PETALING JAYA: PublicInvest Research has downgraded the glove sector to “underweight” on the back of a more challenging operating landscape for the glove makers in near term.
This is due to additional capacity coming on stream and average selling pressure (ASP) pressure on latex gloves due to growing competition from Thailand.
Share prices of the glove makers under its coverage have seen price-to-earnings (PE) contraction with Top Glove Corp Bhd, Hartalega Holdings Bhd and Kossan Rubber Industries Bhd retracing by more than 18% year-to-date.
Despite the recent selloff, the research house said the sector is still trading at unattractive PE valuations and could potentially contract closer to historical average of 21-26 times.
It has also cut the sector’s FY19-20F earnings forecasts by 3-14% and downgraded its rating on Hartalega and Top Glove to “underperform” while Kossan is maintained at “neutral”.
PublicInvest Research said the global consumption of rubber gloves has always been growing at a steady rate of 8-10% annually.
“The previous vinyl gloves disruption in 2016/17 has led to glove makers expanding their capacity more aggressively in order to satisfy the sudden surge in demand for latex and nitrile gloves due to the impact of substitution effect.”
It noted that the capacity expansion planned during the vinyl disruption is expected to come in the market in the second half of 2019. This includes Thailand’s largest glove maker Sri Trang, which expects their production to increase to 23 billion pieces at the end of the year from the current capacity of 21.1 billion.
Overall, global supply for 2019 is expected to grow by 15% based on planned capacity, outpacing the demand growth of 8-10%.
Due to Thailand’s Sri Trang’s aggressive expansion plan and its product mix of 69% latex gloves and 31% nitrile gloves, PublicInvest Research expects it to have a stronger impact on Top Glove as latex gloves make up 49% of its product mix compared with the more nitrile-heavy glove players like Hartalega (95% nitrile, 5% latex) and Kossan (76% nitrile, 24% latex).
“We understand that Sri Trang has been cutting ASP in order to gain market share,” said the report.
In addition, Hartalega could be facing stronger ASP pressure due to its premium pricing and in the times of excess capacity, greater bargaining power is in the hands of buyers.
Hence, Hartalega may see margin compression in the coming quarters.
