Rubber Gloves - CGS-CIMB Research 2020-07-20: Blue Skies Ahead

TOP GLOVE CORPORATION BHD (SGX:BVA)

Rubber Gloves - Blue Skies Ahead

We reiterate our positive view on the Malaysian glove sector post a session with industry group MARGMA at Invest Malaysia 2020 Series 2.
MARGMA expects global glove demand to surpass 330bn pieces in 2020 ( > 20% y-o-y) on the back of higher usage globally owing to Covid-19.
Post Covid-19, MARGMA expects ASPs to normalise in tandem with better supply-demand dynamics. Yet, ASPs should not return to pre-Covid19 levels.

We hosted the Malaysian Rubber Glove Manufacturers Association (MARGMA) at Invest Malaysia 2020 Series 2 today. The industry group presented the opportunities and challenges facing the Malaysian glove sector post-Covid-19. MARGMA was represented by its vice president, Dr. Supramaniam who has more than 29 years in the rubber glove industry, as well as Mr. Chan Wone Fu, its Chief Executive Officer.
MARGMA remains upbeat on prospects for the sector given the recent surge in global glove demand due to Covid-19. It also expects rubber glove demand to continue to rise in the long term (post-Covid-19) from higher glove consumption per capita in developing markets, as well as higher usage in the non-medical industries.

As at Jun 20, MARGMA said it expected global rubber glove demand to rise by 20% to reach 330bn pieces in 2020F. However, we understand that MARGMA now believes there is upside to this number (data yet to be published) given the severity of Covid-19 on a global scale. This is supported by the fact that the bulk of Malaysian glove makers currently have an average order backlog of 6-12 months.
It expects Malaysia to supply up to 220bn rubber gloves in 2020, making up 67% of the global supply.

Despite aggressive expansion plans by Chinese glove makers, MARGMA is not overly concerned about their impact on Malaysian manufacturers. MARGMA said it believes the Malaysian glove sector as a whole will continue to have an edge over rivals from other countries given:
1. their industry-leading technology that is ahead of competition (estimated 8-10 years) via R&D efforts,
2. supportive ecosystem to support glove production (suppliers, transportation, infrastructure, etc.), and
3. established track-record on the quality of its products built over the years.

Despite the detention order imposed by US custom authorities on two of Top Glove’s subsidiaries (Top Glove Sdn Bhd and TG Medical Sdn Bhd), MARGMA is of the view that glove companies in Malaysia have always complied with regulations relating to labour usage.
In order to secure orders from their customers, glove companies are constantly audited by their customers and regulators to ensure compliance with labour laws, MARGMA said. The industry group added that it plans to hire an experienced consultant for advice on the forced labour allegations against some of its members.

We maintain our sector Overweight rating. In our view, glove stocks remain attractive as key beneficiaries of the strong global glove demand due to Covid-19.
Our sector top picks are Top Glove and Supermax. See Top Glove Share Price; Top Glove Target Price; Top Glove Analyst Reports; Top Glove Dividend History; Top Glove Announcements; Top Glove Latest News.
We also have ADDs on Hartalega and Kossan Rubber.
See PDF report attached below for peer comparison on glove makers including Top Glove (SGX:BVA), Kossan Rubber, Supermax, Hartalega, Riverstone (SGX:AP4) and UG Healthcare (SGX:41A).
Re-rating catalysts: higher-than-expected rise in ASPs and/or stronger-than-expected glove demand.
Downside risks: stiff pricing competition and/or faster-than-expected success in the development of a Covid-19 vaccine.
See also previous report: Rubber Gloves - CGS-CIMB Research 2020-07-18: Expecting Higher ASPs Of Gloves In The US.

Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2020-07-20

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