The rubber sector weighting is due to the expectation of normalising costs, production line rationalisation exercises, and the expectation that customer inventory could normalise by second half of 2024 (2H24).
In its Sector Update, RHB Investment Bank (RHB IB) maintains NEUTRAL on the sector, but remains conservative as the research house yet to see consistent demand.
“Moving forward, we expect the improvement in demand visibility, coupled with a favourable cost outlook in 2024, to offer headroom for margin improvement.
“That said, we expect glove inventory rationalisation to materialise by 2H24 which would result in better margins,” it said.
The key re-rerating catalysts for the near term are the consistency of order replenishment, ability to implement cost-pass-throughs, and the gradual improvement in industry utilisation rates.
Meanwhile, the key downside risks include weaker-than-expected demand (dragged by excessive supply capacity) and higher-than-expected operating costs.
RHB IB said the sentiment on the sector improved recently following the sequential pick-up in sales volume during the November results season.
“We expect the recovery in demand to remain choppy, and a meaningful difference is likely to be seen only in 2H24. Nevertheless, the gradual improvement in market dynamics should offer a respite for the local glove manufacturers,” it said.
The research house said, for the Nov 2023 reporting quarter, Kossan Rubber Industries (KRI) chalked a better-than-anticipated performance, while the rest Supermax Corp Bhd (SUCB) and Hartalega Holdings Bhd came in below expectations.
“During the quarter, glovemakers reported a QoQ improvement in volume sold (+5-15%) but this was dragged by a weaker average selling price (ASP), down 3 to 7% quarter-on-quarter (QoQ).
“Thanks to the sequential improvement in cost dynamics and its plant rationalisation exercise, KRI, SUCB and Hartalega were able to see better profitability for the quarter,” it said.
“Industry-blended ASPs dropped from between USD19 and USD20 per 1,000 pieces recently, from between USD20 and USD21. Attempts to raise prices were hamstrung by obstacles, given the easing of raw material prices in the previous quarter.
“According to our channel checks, China glovemakers’ ASPs were largely unchanged, at USD15-17 per 1,000 pieces. We think the recent weakness in ASP is expected to be extended into 4Q23 before they undergo a meaningful recovery in 2024,” it said.
The research house are now expecting industry supply to contract by 50.7 billion pieces year-on-year (YoY) in 2023, in view of the 40 billion piece cut from Top Glove, 13 billion-piece cut from Hartalega, 3 billion-piece cut from KRI and 5 billion-piece cut from SUCB.
“This should be offset by 3 billion newly added capacity from China glovemaker Intco Medical and a 7.3 billion planned capacity expansion from Thailand.
“Our 2023 industry annual supply assumption is now 373 billion pieces. We expect near-term demand to remain erratic as customers are not rushing to commit to making bulk purchases, in view of the ample supply capacity available.
“That said, any attempt to raise prices remains challenging as customers are still price-sensitive,” it said.
RHB IB named two top picks, Hartalega and KRI.
