KUCHING: The ongoing avian flu outbreak in China via the H7N9 virus strain may potentially spell extra demand for glove manufacturers and create potential upside in bottom lines moving forward.
Maybank Investment Bank Bhd (Maybank IB) yesterday opined that the sharp run-up in share prices of rubber glove stocks on news of the outbreak last week was purely speculative, as the virus had yet to have any material impact on demand.
“Assuming the H7N9 virus develops into a full-blown pandemic, we believe all glove-makers will benefit from margin expansions.
“If H7N9 becomes transmissible between humans, we think the virus could spread rapidly especially in areas of high population density like Shanghai and it could spread globally as virus-carriers travel.
“A high contagion level, such as that during the 2009 to 2010 H1N1 outbreak (622,482 cases), will greatly increase demand for gloves globally. As an indication, the order backlog more than doubled to 90 days during the H1N1, compared with the normal 40 days,” the investment bank observed.
Maybank IB highlighted that regardless of whether an outbreak occurred, the glove makers would still benefit from a potential structural change in glove demand as China raised its hygiene awareness and calls for greater usage of gloves.
There could also be a shift in usage from medical grade vinyl gloves to ‘proper’ medical grade latex powdered gloves, the entry level or cheapest ‘proper’ gloves, it added.
Meanwhile, AmResearch Sdn Bhd (AmResearch) remarked that the current outbreak would be positive for the domestic rubber glove manufacturers (commanding 63 per cent of world market share), should this isolated event manifest itself into a prolonged and global pandemic.
The situation should result in an uptick in usage of examination gloves, which make up the bulk of rubber glove exports which made up 88 per cent of exports in financial year 2012 (FY12), it added.
“To put things into perspective, the last three outbreaks/pandemics (2003: SARS; 2007: H5N1 avian flu; 2009: H1N1 swine flu) saw worldwide glove demand rise by between 11 and 24 per cent in the years they occurred.
“Even without this catalyst, glove manufacturers have been optimistic about volume growth in 2013.
On average, they project glove demand to grow between 10 and 15 per cent (FY12: 166 billion pieces) on the back of lower average selling prices in-line with the low and stable raw material prices and sustained re-stocking activities.
“At this juncture, we are maintaining our forecasts as incremental earnings are difficult to quantify,” AmResearch said as it revealed its top sector picks: Top Glove Corporation Bhd (Top Glove) and Kossan Rubber Industries Bhd.
Maybank IB opined Top Glove would be the obvious beneficiary to the hypothetical scenario as it had excess capacity (with 40 per cent of total powdered latex capacity being idle) and could readily respond to a potential upsurge in demand.