KUALA LUMPUR (Dec 11): AmInvestment Bank Bhd has maintained its "Neutral" rating on the glove sector, and said it believes that selling prices and operating profit margins of glove companies will come under pressure due to a short-term oversupply in the industry.
In a note today, AmInvestment said the pressure on selling price will continue in 2020 as the "Big 3" producers, namely Top Glove Corp Bhd, Kossan Rubber Industries Bhd and Hartalega Holdings Bhd, are still in expansion mode.
It said operating margins pressure may remain in 2020 as it believes the "Big 3" producers will continue to be hit by intense competition, higher labour costs, mixed raw material prices and higher gas tariff.
The research house expects sales volume to continue to grow around 8% to 10% in 2020, underpinned by an expanding global healthcare sector as well as increased awareness on the importance of hygienic practices throughout the industry, especially in India and China.
It also noted that there is an influx of latex glove supply from Thailand's Sri Trang, as the group plans to increase its capacity to 30 billion pieces by end-2020 from 22 billion pieces in 9M19.
"2020 will see an enlarged supply of gloves by circa 17.6%, although the expansion is at a gradual pace.
"As this exceeds the organic demand growth expectation of 8-10%, we believe the average selling price (ASP) will continue to be weighed down," AmInvestment said.
Malaysia's exports of rubber gloves in 2018 grew 14% y-o-y (+7.6% natural rubber gloves; +18.2% nitrile gloves) while according to the Malaysian Rubber Glove Manufacturers Association (Margma), the rubber glove industry has been growing at an average of 8-10% for the past 25 years.
According to the research house, currently the glove consumption per capita in emerging markets such as India and China is still low at around two to six gloves as opposed to circa 100-280 gloves for developed countries.
"We may upgrade our Neutral call for the sector to Overweight should there be any pandemic disease outbreaks which cause an upsurge in glove demand and supply constraints for substitute latex and nitrile gloves, resulting in a switch to latex and nitrile gloves," it said.
Conversely, it may downgrade to Underweight in the event of a sustained supply glut, triggering a price war that crimps margins and the inability of glove makers to pass on the rising costs.
AmInvestment's top pick for the glove sector is Kossan (Buy, fair value: RM4.65). The research house noted it favours Kossan for its expansionary plans and efforts in improving operational efficiency.