Hand-in-hand strength for rubber glove sector

KUCHING: Malaysia’s glove sector is likely to see strong earnings growth over the next two years, while an oversupply is unlikely until the second half of 2018 (2H18).

The research arm of Maybank Investment Bank Bhd (Maybank IB Research) believed Malaysia’s glove sector could see strong earnings growth over the next two years as a result of market share gains, on top of the organic global demand growth.

In addition, it said an oversupply is unlikely until 2H18 as the demand-supply situation is balanced for now.

“Given that global glvoe demand only grows six to eight per cent per annum and Malaysia is the biggest glove producer in the world, with market share of 63 per cent in 2016, we reckon that Malaysia has gained market share at the expense of the other glove producing countries, potentially over China,” it explained.

The research team further pointed out that the year to date (YTD) demand for Malaysia’s nitrile gloves is robust, a result of capacity growth in Malaysia and lower supply of vinyl gloves from China.

“We note that several coal-based vinyl glove factories were forced to shut down in early-2017 due to the environmental pollution issues.

“In the first quarter of 2017 (1Q17), Malaysia’s glove export volume jumped 19 per cent year-on-year (y-o-y), significantly higher than global glove demand growth of six per cent per annum.

“Hence, we believe Malaysia has gained market share YTD (2016: 63 per cent of global market share), potentially at the expense of China’s manufacturers,” it added.

Meanwhile, Maybank IB Research noted that the demand-supply situation is balanced for now, especially in view of the prompt average selling price (ASP) adjustments.

To note, ASPs of gloves were raised by approximately 15 to 17 per cent in November 2016 to March 2017 due to the higher raw material prices then, and thereafter, lowered by approximately eight to 16 per cent in April to June 2017 as raw material prices saw a sharp correction.

“Based on the expansion plans of key glove players, we think the new capacity in 2017 can be absorbed by the new demand.

“However, for 2018, capacity growth could outstrip that of demand but just slightly if we adjust for timing for new onboard capacity and utilisation rates,” it rationalised.

As for other factors affecting the performance of the glove sector, Maybank IB Research noted that the gas tariff hike would only have a minimal impact on glove players’ performance as it only makes up eight to 10 per cent of their total production cost.

On the impact of the fluctuating ringgit, the research team noted that although the US dollar to ringgit has fallen to an average of 4.33 in 2Q17, the movement of the currency is relatively more stable compared to 2014 to 2016.

“Additionally, glove players such as Hartalega has also shortened the tenure of their hedging contracts to approximately three months while Top Glove is maintaining its hedging contract tenure at one month. Hence, we think earnings volatility will be a lot lesser than 2015 to 2016,” the research team added.

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