A Steep Hill To Climb For Rubber, Persists As An Underweight: RHB Research

There is no silver lining for the rubber glove sector given the lack of near-term re-rating catalysts – no thanks to persisting imbalances in the demand-supply dynamics and stubbornly elevated costs.

RHB Retails stated although the pace of ASP softness could moderate in the near-term post market consolidation, we think the sub-optimal industry utilisation will continue to be a drag on glove players’ margins before we can see a gradual pick-up in demand.

Easing pace of ASP moderation. The industry’s ASP is currently c.USD20-22 per 1,000 pieces, similar to levels recorded prior to the pandemic. The QoQ decline in ASPs in 3Q22 eased to a low single digit, which also suggests that ASPs may have bottomed already.

Nonetheless, the pace of ASP moderation continues to ease, notwithstanding the impending price war from Chinese peers. That said, the latest 3Q22 results from China’s glove makers may suggest the current ASP level could be deemed unsustainable in the long run following both Intco Medical Technology (Intco) and Shandong Blue Sail Plastic & Rubber (Bluesail) reporting operating losses.

At this juncture, we gather that industry players are still unable to ascertain the timing of de-stocking activities from glove distributors. Under a bull case scenario, we expect such distributors’ inventory levels to normalise by 1H23 after taking into consideration the 6-9-month normalisation period from our last update in late September.

That said, our recent takeaways from the results briefings suggest an absence of re-stocking activities from the distributor front – as such, our assumption for 1H23 inventory normalisation stands. We keep our 2022 year-end demand outlook at 399bn pieces follow by a 4% increase in 2023.

The Reasearch House makes no changes to their industry supply assumptions with an estimate of 429bn pieces by 2022. To-date, no new capacity has been added so far, as Malaysia’s Top-4 producers have collectively postponed the commissioning of their new production lines until 2023 – taking into account the current low industry utilisation rate of 50%. That said, it observed a similar trend for the Chinese producers as well – both Intco and Bluesail have constantly been running utilisation rates of <50%.

“We expect demand to only pick up by 2H23 under our bull case scenario. Our recent takeaways from the results briefings still suggest the absence of re-stocking activities from glove distributors. Cost pass-through mechanisms also remain challenging at the moment. That said, we expect the recent run-up in valuation could pose further downside risks to the glove makers following the year-end KLCI reconstitution.

An increase in gloves ASPs, faster-than-expected capacity expansions, higher-than-expected utilisation rates, and cheaper-thanexpected raw material prices.

“We advocate investors to underweight the sector at this juncture owing to the lack of near-term re-rating catalysts. We think the earliest entry point might appear towards late 1H23, as glove distributors’ inventory levels should eventually come to an end and result in re-stocking activities. However, this might be a bull case scenario, as our channel checks suggest industry players are still unable to ascertain the period of inventory drawdowns.

From our checks with investors, we gather that they are keeping an eye on the normalisation of plant utilisation rates – which otherwise suggest gradual improvements in demand – asa key sector re-rating catalyst before placing bets on the glove sector.”

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