Limited gain for glove firms from China outbreak

MIDF Research said it has upgraded the glove sector to a “neutral” from “negative”,

KUALA LUMPUR: Local glove manufacturers are unlikely to benefit from the recent outbreak of a respiratory illness in China, as current expectations are for the outbreak to be contained in the country.

Moreover, the ample supplies of gloves within China itself would not necessitate any imports unless it is a dire emergency.

Malaysian exports of rubber products to China accounted for only 6% in the year-to-date period this year, according to the Malaysian Rubber Council’s statistics.

Premised on these facts, MIDF Research believed the benefit from the outbreak of the respiratory illness in China to Malaysian glove makers will be limited while China-based glove makers are poised to capitalise on any surge in demand.

“While we do not rule out the possibility of the respiratory illness outbreak spreading to other countries, at this stage, the outbreak is limited to children in northern China.

“Therefore, we opine that the local glove companies under our coverage may not benefit significantly,” it stated in a report.

The research house nevertheless upgraded the glove sector to a “neutral” from “negative” as it is expecting a slightly better outlook for the companies under its coverage.

It remains cautious about intense competition from China-based glove makers which may constrain pricing flexibility of local players in this sector.

“On a positive note, the replenishment of inventory following the expiry of pandemic inventory is expected to boost demand for gloves.

“This, combined with recent permanent and temporary closures of production facilities, could potentially improve production efficiency and reduce production costs per unit,” MIDF Research said.

Thus it expected glove makers under its coverage – Top Glove Corp Bhd, Hartalega Holdings Bhd and Kossan Rubber Industries Bhd – to post positive earnings in the fourth quarter (4Q) of 2023.

The research house also noted the continuous oversupply of gloves in the market had caused buyers to demand lower average selling prices from glove makers in the recent 3Q, given the drop in raw material costs.

“On a positive note, replenishment activities following the expiry of pandemic inventory led to better sales volumes for all three glove makers during the quarter.

“Our top picks for the sector are Hartalega with a ‘neutral’ rating and target price (TP) of RM2.20 a share and Kossan with a ‘neutral’ rating and TP of RM1.38. This is primarily based on their effective cost management and higher net cash position,” it added.

MIDF Research noted that in 3Q, most glove makers under its coverage reported stronger-than-expected core earnings, with Hartalega and Kossan turning profitable in the period.

This was due to higher-than-expected sales volume and lower-than-expected operating costs, attributed to reduced raw material costs, natural gas expenses and production costs per unit, it said.

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