KUALA LUMPUR: The outlook for Malaysia's glove players appears bleak as average selling prices (ASPs) are expected to remain stagnant.
This is due to customers' reluctance in absorbing additional costs, according to Public Investment Bank Bhd (PublicInvest).
PublicInvest said the situation arises amid stiff competition from Chinese gloves manufacturers.
"Though recent demand has displayed some signs of improvement, we believe the operational landscape is still challenging, aggravated by escalating raw material prices.
"We perceive that recent upward movements in share prices have exceeded their fair valuation," it said in a note.
PublicInvest downgraded the glove sector from "Neutral" to "Underweight", with three "Underperform" calls on Hartalega Holdings Bhd, Top Glove Corporation Bhd and Kossan Rubber Industries Bhd.
The three glove players under PublicInvest's coverage, posted weaker set of results in the recent quarter, mainly due to lower ASPs and sales volume.
The industry continues to operate at a low utilisation rate below 50 per cent due to an enduring oversupply of gloves, while the overall sales volume has declined year-on-year (YoY).
PublicInvest believes that the operational landscape for Malaysian glove makers will still be challenging moving into the first half of calendar year 2024 (1HCY24).
The investment bank gathered that Chinese glove players are still running at near full capacity.
Based on its channel checks, Chinese players are currently selling about US$2 per 1,000 pieces cheaper than their Malaysian counterparts, pricing their products at US$16-18 per 1,000 pieces.
"The blended average selling prices (ASPs) have stabilised at around US$20-21 per 1,000 pieces for Malaysian glove players, and this is expected to remain flat in 1HCY24
"Notably, coal price has started to ease, this may provide Chinese players with greater flexibility to reduce ASPs, further intensifying the competitive pricing landscape," it noted.
PublicInvest also said raw material prices such as nitrile butadiene and natural latex which account for about 30 per cent of total production cost has trended upwards since October 2023.
It expects the trend to lead to a squeeze in operating margins for Malaysian glove players in 1HCY24.