Glove Makers - CGS-CIMB Research 2021-07-12: Halting Operations In EMCO Areas


Glove Makers - Halting Operations In EMCO Areas

  • UG Healthcare (SGX:8K7) was spared from the imposition of EMCO in Selangor, but the extension of EMCO to Seremban caused it to temporarily halt operations.
  • Riverstone (SGX:AP4) remains the least impacted glovemaker (by the EMCO) under our glove coverage, as most of its operations are located in Taiping, Perak.
  • We see limited share price reaction to UG Healthcare's latest announcements, as it has trended in line with peers since announcement of Selangor EMCO.

UG Healthcare (UGHC) to halt operations due to EMCO

  • UG Healthcare announced that while it was spared from the imposition of the Enforced Movement Control Order (EMCO) in Selangor effective 3 Jul, it had to halt its manufacturing operations in Seremban when the district was later also placed under the EMCO effective 9 Jul.
  • UG Healthcare estimates some 80m pieces of glove volume loss from the 2-week suspension. Together with its earlier announced productivity loss of 85m on 28 Jun (due to COVID-19 cases found in factories, and the government’s limitation on workforce capacity of essential sectors to 60%), it estimates total output loss year-to-date at ~165m gloves (5% of annual capacity).
  • We believe the negative impact will mainly be reflected in 1QFY6/22F, and our preliminary estimates point towards ~5.6% downside to our FY22F earnings forecast for UG Healthcare.
  • See

Riverstone (RSTON) less impacted vs peers

  • Meanwhile, we believe the ECMO’s impact on Riverstone is relatively limited.
  • Riverstone’s manufacturing plant in Bukit Beruntung, Selangor holds mainly cleanroom facilities, which are used to process gloves into cleanroom products. Majority ( > 90%) of Riverstone’s dipping lines are located in Taiping, Perak, which has moved into Phase Two of Malaysia’s National Recovery Plan (NRP) since 5 Jul, and can continue operating with higher manpower limit (80%, vs 60% in Phase One).
  • We believe Riverstone will increase its cleanroom processing volume in its Taiping and Thailand plants accordingly to partially mitigate the impact from Selangor’s EMCO. We believe our FY21F earnings forecast for Riverstone remains intact despite the recent developments.
  • See

Negative in our view; reiterate sector Neutral

  • According to the Malaysia Rubber Glove Manufacturers Association (MARGMA), ~58% of Malaysia-produced gloves are produced in glove plants located in Selangor; overall production impacted in Malaysia is now likely higher given the imposition of EMCO in more Selangor districts and ongoing manpower limitations in other states.
  • Should the operation suspension in EMCO districts be extended beyond the initially announced 2 weeks, we see longer-term repercussions, where global glove buyers may have no choice but to turn to glove makers in other countries, such as Thailand, China and Vietnam, to secure glove supplies and/or as alternative suppliers.
  • We retain our NEUTRAL call on the SGX-listed glove sector, in view of sector ASP downtrend and near-term uncertainties on output resumption.
  • Nevertheless, we see limited share price reaction to UG Healthcare's latest announcements. Since the initial announcement (1 Jul) of Selangor being placed under EMCO, UG Healthcare's share price has retreated 5.1%, in line with its Malaysian-listed peers (-5.9%).
  • Sector upside risks: sharp rise in glove demand due to structural changes brought by COVID-19.
  • Downside risk: sharper-than-expected fall in glove ASPs.

ONG Khang Chuen CFA CGS-CIMB Research | https://www.cgs-cimb.com 2021-07-12
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