• We foresee a mixed outlook for rubber glove industry in 2024 owing to (i) an improving utilisation rate, (ii) manageable cost pressure, and (iii) sluggish recovery in average selling price (ASP) amid the current persistently weak demand and intense competition from Chinese players.

• The share prices of glove players have rallied amidst full optimism that the worst is over for the industry. However, we foresee limited upside to stock price from current level as we view the sector is traded at relatively stretched valuation against historical average.

• We have a NEUTRAL call for the sector, reflecting its positive recovery and a gradual improvement in sentiment although cautious still lingering.

Marginal improvement in utilisation rate. We expect that the 2024 utilisation rate (UR) will improve marginally to approximately 45-50%, from c.40-45% level observed during 2023. This improvement can be attributed to the capacity cuts implemented by major players, amounting to c.10% of existing capacity. It was observed that the production cut reduced the overhanging capacity in the market amid the current diminished demand, and therefore it could alleviate imbalanced supply and demand dynamics. On top of that, the improvement in UR was also driven by consistent orders from customers, prompted by concerns about product expiration. Note that the average shelf life of glove are about 3-5 years before it expires.

Should glove players cut capacity further? Before the pandemic, the rubber glove industry boasted a commendable utilisation rate of c.70%. The current UR is hovering around 40-45%, representing a significant gap. It's worth noting that the players generally incurring losses when UR falls below the 40% mark. Based on our analysis, we estimate that rubber glove players may need to further reduce existing capacity by about 30-60% to achieve UR of 70%. However, this is unlikely given that most rubber glove players have communicated their intention to refrain from additional production cuts, citing confidence in the potential recovery in demand.

ASPs are expected to remain flattish. Nonetheless, although we foresee some improvement in the utilisation rate, we hold the view that ASPs will remain at the current level ranging from USD20-22/1k pieces. We are aware of efforts to increase glove prices. However, we anticipate that the cost pass-through model will be relatively challenging at this juncture due to intense competition particularly from Chinese players. We observed that Chinese players prioritize maximizing their utilisation rates and expanding market share rather than demanding higher prices. They are even willing to sell below their breakeven price, thus incurring losses. This has led to local players facing the challenge to consistently raise their ASPs.

Rising cost pressure is manageable for now. Nitrile and natural rubber prices shoot up 27.4% QoQ and 12.4% QoQ respectively during 4Q2023 due to short in supply following winter season. As for 2024, we expect both prices to be traded at RM5.50/kg and RM4.50/kg respectively. Meanwhile, for natural gas price, we expect glove players to benefit from lower prices at least until 1H2024, with an anticipated increase in 2H2024 following a lagged impact from the hike in oil prices. Notably, in 4QCY2023, natural gas was traded at RM39.63/mmbtu, marking a 5% QoQ decline from RM41.736/mmbtu in 3Q2023. Nonetheless, we foresee in the event of a severe escalation in operating costs, we anticipate glove players to absorb the entirety of the cost hike given the current challenging conditions within the industry.

Is there further upside to glove stock prices? Glove counters price has rallied since November 2023 by 20-30% (as at 31st January 2024). This indicates the market’s full optimism on the recovery of the rubber glove industry. Historically, the players have traded at a price-to-earnings ratio (PE) range of 30-40x, whereas the current PE stands at approximately 60-100x. This suggests that the market has factored in the full recovery scenario and thus it is considered overvalued at the present level, in our view.

Maintain NEUTRAL on the Sector. We anticipate positive recovery that will underpin a gradual improvement in investors’ sentiment. Nonetheless, downside risk still persists such as over production by Chinese players that could prolong the imbalance supply-demand dynamic within the industry. We maintain a HOLD rating for Top Glove (TP: RM0.90) and a SELL call for Hartalega (TP: RM2.08), while Supermax remains NON-RATED. We also take this opportunity to downgrade KOSSAN (TP: RM1.33) to a SELL following the upsurge in stock price recently.

Source: BIMB Securities Research - 14 Feb 2024