This article first appeared in The Edge Financial Daily on December 28, 2018

KUALA LUMPUR: Two of Malaysia’s largest glovemakers, Hartalega Holdings Bhd and Top Glove Corp Bhd, have made it into the FBM KLCI list of component stocks this year.

The top four listed glovemakers’ shares, including Kossan Rubber Industries Bhd and Supermax Corp Bhd, have continued to climb for the second consecutive year in 2018.

However, the increase was slower compared to their outstanding run in 2017.

Meanwhile, the shares of the smaller players went the opposite direction alongside other small-capitalised stocks across Bursa Malaysia in light of the volatile investing climate throughout the year.

Generally, glovemakers continued to enjoy demand growth in Asian markets like China and India, while maintaining a healthy market share in developed markets such as the US and Europe.

This combination allowed the major players to rake in higher revenues and allow them to maintain a fair performance in earnings as they continue to work on expanding output and improving efficiency amid fluctuations in the ringgit and operating costs.

The Malaysian Rubber Glove Manufacturers Association estimated in August that local manufacturers would supply 63%, or 168.8 billion pieces, of global purchases in 2018, representing some RM18.8 billion in revenue for the year.

The association also expects Malaysia to increase its global market share to 68% over the next two years from 60%-65% now.

Global demand is seen to continue its growth at a rate of 8%-12% a year, and is estimated to exceed 300 billion pieces by 2020.

But the recovery in China’s vinyl gloves production this year could eventually put a cap on demand growth, making oversupply a looming possibility for a sector already trading at high price-earnings multiple presently.

For instance, Top Glove, which commands a 26% global market share, has already seen demand for vinyl gloves taper off in its latest financial quarter.

As such, more analysts are “neutral” towards the sector’s prospects despite acknowledging that cost pressures, such as power tariff and labour, have remained manageable, further supported by comfortable prices of raw materials.

It is, however, worth noting that China is only the third largest glove- producing country by market share at 5%, behind second-placed Thailand with a share of 21% as at August this year.

 Meanwhile, the sector remains uniquely defensive with strong fundamentals due to persisting demand, hence any slide in valuations should provide an opportunity for entry.