Glove makers to benefit from more US orders
17 Jul 2024
Glove manufacturers are expected to deliver sequentially stronger earnings in the coming quarters, predominantly underpinned by the commencement of an inventory-replenishment cycle.
Other positive factors include the potential diversion of trade by the United States away from China to Malaysia as a result of US Food and Drugs Administration (FDA) alerts over some medical supplies from China and higher import tariffs on Chinese goods in 2026.
According to Hong Leong Investment Bank (HLIB) Research, the overall operating environment for glove makers is improving.
“The recovery thesis for 2025 is fairly priced-in, after the recent share price rally driven by positive sentiment from the Us-tariff increases announced back in May 2024.
“Furthermore, most glove makers still have not delivered any meaningful earnings at the moment,” the research house said in a report yesterday.
In Malaysia, sales volumes improved 15%-25% quarter-on-quarter in the first three months of 2024 (1Q24) versus the volatile growth trajectory for the whole of 2023.
However, the average selling price (ASP) trajectory is still mixed, said HLIB Research.
For instance, Hartalega Holdings Bhd’s ASP in ringgit improved by 2%-3% in 1Q24, while that of other manufacturers deteriorated by 2%-5%.
“We conclude that the deviation of 1Q24 sales volume and ASP trajectories compared with global peers was mainly due to price competition among local companies given that some players still have excess capacity,” the research house noted.
Going into 2Q24 and beyond, HLIB Research believe that sales-volume recovery in Malaysia will continue to gain momentum.
“In terms of ASP, we believe it bottomed in 1Q24 and the cost-pass-through mechanism will be progressively reinstated, albeit at a marginal rate, as there is still local competition in the nitrile segment,” it said.
Notably, the research house forecasts glove demand-supply dynamics will reach equilibrium in 2025, which could see the global plant utilisation rates likely to hit about 85% and the ASP for generic nitrile rubber medical gloves will be about US$20-US$21 per 1,000 pieces.
Based on the Red List for manufacturers obtained from FDA import alert number 80-04 for Surveillance and Detention Without Physical Examination of Surgeon’s and Patient Examination Gloves, HLIB Research also observed that the number of Chinese glove makers restricted by US FDA hit a recent high in 1Q24.
“We believe rising quality awareness in the United States could continue to trigger distributors of medical rubber gloves in the region to diversify away certain portions of their orders from China to prevent future order detentions,” the research house added.
Furthermore, President Joe Biden recently announced higher tariffs on Chinese medical and surgical rubber gloves from the current 7.5%, to 25% effective 2026.
“Based on our scenario analysis, we find that this event will not have a material negative effect to our forecast for 2026.
“However, we do believe that the decision of Chinese manufacturers to gradually shift their target markets from the United States to European and Asian markets, will result in a near-term trade diversion to Malaysia,” added the research house.
This will benefit most Malaysian players, especially Hartalega and Kossan Rubber Industries Bhd .
HLIB Research noted that Kossan’s 1Q24 cost structure was 12% lower at US$17.50 per 1,000 pieces compared with Hartalega’s US$19.90 per 1,000 pieces.
Kossan registered a higher 5.5% core pre-tax profit margin for its gloves and cleanroom segments in 1Q24 compared with Hartalega’s 1%, despite the latter having higher interest income.
This may be due to a more cost-effective structure and also Kossan been selling more specialised rubber-glove products, said the research house.
Kossan also had a net cash position of Rm2.1bil in 1Q24 (33% of market cap) compared with Hartalega’s Rm1.4bil (12% of market cap).
HLIB Research, which maintained a “neutral” call on the overall sector, has a “buy” call on Kossan given its possible re-rating.
Source: The Star
