-  TheWall Street Journal reported that Guangdong province recorded its first confirmed case of H7N9 bird flu over the weekend.

-  Recall, the H7N9 virus first surfaced in humans this past April in Eastern China. It has since spread to other neighbouring cities and has to date infected 135 people, killing 44 of them.

-  In recent weeks, however, the number of cases has dropped significantly with the Guangdong case coming in after a 3-week lull. Only one case was reported in July.

-  We are not surprised by this report as we had earlier pointed out (refer to report dated July 4) that the virus has not been fully suppressed and is only in a dormant state.

-  According to the World Health Organisation (WHO), previous bird flu viruses, including the H5N1 which occurred in 2007, exhibited a temporal pattern. We understand that the virus could spread once the current dry and warm season ends as the flu season is highly correlated to the winter months.

-  In addition, we note that the Guangdong-Hong Kong boundary crossing is the busiest in the world. With more than 500,000 people travelling either way daily, the virus remains a deadly threat - more so if it mutates into a form that is easily transmissible between humans. No evidence supporting sustained human-to-human transmissions have been documented thus far.

-  Should the current epidemic worsen and manifest itself into a prolonged pandemic, we believe the greatest beneficiaries would be the latex glove manufacturers due to immediate uptrading activities. We understand that China has a relatively low glove usage per capita (4.8 pcs vs USA’s 149.3 pcs) and greater price sensitivity. To be more specific, we foresee an uptick in usage of examination gloves, which make up the bulk of rubber glove exports (88% in FY12).

-  To put things into perspective, the last 3 outbreaks/pandemics (2003: SARS; 2007: H5N1 avian flu; 2009: H1N1 swine flu) saw worldwide glove demand rise by between 11% and 24% in the year they occurred.

-  While the H7N9’s mortality rate of 36% is much lower than the H5N1’s 60%, it is still above that of the H1N1 strain which caused the 2009 swine flu pandemic. The latter had a fatality risk of 21%. With little yet known about the H7N9, we believe it could still pose a threat.

-  All in all, we reiterate our OVERWEIGHT stance on the rubber gloves sector. Top Glove Corp (FV: RM7.15/share) and Kossan Rubber Industries (FV:RM6.30/share) remain our top BUYs while our HOLD recommendations remain on Hartalega Holdings (FV: RM6.00/share) and Supermax (FV: RM2.15/share).

Source: AmeSecurities