KUALA LUMPUR: Players in the glove sector are seeing a decline in their share prices due to negative sentiment, largely driven by a highly competitive landscape, especially from China.
Tradeview Capital Sdn Bhd vice president Tan Cheng Wen noted that the outlook for the glove sector is primarily influenced by concerns among most players about increasing input and operating costs.
Additionally, he said that the recovery in demand has been slower than anticipated, with most of the demand recovery resulting from inventory restocking.
The utilisation rate continued to recover from previous lows for all the major players given demand normalisation.
"We believe profitability should continue to improve as raw material prices come off to buffer margins and a possibility of limited changes to operating costs," he told Business Times.
He added major glove counters enjoyed a tailwind in valuation following the announcement of the increased US tariff hikes on Chinese players in May 2024—rising to 25 per cent by 2026 from the current 7.5 per cent reflecting Washington's strategy to protect US industries from perceived unfair competition.
"However, the recent weakness in share price can be attributed mostly to reflect the negative sentiment of a stiff competitive landscape, particularly from China.
"With the potential higher energy costs and operating costs (freight costs), and assuming demand continues to improve, average selling price (ASP) is likely to range between US$20-22 per thousand pieces based on the cost pass-through mechanism as guided by the various glove companies," added Tan.
Meanwhile, RHB Investment Bank Bhd (RHB Research) said glovemakers are expected to deliver a stronger set of results for the second quarter of 2024 (Q2 2024), predicated by an improving operating environment on better demand visibility and strengthening average selling prices (ASPs).
The firm said that the current production run rate has shown improvements, with order volumes in Q2 2024 set to grow by at least 10 per cent quarter-on-quarter (QoQ).
"Moving forward, we expect a meaningful demand recovery trend to manifest in 2H24, coupled with an ASP pick-up, to propel glove makers' profitability in 2024," it said.
Industry-blended ASPs are now hovering at US$20-21/1,000 pieces.
The firm noted China's glovemakers' ASPs are now in the US$17-18/1,000 pieces range, which implied a narrowing pricing gap of US$3 from US$5 between Malaysian and Chinese glovemakers.
"At this time, we see minimal risk of another price war, as customers have a greater acceptance for price increases given the heightened emphasis on product quality," it said.
Malaysia's glove export volumes rose eight per cent QoQ in 2Q24, outpacing Q1 2024's growth.
Export value climbed 10 per cent QoQ to RM3.6 billion vs Q1 2024's RM3.3 billion.
Conversely, China's glove exports were flattish QoQ following Q1 2024's three per cent QoQ growth.
RHB Research expects 2024 global glove demand growth of 22 per cent, premised on the recovery of glove restocking activities in the second half of 2024 (2H24).
"We now expect global industry supply to increase by 7.3 billion pieces from 4.3 billion in 2024 on planned capacity replenishments by Hartalega Holdings Bhd (four billion pieces from the relocation of production lines to NGC1.5 by end 2024), Top Glove Corporation Bhd (three billion pieces from the resumption of production lines), and 0.3 billion pieces planned capacity increase by Sri Trang Gloves (Thailand).
It added that sequentially improving sales volume on a more balanced demand-supply dynamic should lead to an improvement in glovemakers' profitability in 2024.
As the industry's excess capacity is phased out, it is expected to see industry demand-supply equilibrium by end 2024.
"We also expect the risk of price competition from Chinese peers to subside, premised on arising quality concerns resulting in higher rejection rates from the US Food & Drug Administration (FDA) and China players' pivoting stance towards sustainability.
"The recent announcement of a 25 per cent tariff on China-made medical grade gloves is set to see a trade diversion towards Malaysian-made products.
"With that, Hartalega is expected to be the prime beneficiary given its large exposure to North America (50 per cent of revenue), followed by Kossan, Supermax, and Top Glove," it said.
The firm maintained an overweight" on the sector.