Recent export data suggests a positive demand recovery sign that coincides with steady ASP performance. Further normalisation in gas tariffs and various cost discipline measures in place could eventually propel profitability in 2024.
RHB, in its Rubber Products Sector Update note today (Jan 5) said they expect a meaningful demand recovery trend by 2H24 before glovemakers recommence capacity expansions by 2025/2026.
Key downside risks include weaker-than-expected demand, inability to pass on costs to customers, and higher-than-expected operating costs.
What triggered the upgrade? Malaysia’s monthly glove exports remain on a positive YoY growth trend for two consecutive months following a 2% YoY increase in Nov 2023 (Oct 2023: +33%). Despite export volumes contracting by 25% on a MoM basis, export value was 1% MoM higher in Nov 2023.
RHB believes this may indicate cost pass-throughs starting to kick in and a better product mix in Nov. On this front, they believe the ability to initiate cost pass-throughs will serve as a crucial catalyst to drive profitability moving forward, more so as it also indicates the risk from a price war has gradually dissipated.
Based on RHB’s channel check, Malaysian glovemakers sold at USD19-20/1,000 pieces in Dec 2023, largely unchanged vs 3Q23’s numbers. While domestic glovemakers suffered a weaker ASP in 3Q23, (down 3-7% QoQ), RHB thinks the pick-up in export value could substantiate the management teams’ guidance and our expectations of a stabilised ASP trend, which could gradually materialise in 2024.
Demand-supply dynamic. RHB’s 2024 industry supply is now at 376bn vs 2023’s 373bn, taking into account 1bn in new capacity from Thailand and Hartalega’s progressive capacity transition plan (estimated: 2bn vs New Generation Complex or NGC’s 1.5bn).
Local players have yet to announce plans to commence new capacity in 2024, given that domestic industry plant utilisation is still running <50%. RHB raised their 2024 demand assumptions to 397bn from 386bn previously, which indicates 7% YoY growth from 4% growth previously vs the pre-COVID-19 5-year average growth of 14%.
That said, they expect the industry to achieve equilibrium by 2H24, as the bulk of inventory stockpiled since 2020-2021 has been gradually consumed and is approaching its shelf-life end (3-5 years usually).
Now OVERWEIGHT. RHB believes Malaysian glovemakers still have legs to run predominantly in 1H24 on a temporary demand shift to Malaysia amid China’s Lunar New Year holiday break and ample room for capacity expansion (post demand recovery by 2H24).
RHB upgrades Hartalega, Kossan Rubber, and Supermax to BUY, with Hartalega and Kossan being
Their sector Top Picks. RHB keep their NEUTRAL rating on Top Glove on weaker-than-peers balance sheet and plant utilisation and expect improvements in demand visibility and favourable cost outlooks in 2024 to propel profitability. The consistency of order replenishments, ability to implement cost pass-throughs, and gradual improvements in utilisation rates remain the key statistics to watch out for and ensure earnings sustainability.
