This article first appeared in The Edge Malaysia Weekly on April 6, 2020 - April 12, 2020

THE glove sector was not exactly the top pick for investors last year mainly because of muted earnings, resulting in most of the counters trading at around 30% off their peaks.

How things have changed. The emergence last December of the new deadly novel coronavirus in China has turned the world on its head, and put glove manufacturers in the driving seat.

The Covid-19 outbreak has since morphed into a global pandemic. More than a million people have been infected and 53,000 have died so far.

Thus, the services of Malaysian glovemakers, which supply almost two out of every three gloves globally, are urgently needed.

While the economy and companies are suffering because of the government-­ordered lockdown, the pandemic has proved to be a catalyst for Bursa Malaysia-listed glovemakers. The flurry of buying activity has pushed their share prices up by 10% to 68% year to date.

Good for short-term gains

“If you are asking me whether I’m buying glove stocks right now, let me answer that with another question: What else can you buy now for earnings growth? The only sectors that are expected to report earnings growth in the first two quarters of the year are those that are not negatively impacted by Covid-19, such as the glove sector,” ­Areca Capital CEO Danny Wong tells The Edge.

Not surprisingly, Wong is positive on the sector in the short term.

“We buy the sector for short and mid-term [gains] at the moment but not for the long term. The worry that we have is once this pandemic is over, there may be an overcapacity situation for some players who have expanded their capacity aggressively to meet the higher demand during this time. So, there might be a glut of gloves but, of course, it is too soon to judge right now,” he adds.

EquitiesTracker Holdings Bhd head of research Lim Tze Cheng is also positive on the sector and sees demand rising for reasons other than Covid-19.

“We believe that demand for gloves will go up because buyers, who are not just end-­users but also brand owners, have run down their inventories in the last two years (2018 and 2019), and are in need of restocking for 2020 and 2021. That is why we turned positive on gloves in December last year, before Covid-19 became a pandemic.

“Now, with reports of a global shortage in gloves, we believe that demand would not just be due to Covid-19 needs but also these buyers stocking up their inventories. Also, the Covid-19 issue has increased glove usage in China’s healthcare system. In 2018, China’s glove consumption per capita was just six pieces, which is very low,” he says.

TA Investment Management chief investment officer Choo Swee Kee says the spike in demand for gloves due to the pandemic is beneficial for the segment, given greater sales volumes — especially demand from the US and Europe — and higher average selling prices.

“Nonetheless, we believe the current share prices have already priced in this expectation. If you strongly believe that this pandemic will peak by May 2020, then there are only two months left to run for peak demand.

“Valuations have risen to above +1.5 to 2 standard deviation of forward price earnings, which we deem expensive,” he says.

Kenanga Research, in an April 1 note on the sector, says the stage is set for a recovery in volume growth for glove players.

“The fourth quarter of calendar year 2019 results season indicated a positive recovery in demand, with players’ volume sales growing an average 8% across the board led by Hartalega Holdings Bhd (13%), Kossan Rubber Industries Bhd (8%), and Top Glove Corp Bhd (2%).

“From our ground checks, demand for nitrile gloves is picking up again, with players’ new capacities swiftly taken up. We believe this uptick in demand is turning positive and should be reflected in the bottom lines in subsequent quarters.”

Kenanga adds that it expects the nitrile glove segment to continue to grow and expropriate market share from latex gloves.

“The growth in the nitrile glove segment is evident. Assuming nitrile:latex breakdown of 80:20 (currently at 63:37) and based on estimated global demand of 324 billion pieces in 2020 (forecast for 2019 was 300 billion pieces and assuming 8% growth rate in 2020), this implies a nitrile growth rate of 20% or an additional 42 billion pieces from switching to nitrile gloves,” the research house says.

Kenanga’s top pick for the sector is Hartalega, due to its highly automated production processes.

“The model is moving from ‘good’ to ‘great’ as it is head and shoulders above its peers in terms of better margins and reduction in costs. We also like Hartalega because it is constantly evolving via innovative product development, and for its nitrile glove segment, which is booming,” it says.

Malaysia expected to supply two-thirds of global demand

Last year, global demand for gloves was 290 billion pieces, of which 187 billion were supplied by Malaysia. Glovemakers are now working hard to meet the higher demand of more than 300 billion pieces this year, owing to the pandemic.

Malaysian Rubber Glove Manufacturers Association (MARGMA) president Denis Low tells The Edge that its recent meeting with Senior Minister Datuk Seri Azmin Ali and Ministry of International Trade and Industry officials on the industry’s supply of gloves during the Covid-19 pandemic was positive.

“We will be operating at optimum level during the Movement Control Order (MCO) period to produce the 220 billion to 240 billion glove pieces [per annum] that the world needs. This year, global demand is expected to ramp up to 340 billion pieces and, hopefully, Malaysia will supply 65% of that, so that there is no shortage in the world. The good news is that the glove industry’s support services, such as packaging and chemical suppliers, are also allowed to operate during the MCO period,” he says.

The supply of gloves is expected to translate into a revenue of RM21.8 billion for the industry this year, from around RM18.2 billion last year, when global demand was about 290 billion pieces per annum. Malaysia supplied about 187 billion pieces of that total.

Low reiterates that there is no shortage of gloves in the country as the demand is relatively insignificant.

“Malaysia’s demand is 120 million gloves per annum, which takes up only about six to seven hours of production time for all the manufacturers. So, in the Malaysian context, there should not be any shortage simply because the numbers are very small compared with what we can produce in total for a year. There are profiteers out there giving false information that there is a shortage of gloves in Malaysia,” he says.

MARGMA members have pledged 19 million pieces of medical gloves to the government to be distributed to all frontliners.

“Our members will ramp up capacity to ensure that the rest of the world is not short of glove stock, but we will prioritise the needs of Malaysians,” says Low.

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