This article first appeared in The Edge Financial Daily on January 23, 2020

Rubber product (glove) sector
Maintain overweight: On Tuesday, share prices of rubber glove manufacturers rose by an average of 6.72%, reacting to news that the World Health Organization was considering declaring an international health emergency over China’s pneumonia outbreak (a coronavirus), which was first discovered in Wuhan.

Although the share price performance of rubber glove manufacturers tends to react positively to news flows of virus outbreaks (either pandemic or epidemic), share prices are also corrected subsequently as the incremental real demand varies from case to case.

There has yet to be any spike in glove demand arising from the latest incident (human-to-human transmission), but we believe the news would help raise awareness of the need for a proper protection barrier for medical professionals. It was reported by some news sources that 15 Chinese medical workers were infected with the coronavirus.

As most manufacturers are already operating at close to their optimal utilisation rates (close to 90%), a sudden surge in demand would likely push average selling prices higher, which would lead to an improvement in the manufacturers’ margins.

We believe that Top Glove Corp Bhd is likely to benefit the most as the company is only operating at around 85%. However, it is still too early to determine whether the current outbreak would spur demand similar to SARS in 2002 to 2003. China currently accounts for 2% of Malaysian rubber glove sales, but incremental sales (if any) are more likely to arise from other regions, which could be impacted by the spread of the virus. Thailand, Japan and South Korea have reported confirmed cases of the coronavirus.

We believe that there could be a potential spike in glove demand if the current outbreak is declared a pandemic or epidemic. However, our current “overweight” call on the sector is not dependent on the incremental demand due to this outbreak. We expect stronger earnings growth in 2020, supported by stronger demand and a recovery in profit margins. — Affin Hwang Capital, Jan 22