• Keep NEUTRAL. The gradual improvement in market dynamics should offer favourable tailwind for the local glove manufacturers amid continuing challenges in raising ASP. With client inventory depletion expected to end by 1H23, we expect a better order consistency in 2H23, which should probably be followed by gradual commissioning of new production lines by 2024. Key downside risks include weaker-than-expected demands (dragged by excessive supply) and higher-than-expected operating costs.

• Cost pass-through coming into the picture. Industry-blended ASP is said to have stabilised at USD20/1,000 pieces – in line with our expectation that ASPs may have bottomed already. Positively, the local and regional glove makers have collectively increased ASPs since the start of 2023 – the price gap between Chinese and local glove makers have narrowed to USD3 from USD5 previously.

• Demand. Malaysia glove exports rebounded 8% and 10% MoM during February and March. This is the second consecutive MoM increase following a 14% MoM decline in January, which suggests gloves demand is gradually gaining traction. Nevertheless, we understand that customers are still reluctant to place bulky orders. Advance orders have also been shortened to one month from pre-COVID-19’s three months. Industry players are expecting client inventory rationalisation to happen by 2H23, underpinned by glove inventory levels that have built up since 2020, which are running towards their expiry dates (typical shelf life: 3-5 years). As such, we maintain our 2023 year-end demand target at 415bn pieces, representing 4% YoY growth from 2022’s numbers.

• Supply. We expect muted-to-negative industry supply growth for 2023, in view that glove makers are contemplating phasing out obsolete production lines. We expect capacity rationing exercise (given the low industry utilisation rate of 30%-40%) that could lead to a better operating efficiencies, as the obsolete plants are less energy and manpower efficient.

• Maintaining our call. Our sector weightage is justified based on expectation of a normalised cost outlook by 2H23 – ie lower gas tariff – and the implementation of cost pass-through initiatives. Nonetheless, the order replenishment consistency and industry utilisation rates improvement will be key re-rating catalysts. The potential upside from the sector’s current P/BV of 1.1x reverting to the -1SD level (1.85x) could result in 65% upside from the current price levels – provided the re-rating catalysts mentioned above materialised.

• Risks to sector. An increase/decrease in gloves ASPs, slower-/faster- than-expected capacity expansions, higher-/lower-than-expected utilisation rates, and lower-/higher-than-expected raw material prices are the upside/downside risks.

Source: RHB Research - 15 May 2023