Rubber Gloves - CGS-CIMB Research 2020-12-15: Value-Trade At This Juncture

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TOP GLOVE CORPORATION BHD (SGX:BVA)

Rubber Gloves - Value-Trade At This Juncture

• Global glove demand remains robust owing to COVID-19-driven demand, with glovemakers’ total capacity fully sold up to at least 1QCY22.
• Glove stocks should record stronger earnings in quarters ahead, driven by:
  1. higher ASPs,
  2. rise in production capacity, and
  3. better economies of scale.
• Maintain Overweight, with Hartalega and Top Glove (SGX:BVA) as our top picks.

Capacity of glovemakers fully sold up to 1QCY22

• Owing to the COVID-19 pandemic, there is an acute shortage of rubber gloves globally due to increased usage in the medical field as well as in non-medical industries (retail, F&B, etc.). Though we expect mass roll-outs of COVID-19 vaccines in 2021F, we believe the glove shortage will persist; glovemakers continue to highlight that their capacity is fully taken up until at least 1QCY22.
• Due to the supply shortage currently, we also gather that certain glove buyers are willing to lock-in large volume orders at a premium to current average selling prices (ASPs) to ensure sufficient glove supply next year.

Global glove demand to outstrip incoming new capacity

• We expect that in the next 2-3 years, global glove supply will grow 15-25% annually on the back of higher usage and increased healthcare awareness globally.
• Despite glovemakers’ aggressive expansion plans to capture this demand growth, the global supply growth in the next 2-3 years would likely still not catch up with the demand increase, in our view. And this assumes that there would be no supply disruptions (due to unforeseen circumstances) or delays in expansion plans (construction delays, raw material supply constraints, etc.).

ASPs to continue on an uptrend until at least 1QCY21

• At this juncture, we understand that glovemakers expect ASPs to continue rising on a monthly basis up to at least end-1QCY21, without discounting further hikes going forward. This is given the supply shortage globally, as well as to pass on:
  1. rising raw material prices (nitrile butadiene: +40% year-to-date, latex: +28% year-to-date),
  2. higher labour costs, and
  3. the recent strengthening of the RM against the US$ (+2.6% q-o-q).

Glovemakers to record stronger results in quarters ahead

• Going forward, we expect glovemakers to continue recording stronger quarters, backed by:
  1. higher ASPs,
  2. increase in production capacity (19.6% y-o-y in 2021F), and
  3. higher economies of scale.
• Note that we have assumed ASPs will continue on an uptrend to only 1QCY21F, hitting a conservative average of US$60/1,000 pieces of gloves in that quarter (already at a 20-40% discount to current ASPs).

Maintain Overweight

• We maintain our Overweight call on the glove sector. While our top picks in the sector are currently Hartalega and Top Glove (SGX:BVA), we also have ADD calls on Supermax and Kossan.
• 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 continue to like the sector given its strong earnings prospects, as it is a key beneficiary of the robust global glove demand owing to COVID-19.
• Potential re-rating catalysts: surge in ASPs and stronger-than-expected global glove demand.
• Downside risks: sharp decline in ASPs and lower-than-expected demand for gloves.

Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2020-12-15

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