Sales volume could recover by c.15% yoy in 2024F
CGSCIMB recently hosted Hartalega at their Malaysia Corporate Day 2024 and subsequently spoke to other industry players. Their findings suggest local glovemakers are seeing a gradual recovery in sales volume in 2024F, following a 45-50% aggregate volume decline in 2021-23 among the Big 4 (Hartalega, Top Glove, Kossan & Supermax).
CGSCIMB, in its Sector Note today (Jan 16) said there are several factors driving this which include the inventory restocking cycle by global customers and regional players, i.e. China glovemakers operating at near maximum capacity, thus driving glove volumes back to the Malaysian players.
CGSCIMB’s initial assessment indicates c.15% volume growth to be the base case in 2024F for the Big 4, which they have already factored into the firm’s CY24-25F estimates.
Profitability upside is still patchy given lingering excess capacity
CGSCIMB channel checks also suggest that while there is a positive trend in the profitability per 1,000 pcs, it is likely to remain well below pre-pandemic levels for the next 12-18 months.
This is due to lingering excess capacity in the background among the Big 4 that could be easily turned on, in addition to the possibility of the China glovemakers resuming capacity expansion, capping any significant upside to the profitability.
In short, CGSCIMB thinks it would be challenging for Malaysian glovemakers to return to pre-pandemic profit levels before 2026F.
Industry players they spoke to also acknowledged the lingering excess capacity and difficulty in raising ASPs substantially to reflect the cost volatility.
Likely difficult to return to pre-pandemic profit levels before 2026F
The Big 4’s share prices have re-rated over the last 3 months, with current P/BV multiples of 0.6-2.1x inching closer to pre-pandemic averages of 3-4x.
CGSCIMB however, view this as unjustified given prolonged suppressed ROEs, even by FY26F. They think investors are better off trading the sector, with the blue-sky scenario (40x FY26F P/E) forming the upper range, and the worst-case scenario (12x FY26F P/E) forming the lower range.
CGSCIMB stays the sector being Underweight and have Reduce calls on Hartalega (TP: RM1.95) and Top Glove (TP: RM0.70) on de-rating catalysts namely: weaker-than-expected sales volumes growth and profitability per 1,000 pcs.
Upside risks on the sector, include – 1) rivals raising ASPs, which could result in potential sales volume returning to the local players, 2) stronger-than-expected global glove demand, and 3) prolonged weak ringgit vs. US dollar.
