KUALA LUMPUR: Affin Hwang Capital expects earnings for the rubber sector to fall below 2019 levels in the second quarter (Q2) due to the continued decline in average selling prices (ASP).
It said all the rubber glove manufacturers under its coverage recorded a lower quarter-on-quarter profit in Q1 2022, as the decline in ASP coupled with an increase in production costs continued to drag earnings before interest, taxes, depreciation and amortisation (Ebitda) margins lower.
Although some managed to drive higher sales volume, this was not sufficient to compensate for the lower margin, Affin Hwang added.
"Due to the on-going overcapacity, we believe it would continue to be challenging for manufacturers to pass on higher production costs (labour, fuel and electricity) incurred since the start of the year.
"Given that there are still new capacity additions coming through, we believe it would be challenging for the manufacturers to raise their prices.
"However, we are not expecting the manufacturers to sell their products at a loss (positive gross profit margin), as most selling prices are set one month before delivery of product," said the firm.
Affin Hwang expects the overcapacity to start easing by year-end.
It said Malaysian manufacturers also needed to maintain their current quality standards to remain competitive in the long run.
There have been an increase in the number of companies having ventured into the rubber glove manufacturing business amid the pandemic.
However, the firm noted that the quality for some of these players was questionable.
"There was a spike in the number of companies that were put under the import alert list by the Food & DRug Administration (FDA) due to excessive defects above the tolerance levels post the H1N1 pandemic (2009-2010).
"The FDA had previously relaxed its rules during the height of the pandemic to increase the supply of gloves into the US, which we believe has helped contribute to the rise in the market share of the China rubber glove manufacturers," it said.
The firm maintained "Underweight" rating for the sector due to several headwinds faced by the sector, including declining ASPs, rising production costs, and shortage of labour, which have negatively impacted the glove makers' profitability.
It gave "Sell" calls on Hartalega Holdings Bhd, Top Glove Corporation Bhd, Kossan Rubber Industries Bhd and Supermax Corporation Bhd.
"Apart from that, further allegations of mistreatment of foreign labour could also negatively impact demand for Malaysian rubber gloves," it added.