PETALING JAYA: Manufacturers of rubber products are set for a meaningful turnaround in 2024, says RHB Research.
The sentiment on the sector has improved recently following sequential pick-up in sales volume during the November results season, the research firm noted in its latest report.
RHB Research said: “We expect the recovery in demand to remain choppy, and a meaningful difference is likely to be seen only in the second half of 2024 (2H24).”
Nevertheless, the gradual improvement in market dynamics should offer a respite for local glove manufacturers, it added.
For the November 2023 results period, RHB Research said there was a mixed bag of results among the companies in the sector.
“Kossan Rubber Industries Bhd chalked up a better-than-anticipated performance, while the rest, such as Supermax Corp Bhd and Hartalega Holdings Bhd, came in below expectations,” the research firm noted.
During the quarter, glovemakers reported a quarter-on-quarter (q-o-q) improvement in volume sold by 5%-15%, but this was dragged by a weaker average selling prices (ASP), which were down by 3%-7% q-o-q.
“Thanks to the sequential improvement in cost dynamics and their plant-rationalisation exercises, Hartalega, Kossan and Supermax were able to see better profitability for the quarter,” said RHB Research.
Meanwhile, the industry’s blended ASPs dropped to between US$19 and US$20 per 1,000 pieces recently, from US$20-US$21.
“Attempts to raise prices were hamstrung by obstacles, given the easing of raw material prices in the previous quarter,” the research firm said.
According to RHB Research’s inquiries, the ASPs of China glovemakers were largely unchanged, at US$15 to US$17 per 1,000 pieces.
“We think the recent weakness in ASPs is expected to be extended into 4Q23, before they undergo a meaningful recovery in 2024,” added the research firm.
On the demand-supply dynamic, RHB Research expects the industry’s supply to contract by 50.7 billion pieces year-on-year (y-o-y) in 2023.
“This is in view of the 40 billion cut from Top Glove Corp Bhd, 13 billion-piece cut from Hartalega, three billion-piece cut from Kossan and five billion-piece cut from Supermax,” said RHB Research.
However, this should be offset by three billion in newly added capacity from China glovemaker Intco Medical and a 7.3 billion planned capacity expansion from Thailand.
According to RHB Research, its 2023 industry annual supply assumption is now at 373 billion pieces.
“We expect near-term demand to remain erratic as customers are not rushing to commit to making bulk purchases, in view of the ample supply capacity available.
“That said, any attempt to raise prices remains challenging as customers are still price-sensitive,” explained the research firm.
RHB Research, which maintained a “neutral” call on the sector said: “Our sector weighting is due to the expectation of normalising costs, production-line rationalisation exercises, and the expectation that customer inventory could normalise by 2H24.”
However, the research firm chose to remain conservative as “it had yet to see consistent demand”.
Moving forward, RHB Research expects improvement in demand visibility, coupled with a favourable cost outlook in 2024, to offer headroom for margin improvement.
“That said, we expect glove-inventory rationalisation to materialise by 2H24 which would result in better margins.”
The brokerage firm also said the consistency of order replenishment, ability to implement cost-pass-throughs, and the gradual improvement in industry utilisation rates should be key re-rating catalysts for the near term.
However, the key downside risks include weaker-than-expected demand dragged by excessive supply capacity and higher-than-expected operating costs.