Chinese and Thai players undercutting M’sian firms

CGS-CIMB Research said that domestic glove makers are still being undercut by US$3 to US$4 per 1,000 pieces, prolonging the challenges in passing on cost escalations.

PETALING JAYA: Malaysia has some of the world’s largest glove makers, but their pricing power has been diminishing due to competition from Chinese and Thai players who make cheaper gloves.

The regional competition is hurting the margins of local glove manufacturers and unfortunately, the situation may persist over the next 12 to 18 months.

CGS-CIMB Research said in a note that domestic glove makers are still being undercut by US$3 to US$4 per 1,000 pieces, prolonging the challenges in passing on cost escalations.

It also said that the profitability of local glove players, measured by earnings before interest, tax, depreciation and amortisation (Ebitda) per 1,000 pieces, may settle at a new normal, given the eroding pricing power

“In addition, elevated glove inventories following pandemic-led stockpiling is limiting strong upside to volume growth in the near term.

“This could cap the improvement in industry utilisation rates, in our view,” said the research house.

Nevertheless, it estimated the glove sector to eke out small profits in the financial year 2024 (FY24).

The Big Four glove players are expected to swing from aggregate losses of RM456mil in 2023 to a modest profit of RM21mil in 2024, growing to a RM568mil net profit in 2025.

The Big Four players are Top Glove Corp Bhd, Hartalega Holdings Bhd, Kossan Rubber Industries Bhd and Supermax Corp Bhd.

“We estimate the Ebitda per 1,000 pieces of local glove makers to recover to 85% to 95% of their respective pre-pandemic averages by 2025.

“We also expect some variations to the recovery in utilisation rates, led by Hartalega as it has undergone the largest capacity cut.

“We believe Top Glove and Supermax may still have plenty of excess capacity to shed, hence their utilisation rates could recover more slowly.

“We also observe that some glove players may eke out some profits in some quarters given the raw material price volatility.

“However, this may be unsustainable unless the utilisation rate improves significantly to 70% to 80% levels,” it said.

CGS-CIMB Research noted that the local glove makers had largely adopted a cashflow-neutral strategy to maintain their net cash positions, which the research house said is “relatively successful so far”.

The research house has maintained its “underweight” call on the glove sector as its projected FY25 sector return on equity of only 3% is still well below the pre-pandemic average of 11% to 20%.

“Upside risks for the sector are competitors raising average selling prices, which could result in potential sales volume returning to the local players; stronger-than-expected global glove demand; and prolonged weak ringgit versus the US dollar.

“We have ‘hold’ calls on Supermax and Kossan and ‘reduce’ ratings on Hartalega and Top Glove,” it added.

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