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CGS-CIMB Research said apart from Top Glove and Supermax, it also has Add calls on Hartalega and Kossan Rubber Industries.

KUALA LUMPUR: CGS-CIMB Equities Research maintains its Overweight view on the Malaysian glove sector with Top Glove and Supermax as its top picks.

“In our view, glove stocks remain attractive investments as key beneficiaries of strong global glove demand due to Covid-19; we expect record-breaking profits in the next two to three quarters, ” it said on Monday.

CGS-CIMB Research said apart from Top Glove and Supermax, it also has Add calls on Hartalega and Kossan Rubber Industries.

“Re-rating catalysts: higher-than-expected rise in average selling prices (ASPs) and/or stronger-than-expected glove demand. Downside risks: stiff pricing competition and/or faster-than-expected success in finding the Covid-19 vaccine, ” it said.

To recap, the United States Customs and Border Protection (CBP) placed a withhold release order (detention order) on disposable gloves produced by two of Top Glove Corp’s subsidiaries, Top Glove Sdn Bhd and TG Medical Sdn Bhd, on July 15.

According to a US media report, CBP stated that it had gone through extensive interagency consultations and had found evidence of forced labour practices, including debt bondage, in Top Glove’s units.

“Under this order, products made by both companies are not allowed entry into the US. We estimate that sales to US by both subsidiaries make up 9-10% of Top Glove’s total 9MFY8/20 sales.

“We believe that the impact to Top Glove’s earnings will be minimal, assuming that it can resolve the detention order in the expected two to four weeks timeframe. We estimate that its FY8/20 EPS will be negatively impacted by 0.4% for every week the order is in effect. Expect other glove companies to benefit from this detention order.

In the same media report, CBP also mentioned that it is aware of the current critical need for disposable rubber gloves for domestic usage and would continue to allow entry of gloves produced by other manufacturers. It also expects no significant impact on total US imports of disposable rubber gloves.

“Based on our estimates, Top Glove’rubber gloves make up c.13% of the US’s total rubber glove imports.

“In our view, this will likely lead to a spike in demand for rubber gloves by other glove manufacturers as long as the detention order on both Top Glove’s subsidiaries is in effect. Hence, we believe glove makers under our coverage (ex- Top Glove) will benefit in terms of higher sales to the US, namely Hartalega, Kossan and Supermax.

“However, we believe that other glove makers are unlikely to be able to fully fulfil the supply gap as glove makers globally are already running at high average uilitisation rates of more than 95%.

“Hence, this could result in average selling prices (ASPs) of rubber gloves in the US being driven higher due to a potential supply squeeze. This is further aggravated by the surge in new Covid-19 cases in the US, which reached a new daily record high of 71,200 cases (17 Jul), the research house said.

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