Strong cash position should help glove makers ride out price war ahead, says HLIB Research
Time:Dec 22, 2021

KUALA LUMPUR (Dec 20): Current headwinds faced by glove makers are unlikely to dissipate in the near future, with Hong Leong Investment Bank (HLIB) Research expecting the operating environment to remain challenging in the first half of next year (1H22).

However, the research firm’s analyst Sophie Chua Siu Li in a note on Monday (Dec 20) said glove makers' strong cash position should help them to navigate through these challenging times and withstanding any impending price war that might come their way.

Chua said average selling prices (ASPs) of gloves had been on a downtrend since mid-2021, following the mass roll-out of vaccination programmes in major glove-consuming countries as better vaccination coverage greatly alleviated buyers’ urgency to stock up on gloves.

“As we move into 1H22, glove prices are expected to continue trending downwards, but at a slower pace of about 5% month-on-month (m-o-m) versus 10% m-o-m previously as glove prices have fallen closer to pre-Covid-19 levels, where current ASPs are at US$25 (about RM105.69) to US$35 per thousand pieces, while pre-pandemic ASPs were at US$21 per thousand pieces.

“We also note that the pricing difference between the US market and the European Union market is also narrowing, at about US$5 now, as opposed to a US$10 gap earlier.

"In our view, glove prices are likely to reach pre-Covid-19 levels by the second quarter of next year,” she said.

Chua added that the spike in glove demand previously resulted in nitrile butadiene rubber (NBR) latex prices to more than double to a high of about US$2.40 per kg in early-2021, but had since tapered off in tandem with weaker glove demand. 

She also said that NBR latex prices are expected to reach pre-Covid-19 levels of about US$1.10 per kg in early-2022 as glove demand continues to normalise and as additional supply capacity kicks in.

“Natural rubber latex prices, however, are expected to stay elevated in 1H22, given the La Nina phenomenon expected in January 2022, by a wintering period that typically lasts from February to May,” she said. 

With ASPs declining faster than raw material prices, coupled with higher operating costs stemming from better social compliance practices and stricter standard operating procedures, Chua also observed that margins for glove makers are expected to be compressed further, not to mention that the impending price war arising from Chinese glove makers attempting to win market share could also exacerbate the situation further. 

“Nevertheless, we are comforted by the fact that glove makers under our coverage accumulated a large war chest during the upcycle and the strong balance sheet should help the glove producers to better weather through these difficult times,” she said. 

Amid falling ASPs, Chua said glove buyers had refrained from stocking up on gloves to avoid locking in purchases at high prices. 

However, with glove prices slowly approaching pre-Covid-19 levels, she opined that restocking activities could gradually resume in 1H22. 

“That said, we expect utilisation rates of glove producers to still remain below pre-Covid-19 levels of 80% to 85% in 1H22 due to overall softening of demand,” she said.

HLIB Research maintained its “neutral” call on the glove sector with the given stock ratings of the three glove makers under its coverage, namely Top Glove Corp Bhd ("sell"; target price [TP]: RM1.56), Hartalega Holdings Bhd ("hold"; TP: RM6.10) and Kossan Rubber Industries Bhd ("hold"; TP: RM2.65).

Edited by Surin Murugiah

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