Glove makers starting to bounce back

Phillip Capital Research expects sales volumes to pick up sequentially on re-stocking activity after two years of inventory adjustments.

PETALING JAYA: A more balanced demand-supply market for the glove sector is likely to see an improvement in profitability of glove manufacturers.

Phillip Capital Research, which has initiated coverage on the glove sector with an “overweight” rating, expects sales volumes to pick up sequentially on re-stocking activity after two years of inventory adjustments.

Average selling prices (ASPs) have also stabilised and are likely to trend higher on a more balanced market, the research house added.

“We gather that utilisation rates and ASPs for local glove makers have rebounded slightly to an average of around 45%-50% and US$19-US$20 per thousand pieces, driven by inventory re-stocking on the back of low customer inventories at one to two months supply, by our estimates.”

It noted that the decommissioning of inefficient production lines by Hartalega Holdings Bhd, Top Glove Corp Bhd and Kossan Rubber Industries Bhd has helped reduce global capacity.

The research house said re-stocking will be sustained over the 2024-2025 period with global demand expected to recover to 329 billion and 368 billion pieces, respectively.

“Our current projection shows Hartalega, Kossan and Top Glove’s utilisation rates are expected to recover to 80%, 62% and 36%, respectively (from 46%, 50% and 30%, respectively) in 2024 with Chinese glove makers operating at near full capacity.

“We are also pencilling in a higher ASP of US$20-US$22 in 2024 on the back of improving demand. We believe the worst is over for the sector, with Hartalega and Kossan seeing earnings turnaround in recent quarters,” said Phillip Capital Research.

However, it expects Top Glove to remain loss-making in its financial year 2024 (FY24) due to its less efficient cost base.

Glove makers are also in a net cash position with Kossan having the highest cash level at RM2.1bil, followed by Hartalega with RM1.4bil and Top Glove at RM400mil.

The research firm has “buy” calls on Hartalega and Kossan, but a “sell” rating on Top Glove due to near-term uncertainty over its earnings turnaround .

Meanwhile, RHB Research said April-May order volumes of glove products have picked up sturdily.

“We think further gas tariff normalisation and ASP trend stabilisation could eventually propel profitability in 2024 and now expect a meaningful demand recovery trend by the second half of 2024 before capacity expansions recommence by 2025 or 2026,” the research house said in a report.

It also expects the risk of price competition from Chinese peers to gradually subside.

“Industry-blended ASPs have held up at US$20 per 1,000 pieces from US$19-US$20 previously, although nitrile ASPs were relatively lower at US$17-US$18 versus latex gloves’ US$20.

“According to our channel checks, Chinese glove makers’ ASPs are expected to increase to US$16-US$17 from US$15-US$16. The continued narrowing of the ASP gap means the prolonged price war is approaching its tail end, in our view, which ultimately allows Malaysian manufacturers to compete via product quality rather than price,” the research house added.

The research house said Malaysia’s glove export volumes spiked 6% month-on-month (m-o-m) in February, continuing its positive growth for two consecutive months. On the other hand, China glove exports contracted by 15% m-o-m in February following 4% growth in January.

For 2024, RHB sees global glove demand growing 7% premised on the recovery of glove restocking in the second half of the year.

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