Tough times expected to remain for glove sector

Kenanga Research says industry sales are expected to be volatile in 2024.

PETALING JAYA: The glove sector remains pressured by a challenging operating environment that is plagued by overcapacity.

This is made worse by the predatory pricing by overseas players and higher cost of inputs, while demand remains weak.

Kenanga Research remains pessimistic about the sector, noting that industry sales are expected to be volatile in 2024 as distributors and buyers are still not placing sizeable orders or are holding substantial stocks.

“The industry is cautious about raising prices (to fully pass on the higher input cost) given the still competitive landscape in the industry.

“This falls in line with our view that raising average selling prices (ASP) over the immediate term will be challenging,” Kenanga Research stated in a report on the sector.

The lack of pricing power is due to the negative demand supply fundamentals. World demand is estimated at 390 billion pieces in 2024 but world output capacity is estimated at 602 billion pieces and the imbalance is expected to persist into 2026.

“Due to the current competitive pressure emanating from massive oversupply and low industry utilisation averaging 40%, customers can walk away and choose to buy from other players whenever there is an attempt to raise prices.

“We gathered that Chinese manufacturers are still selling at below US$20 per 1,000 pieces, at US$16 to US$18 per 1,000 pieces, which means any attempt by Malaysian producers to raise ASP are likely to result in market share losses,” the research house noted.

Nevertheless it added further decommissioning of older production facilities by local producers should help ease supply pressure and lead to rational competition amongst industry players.

Kenanga Research hence retains an “underweight” call on the sector but upped its call on Supermax Corp Bhd to “market perform” from “underperform”, following the recent weakness in its share price.

It put a target price (TP) of 84 sen a share on Supermax and maintained its underperform call for Top Glove Corp Bhd (TP: 75 sen), Kossan Rubber Industries Bhd (TP: RM1.48) and Hartalega Holdings Bhd (TP: RM2.33).

UOB Kay Hian (UOBKH) Research meanwhile has upgraded its call on Hartalega to a “buy” with a TP of RM3.27 a share (from RM2.77 earlier).

This is driven by the belief that the glove maker is set to gain from early signs of a demand recovery from distributors’ accelerating restocking cycle, inception of regional producers’ ASP upcycle and potential deterioration in the United States and China trade tensions.

“We anticipate Hartalega will deliver sequentially stronger earnings in the fourth quarter of financial year 2024 (4Q24) and financial year 2025 (year ending March 31).

“This will mainly be led by demand recovery, improving margins amid cost efficiency and better capacity utilisation,” the research house wrote in a report on the company.

The TP on Hartalega implies a 29 times 2025 price earnings multiple.

UOBKH Research’s forecast for a stronger 4Q24 for the glove maker is backed by expectations for higher product shipments in the period, coupled with a better order book of two to 2.1 billion pieces per month, which should see sales volume rise 20% to 25% quarter-on-quarter.

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