Rubber Gloves - CGS-CIMB Research 2020-07-01: No Concern On Lower ASPs & Oversupply


Rubber Gloves - No Concern On Lower ASPs & Oversupply

  • Yesterday, an article from The Star highlighted that there is an oversupply of gloves in the market, leading to a gradual decline in ASPs.
  • Based on our channel checks, glove makers’ order book visibility remains strong (6-8 months) with expectations of further hikes in glove ASPs.
  • We stay sector Overweight, with Top Glove (SGX:BVA) and Supermax as our top picks.

The Star reported oversupply and lower ASPs in glove sector

  • Yesterday, The Star reported that glove selling prices (ASPs) are declining gradually. This is the result of an oversupply situation, leading to near-term impact on ASPs. It also stated that its checks on e-commerce sites show that gloves are being sold at steep discounts compared to the peak period from Mar to Apr.

This is unlikely the case, in our view

  • Based on our channel checks with Malaysia Rubber Glove Manufacturer Association (MARGMA) and glove companies under our coverage, average order book visibility remains high at least 6-8 months. We also understand that most global medical distributors and government agencies worldwide are aggressively stocking up gloves as these customers have low-to-minimal inventories of rubber gloves.
  • In addition, we are of the view that glove ASPs are set to continue increasing in the near-term. This is given that glove buyers worldwide are willing to offer higher ASPs to ensure supply and delivery of gloves in light of the Covid-19 pandemic.
  • Also, glove makers are allocating certain capacity for spot-orders (10-20% of total capacity), which have higher ASPs. We expect glove makers to record ASPs hikes on a monthly basis up to end-CY20.

Discounted prices on e-commerce sites do not paint the full story

  • Based on our channel checks, e-commerce sites do show that certain merchants are selling rubber gloves at discounted prices (vs. original selling prices stated). While we believe most of these are marketing gimmicks, we also note that most of these discounted gloves (local and imported) are either sold in odd sizes or in limited quantities.
  • In addition, we are unable to ascertain the quality of these gloves sold by these merchants. Note that most of the gloves manufactured by glove makers under our coverage are medical-grade quality and meet international medical standards such as from US Food and Drug Administration (FDA).

Glove makers under our coverage not under threat anytime soon

  • We are not overly concerned about the potential emergence of new glove manufacturers locally given the current strong global glove demand. While most of this news is market speculation, we believe these new manufacturers would require at least 12-18 months to build a glove manufacturing plant.
  • Furthermore, glove makers under our coverage have superior pricing power given that their larger capacity size provides higher economies of scale.

Reiterate Overweight

  • We stay sector Overweight. In our view, glove stocks remain attractive as key beneficiaries of strong global glove demand from Covid-19.
  • Our sector top picks are Top Glove (SGX:BVA) and Supermax. We also have ADDs on Hartalega and Kossan Rubber.
  • See PDF report attached below for sector comparison of Malaysia glove sector stocks.

Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2020-07-01
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