Rubber Gloves - CGS-CIMB Research 2020-06-23: Too Early To ‘Sweat’ It

TOP GLOVE CORPORATION BHD (SGX:BVA)

Rubber Gloves - Too Early To ‘Sweat’ It

Recent media reports indicate that two of China’s largest glove makers plan to expand their respective production capacity over the next 3 years.
We are not overly concerned, as China’s new capacity
1. is coming on-stream gradually,
2. could be delayed, and
3. has less economical cost base.
Reiterate Overweight, with Top Glove (SGX:BVA) and Supermax as our top picks.

Recent media reports indicate that two China glove makers, Blue Sail Medical (002382:CH) and Intco Medical (300677:CH), have ambitious plans to ramp up their nitrile glove (NBR) production capacity.
We gather that Blue Sail aims to raise its nitrile glove production capacity to 36.1bn by end-CY23 from 4.3bn at end-CY19. Intco plans to expand its nitrile glove capacity to 59.2bn p.a. by end-CY23 from 5.0bn at end-CY19.

Nevertheless, we are not overly concerned over the potential oversupply of gloves. Out of the total incoming China nitrile glove capacity of 86.0bn pieces p.a. (270-320 lines), only 7.7bn (9.9%) are slated be ready by 4QCY20, assuming no delays. As for the remainder new capacity, we gather that certain factory sites have not been identified.
In addition, we expect the commissioning of new production lines (2 weeks to 1 month per line) in the new factories to be delayed, resulting in the new capacity coming onstream on a staggered basis. This will allow the new capacity to be well-absorbed by the inelastic global glove demand (we estimate 10% p.a. in CY21-23F growth in global glove demand).

Based on our analysis, Malaysian glove makers have cost advantages and better production quality vs. China-based players. Besides higher labour costs, natural gas prices are higher in China vs. Malaysia. In addition, the consumption of natural gas to manufacture gloves (10% of total cost) in China is higher due to weather conditions (four seasons).
Also, China has in the past had issues with natural gas shortage which may led to quality issues and production disruption.

In 2019, China’s annual glove usage per capita was six pieces vs. 150 in the US and 100 in the EU. Given our view that China’s glove usage per capita should rise from better healthcare awareness (Covid-19), we believe Blue Sail and Intco’s new capacity will mainly cater to the rise in domestic demand.
Also, we believe recurring large-scale glove buyers are unlikely to source sizeable glove quantities from China due to concentration risk, given that China is already the largest supplier of personal protective equipment (PPE) products globally, according to Asian Development Bank’s research.

We maintain our Overweight call on the Malaysian glove sector. In our view, the new glove production capacity from China will not pose an immediate threat to Malaysia’s rubber glove industry given the latter’s technological advances in the industry and a more efficient cost structure. Our sector top picks are Top Glove (SGX:BVA) and Supermax. We also have ADD calls on Hartalega and Kossan Rubber.
See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.
Downside risks to our sector call are stronger-than-expected pricing competition in the rubber glove sector and/or faster-than-expected success in finding Covid-19 vaccines.

We estimate that Blue Sail has a total annual glove production capacity of 21.6bn, comprising 80% polyvinyl chloride (PVC)/thermoplastic elastomer (TPE), and 20% nitrile. It is constructing new glove plants with a total combined capacity of 6.6bn pieces p.a. (4.6bn PVC/TPE and 2.0bn nitrile) that are slated to be completed by end-CY20.
Blue Sail is also looking to construct two glove facilities on a plot of land in Shandong, China with a total combined capacity of 10bn pieces p.a. Construction works on this land is slated to begin in 3QCY20. Assuming that construction begins in 3QCY20, commercial production from the first plant (5.0bn pieces p.a.) should start in 3QCY21 and the second plant (5.0bn pieces p.a.) by 1QCY22.
We gather that Blue Sail is looking to acquire land to build and gradually commission new glove plants with a total combined annual production capacity of 20.0bn pieces p.a. (estimated 6.7bn p.a. in CY21-23F). By CY23F, Blue Sail aims to have production capacity of up to 36.1bn pieces of nitrile gloves p.a. and 24.9bn pieces of TPE gloves p.a., i.e. a total capacity of 61.0bn gloves p.a.

According to our channel checks, Intco’s annual production capacity currently stands at 19.0bn pieces -- 14.0bn PVC gloves and 5.0bn nitrile gloves.
In the nitrile space, we gather that Intco started constructing a new nitrile glove manufacturing plant in Anhui, China in 4QCY19. This plant will have an annual capacity of 5.7bn (32 double former glove dipping lines). Note that this is part of its expansion plan financed by the proceeds from its IPO in 2017. We understand that this plant is slated for completion by 4QCY20. Also in Anhui itself, Intco has in the pipeline plans to set up three other nitrile glove plants, each with 7bn annual capacity, to commence production over the next three years.
Besides its expansion plans in Anhui, Intco has in Mar 2020 signed an agreement with the Jiang Xi state government to secure land to expand its glove manufacturing capacity in the province of Jiang Xi, Pengze, by another 27.1bn pieces (9.9bn nitrile gloves, 3bn surgical gloves, 3.1bn latex examination gloves, and 1.4bn latex surgical gloves). Intco targets to complete the expansion within five years.
Furthermore, we gather that Intco is in the midst of identifying and acquiring land in Vietnam to expand its nitrile glove production capacity. Upon securing this land, it plans to build glove plants with a total production capacity of 8.8bn nitrile glove p.a. In total, Intco plans to have a total annual production capacity of 84.4bn pieces in CY23F.

Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2020-06-23

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