KUALA LUMPUR: Concerns over negative news surrounding glove manufacturers, especially on the uncertainty of future average selling prices (ASPs), are expected to ease moving forward so long as the overall lead time remains around 12 months, Affin Hwang Capital said.
Quoting a report by Frost & Sullivan commissioned by Top Glove Corp Bhd, Affin Hwang said the demand for disposable gloves would likely grow 15 per cent on a compound annual growth rate (CAGR) basis for the next five years, mainly supported by the rise in consumption from the medical segment.
"We concur with their thesis, as we believe that the Covid-19 pandemic would likely change consumption patterns similar to previous pandemics, given the increase awareness of the importance of PPE (personal protective equipment).
"Public policy changes are also inevitable, for example in China, the National Health and Family Planning commission in January 2020 had started to require medical staff to wear disposable gloves when necessary," it said in a note today.
Affin Hwang said apart from the concern about the uncertainty of future ASPs, the recent development of company-related newsflow had also hampered investor sentiments on the sector.
"Our checks indicated that that the order cancellations, the shortening of lead time and the equity fund raising are not related to the outlook of the overall sector but peculiar to Top Glove only.
"Due to Top Glove's dominant market share, there were concern as it might be raising fund in anticipation of a weaker outlook moving forward," it said.
Affin Hwang said ASPs would fall gradually and would not revert to pre-Covid-19 levels at least for the next two to three years.
Since the start of the year, the overall market cap of the sector has contracted by 19 per cent, and has underperformed the overall market, which manage to deliver -1.7 per cent year-to-date return.
"There is no doubt that the current ASP trend is not sustainable, as demand would normalised as more vaccines are being administered," it said.
However, Affin Hwang expects ASPs to decline by 30-35 per cent (3.0-3.5 per cent per month) in 2021, consistent with Frost & Sullivan's research report.
"Although we are expecting overall supply to increase by 20 per cent per annum over the next few years, demand is also expected to grow by 15 per cent, outpacing historical growth of 8.0-10 per cent per annum," it said.
Affin Hwang has maintained its "overweight" call on the sector.