KUALA LUMPUR (Sept 14): Hong Leong Investment Bank (HLIB) Research has downgraded its rating of the rubber glove sector to "neutral", from "overweight" previously, as projected lower average selling prices (ASPs), higher compliance costs and intensified competition are seen to weigh down on glove makers’ profitability.

In a note today, HLIB Research equity analyst Chan Jit Hoong said the research house expects rubber glove ASPs to trend lower, given an easing tight supply situation and stronger incoming supplies from China over the next three to six months.

"In the event where incoming supply profoundly outstrips demand, we believe all glove makers will scale back on their expansion plans and be more disciplined in the commissioning of new lines so as to not flood the market with excess supplies or put downward pressure on ASPs, ultimately normalising any imbalance between demand and supply of rubber gloves," he said. 

Besides that, Chan pointed to the roll-out of vaccination in major glove consuming countries like the US and Europe, which had resulted in lesser urgency for distributors to pre-book supplies in advance as buyers are currently holding back on purchases in order to avoid stocking up at high prices where glove makers are expecting ASPs to gradually decline by 30% quarter-on-quarter (q-o-q).

Based on HLIB Research's estimates, ASPs should reach US$30 (about RM124.47) per thousand pieces by the first quarter of 2022 (1Q22), which would still be higher versus pre-Covid-19 levels of US$22 per thousand pieces. 

Furthermore, Chan highlighted that glove manufacturers under its coverage are committed to further stepping up their social compliance practices despite already outdoing certain established standards. 

"Improved compliance would lead to higher costs for glove makers which, in our view, could cause slight margin compression in the short term as buyers are regaining bargaining power and the rise in costs might not be fully passed on to buyers," he said. 

"Given the current headwinds, we believe short-term prospects for glove makers are no longer as rosy as the projected lower ASPs, higher compliance costs and intensified competition are seen to weigh down on glove makers’ profitability," Chan added. 

Also under its coverage, HLIB Research has downgraded its ratings of both Hartalega Holdings Bhd and Kossan Rubber Industries Bhd to "hold" with lower target prices (TPs), but maintained its "buy" rating of Top Glove Corp Bhd.