export revenue to hit RM20.68bil.
For comparison, Malaysia exported RM17.74bil worth of rubber gloves in 2018.
Ng of Affin Hwang Capital Research believes that Malaysian manufacturers will start gaining market share in the US in the coming months, ebing a beneficiary of the US-China trade war.
“We believe that since the US has already started to impose a 15% tariff on gloves from China (since Sept 2019), buying patterns should start to normalise, as distributors were stocking up on China gloves in anticipation of the tariff hike, ” he says.
Another challenge faced by the local gloves sector is the increased natural gas price that raised production costs.
The average natural gas tariff after surcharge for the non-power sector in Peninsular Malaysia was hiked by 5.3% to RM34.66 per million British thermal units (MMBtu) from July 15- Dec 30 this year, as compared to RM32.69 between Jan 1 to July 14,2019.
Affin Hwang Capital Research estimates the price hike would have reduced the gross profit margins of the glove players by 0.5% to 0.8% in 3Q19.
“It was challenging for the manufacturers to raise prices with such short notice (three days), as the lead time for orders was around 45 days.
“The rubber producers would require some time to pass on the higher gas price, which we believe is already ongoing, ” it says.
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