KUALA LUMPUR: Due to persistently low demand, glovemakers' recent profit reports suggest that the sector's recovery is still uneven.
Kenanga Research noted a slight sequential weakening in earnings delivery during the fourth quarter (Q4) reporting season, with only 25 per cent/50 per cent/25 per cent of results surpassing/aligning with/falling below expectations, compared to 50 per cent/20 per cent/25 per cent in Q3 2023.
Among the four companies under its coverage, Kenanga Research mentioned that only Kossan Rubber Industries exceeded its forecast, while Hartalega Holdings Bhd and Top Glove Corp Bhd met expectations, and Supermax Corp Bhd reported disappointing results.
"The undertone suggests the sector's recovery path remains bumpy amidst continued weak demand, massive overcapacity, and predatory pricing by certain overseas players.
"Despite registering a second consecutive quarterly profit, Kossan and Hartalega's Q4 2023 bottomline was lower quarter-on-quarter, dragged down by subdued sales volume and sustained high input nitrile butadiene rubber prices.
"On the other hand, Supermax and Top Glove suffered their fifth and sixth consecutive quarterly losses, respectively, due to the sale of high-priced inventory at falling market prices, subdued sales volume coupled with lower overhead absorption on the back of a less-than-optimum utilisation rate," it said in a note.
Kenanga Research anticipates continued volatility in sector earnings ahead, attributing it to weak demand and persistently high nitrile butadiene rubber prices.
The industry foresees fluctuating quarterly sales orders as distributors and buyers refrain from placing significant orders or holding substantial stocks due to ample supply availability.
"We expect the operating environment to remain challenging in subsequent quarters, plagued by predatory pricing by certain overseas players (i.e. selling below cost over an extended period of time to eliminate competitors) and massive oversupply.
"Overall, the industry is cautious about raising prices (to fully pass on the higher input cost) given the still competitive landscape in the industry.
"This falls in line with our view that raising the average selling price (ASP) over the immediate term will be challenging. With a low industry utilisation of about 40 per cent, this is without a doubt still a buyer's market."
The demand-supply situation is projected to approach equilibrium by 2026, with no new capacity additions and a 15 per cent annual growth in global demand for gloves.
Malaysian Rubber Glove Manufacturers Association (MARGMA) forecasts a 12 per cent to 15 per cent annual growth in global demand for rubber gloves from 2023, following a 25 per cent contraction in 2023.
We project the demand for gloves to rise by 30 per cent in CY24 to 390 billion pieces and resume its organic growth of 15 per cent thereafter.
"This will result in an excess capacity of 212 billion pieces in CY24. The overcapacity still persists, which means low prices and depressed plant utilisation will continue to plague the industry in CY24," it said.
Kenanga Research assumed an ASP of US$20 per 1,000 pieces, similar to CY23, and an average plant utilization of 45 per cent, up from an estimated 40 per cent in 2023.
The firm maintains an "underweight" recommendation for the sector and does not have a top pick.