PETALING JAYA: Malaysian rubber glove manufacturers’ selling prices and operating profit margins will come under pressure in the short term due to oversupply, according to AmResearch.
With that, the research house is downgrading the sector to “neutral” from “overweight”.
Nevertheless, it expects the sales volume to continue to grow at around 8-10% for the year.
“The expected robust growth is underpinned by an expanding global healthcare sector as well as increased awareness on the importance of hygienic practices throughout the industry, especially in emerging markets such as India and China,” it said.
“Currently, glove consumption per capita in emerging markets such as India and China is still low at around two to six gloves as opposed to 100-280 gloves for developed countries.”
In 2018, Malaysia’s rubber gloves export expanded 14% year-on-year (y-o-y), with natural rubber gloves recording a 7.6% increase and nitrile gloves 18.2% growth.
AmResearch believes that there will be pressure on operating profit margins in 2019 stemming from the influx of glove supply of the “Big 3” producers, namely Top Glove, Kossan and Hartalega.
“FY19 will see an enlarged supply of gloves by 13%, although the expansion will come at a gradual pace. As this exceeds the organic demand growth expectation of 8-10%, we believe average selling price (ASP) will be slightly weighed down initially.”
The research house said it will take six to 12 months for demand-supply to reach equilibrium.
“The Big 3 producers enjoyed higher sales volume of between 5% and 18.8% in 1H19, while ASP movement was mixed largely on the back of mixed raw material price and US dollar/ringgit movements.”
“As a result, there was a contraction in ebitda (earnings before interest, taxes, depreciation and amortisation) margin for Top Glove and Hartalega but an improvement in Kossan’s in the latest quarterly results.”
Nonetheless, with an estimated 2% to 4% drop in nitrile-based rubber (NBR) price in 1H19, AmResearch said it bodes well for the Big 3 as the lower NBR price will widen their products’ margins.
Nitrile gloves production makes up 95% of Hartalega’s, 45% of Top Glove’s and 75% of Kossan’s total gloves production.
It highlighted that the NBR price will continue to decline due to the falling prices of butadiene, which is an input cost for nitrile gloves.
Meanwhile, the research house expects a weaker ringgit will elevate the glove producers’ margin as exports make up most of the sales.
AmResearch’s top pick is Top Glove due to expansionary plans; efforts in improving quality and operational efficiency; as well as its position as the largest rubber glove manufacturer.
