Greater demand seen in 2H

KUALA LUMPUR: Rubber products industry is expected to see a substantial demand recovery trend in the second half of 2024 (2H24) before glovemakers recommence capacity expansions by 2025/2026. 

Recent export data suggests a positive demand recovery sign that coincides with steady ASP performance, according to RHB Research. 

The firm said further normalisation in gas tariffs and various cost discipline measures in place could eventually propel profitability in 2024. 

Additionally, RHB Research believes that 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.  

It has upgraded the ratings of rubber products companies such as Hartalega Holdings Bhd, Kossan Rubber Industries Bhd, and Supermax Corp Bhd to "buy," with Hartalega and Kossan being the sector top picks.  

The firm has kept a "neutral" rating on Top Glove Corp Bhd on its weaker-than-peers balance sheet and plant utilisation.  

"We 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," it added. 

Nevertheless, RHB Research said there are key downside risks for the rubber products industry, including weaker-than-expected demand, the inability to pass on costs to customers, and higher-than-expected operating costs. 

The 2024 supply for the rubber products industry has reached 376 billion, surpassing the 2023 figure of 373 billion.  

This includes the addition of one billion in new capacity from Thailand and Hartalega's progressive capacity transition plan, estimated at two billion compared to the New Generation Complex's (NGC) 1.5 billion. 

Local players have yet to announce plans to commence new capacity in 2024, given that domestic industry plant utilisation is still running at more than 50 per cent. 

RHB Research has raised its 2024 demand assumptions to 397 billion from 386 billion previously, which indicates seven per cent year-on-year (YoY) growth from four per cent growth previously vs the pre-Covid-19 five-year average growth of 14 per cent.  

That said, the firm expects the industry to achieve equilibrium by 2H24, as the bulk of inventory stockpiled from 2020–2021 has been gradually consumed and is approaching its usual shelf-life end of three to five years. 

On the trade front, Malaysia's monthly glove exports remain on a positive YoY growth trend for two consecutive months, following a two per cent YoY increase in Nov 2023 and a 33 per cent in October. 

Despite export volumes contracting by 25 per cent on a month-on-month (MoM) basis, export value was one per cent MoM higher in Nov 2023.  

"We believe this may indicate cost pass-throughs starting to kick in and a better product mix in Nov.  

"On this front, we 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," RHB Research said. 

Based on its channel check, Malaysian glovemakers sold at US$19 to US$20 per 1,000 pieces in Dec 2023, largely unchanged versus the third quarter of 2023's (3Q23) numbers.  

While domestic glovemakers suffered a weaker average selling price in 3Q23, down three to seven per cent quarter-on-quarter (QoQ), the firm believes that the pick-up in export value could substantiate the management teams' guidance.  

Additionally, its expectations of a stabilised ASP trend could gradually materialise in 2024.

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