Maintain OVERWEIGHT. The recent round of reporting season for glove makers suggest that the ASP trend is expected to soften in subsequent quarters albeit at a slow pace on the back of still robust demand. This gradual forward decline in ASP is reflected by lead times having been reduced to between 90 to 120 days from 150 days previously but still high compared to pre-COVID period of 30 days, supported by post-pandemic demand growth averaging 15%-20% per annum. In our view, current share prices of glove makers have priced-in weakness in ASP trend moving into 2H 2021. Glove stocks under our coverage are currently trading at an average FY22E PERs of between 8x-12x and offering dividend yield of 5%-9% while our ASP assumption of USD40/1,000 pieces for CY22 is moving towards normalisation. From the perspective of a long-term investor, there is still value to be derived from Malaysian glove players which command 65-68% of global market share. Our target price PER of glove stocks is conservatively at 30% discount to 5-year historical forward mean averaging between 15x to 28x with earnings expected to start normalising moving into 2022. Top Pick for the sector is HARTA (OP; TP: RM13.80) with the stock trading at 10x FY23E EPS offering 8% dividend yield.

ASP tapering discounted. In our view, we believe that share prices of glove makers have priced-in ASP tapering in 2H 2021, rendering current valuations palatable based on FY22 PER of 8-12x which is at 50% discount to pre-COVID mean valuations of between 16x-28x. The recent round of reporting season for glove makers suggest that the ASP trend is expected to soften in subsequent quarters albeit at a slow pace on the back of still robust demand. Glove players including Kossan and Hartalega are expected to show QoQ ASP improvement in their June quarter i.e., 2QFY21 and 1QFY22, respectively, though expected to taper from Sep 2021 quarter. TOPGLOV’s ASP has been tapering off since Feb or Mar 2021. Due to the over ordering over the past 15 months since the pandemic started, the market is currently undergoing through a phase of inventory adjustment. However, players expect orders to creep up from Aug 2021 and hence do not expect excessive downwards pricing pressure. ASP trend is expected to soften albeit at a slower pace going forward as lead times have been reduced to between 90 to 120 days from 150 days previously but still high compared to pre-COVID of 30 days. Post COVID-19, inventory restocking cycle is expected to spur demand coupled with increased usage arising from new users and increased hygiene awareness. In our view, from the perspective of a long-term investor, we still see significant value being derived from Malaysian glove players which commands 68% global market share. For TOPLGOV, the group expects volume sales to improve QoQ by 10-20% in 4QFY21.

Latest MCO could lead to production delays. In our view, we believe the pace of ASP tapering off could be slower than expected due to: (i) latest MCO requirement of allowing 60% workforce would likely to lead to lower glove production during the period with Malaysia supplying 65-68% market share globally; and (ii) hiring of foreign workforce under the current pandemic where borders are closed could stymie expansion plans.

Global demand growth expected at 15-20% per annum post COVID-19. According to the Malaysian Rubber Glove Manufacturers Association, the global shortage of rubber gloves will sustain beyond 1Q 2022 with growth rate averaging between 15% and 20% per annum going forward compared to pre-COVID-19 of 8%-10%, with still high lead time averaging six to eight months (although lower compared to 12-15 months at the start of the pandemic). We have done an analysis on the supply-demand dynamics which in conclusion quashed oversupply concerns. We highlight that even assuming a 15% demand growth in 2022, supply barely matches demand (see table overleaf). Interestingly, players are getting orders for new users such as airlines, restaurants, retail apparel chains and hotel operators. If we look at the capacity expansion numbers in isolation, it looks overwhelming. Juxtaposed against the annual demand growth and new pandemic-led demand, the additional capacity is actually not a concern. In fact, the estimated new yearly capacity may not actually materialise as scheduled and hence, total industry capacity may be unable to meet the post pandemic demand growth of 15% per annum moving into 2022.

TOP Pick is HARTA (OP; TP: RM13.80). We like HARTA for: (i) its solid management, (ii) constantly evolving via innovative products development, and (iii) trading at 10x FY23E EPS based on ASP assumption averaging USD40/1,000 pieces. At current price, the stock offers 8% dividend yield based on our FY23E forecast.

Source: Kenanga Research - 1 Jul 2021