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CGS-CIMB Research maintains overweight on gloves

KUALA LUMPUR: CGS-CIMB Equities Research is maintaining its Overweight stance on glovemakers, with Hartalega and Top Glove as its top picks as it expects global demand to remain robust.

In its research note on Wednesday, it said the Covid-19 pandemic will continue to drive strong global demand while glovemakers’ total capacity has been fully sold up to at least 1QCY22.

“Glove stocks should record stronger earnings in quarters ahead, driven by: i) higher average selling prices (ASPs), ii) rise in production capacity, and iii) better economies of scale,” it said.

CGS-CIMB Research said due 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 ASPs to ensure sufficient glove supply next year. Global glove demand to outstrip incoming new capacity.

“We expect that in the next two to three 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 two to three 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.),” it explained.

CGS-CIMB Research said at this juncture, it understands glovemakers expect ASPs to continue rising on a monthly basis up to at least end-1QCY21, without discounting further hikes going forward.

The factors are the global supply shortage, as well as the ability to pass on: i) rising raw material prices (nitrile butadiene: +40% year-to-date, latex: +28% year-to-date), ii) higher labour costs, and iii) the recent strengthening of the ringgit against the US dollar (+2.6% quarter-on-quarter).

“Going forward, we expect glovemakers to continue recording stronger quarters, backed by: i) higher ASPs, ii) increase in production capacity (19.6% on-year in 2021F), and iii) 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).

We maintain our Overweight call on the glove sector. While our top picks in the sector are currently Hartalega and Top Glove, we also have Add calls on Supermax and Kossan.

“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,” it said.


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