KUALA LUMPUR: Share prices of Malaysian glove stocks, some of which have plunged more than 50% over the past 12 months, remain weak as global vaccine rollout has begun normalising demand and eroding average selling prices (ASPs).
Hong Leong Investment Bank (HLIB) Research, in a recent note, said the global vaccination rollout, especially in major glove consuming countries like the United States and the European Union (EU), has resulted in lower urgency for distributors to pre-book supplies in advance.
It said buyers have also become wary of locking-in glove supplies at high prices.
“We expect ASPs to trend lower, given the easing tight supply situation and stronger incoming supplies from China over the next three-to-six months.
“Commitment to further improve social compliance practices are also expected to weigh down on the glove makers’ profitability in the short term.”
However, HLIB said the demand for gloves is unlikely to suffer from a sharp decline, despite the Covid-19 situation in some of the major glove-consuming markets having improved.
“Similar to other major viral respiratory diseases, health experts believe that Covid-19 will also be seasonal with winter dominance. This implies that a resurgence of Covid-19 cases is likely during winter.
“Furthermore, with Covid-19 potentially becoming an endemic, we reckon that testing activities might become a norm going forward.”
Nevertheless, HLIB said ASPs would continue to decline.
“As evident from the improved situation in the United States and the EU, better vaccination coverage can help prevent severe illness and has also resulted in lesser urgency for distributors to replenish inventories back to its usual two-to-three-months level.
“Buyers are currently also holding back on purchases to avoid stocking up at high prices where glove makers are expecting ASPs to gradually decline by 30% quarter-on-quarter.”
At a media conference earlier this month, Hartalega Holdings Bhd chief business officer Kuan Mun Keng said margins are expected to start normalising by early 2022.
UOB Kay Hian, in a recent note, said ASPs have moderated slightly ahead of expectations.
“We now expect normalised ASPs in mid-2022 as opposed to 2023 previously. Given that ASPs are no longer as lofty, downside risk from further disappointment is limited. That said, deferred capacity and sub-optimal utilisation rates are possible pressure points to the sector.
“Factoring in the softened ASPs alone, our earnings projections already suggest significant downside to consensus expectations. Against this backdrop, there could be further downside to both sentiment and earnings going forward.”
Given the unfavourable reward-to-risk payoff, UOB Kay Hian has advised investors to minimise their exposure to the sector.
Over the past 12 months, shares of Hartalega have plunged 56%.
Thr glove stocks also ended lower in trading yesterday amid a weak broader market.
Hartalega was down 30 sen to RM6.10; Top Glove closed 25 sen lower to RM2.81; Kossan dropped 15 sen to RM2.45; while Supermax shed 14 sen to RM2.44.