Limited returns for local glove makers
PETALING JAYA: Continued global oversupply in the rubber glove market and the erosion of Malaysia’s traditional cost advantage are expected to keep the returns of local glove makers subdued.
CGS International (CGSI) Research said the sector’s return on equity would remain capped below 5.5% in calendar year 2027, as rising competition from regional peers and sustained pricing pressures weigh on profitability.
“Malaysian glove producer earnings before interest and taxes (ebit) margins are not going to recover to pre-Covid-19 levels of US$3 per 1,000 pieces until at least 2028.
“The ongoing oversupply situation in global gloves coupled with a shift in cost profiles, especially around fixed costs such as labour and energy, relative to newer China-based producers, have made Malaysian glove producers the marginal cost producers from cost leaders in the pre-Covid-19 days,” CGSI Research said in a report.
According to the research house’s estimates, new capacities by Chinese producers outside China to avoid US tariffs could add 17.2% or 84 billion to global supply by 2027, providing further headwinds to market equilibrium and margin recovery.
CGSI Research highlighted that the glove producers’ costs used to be 17.7% cheaper than China in 2017, but the marginal cost producers at 7.5% had become expensive than China, thus making them more vulnerable to demand-supply dynamics.
“Higher fixed costs from the removal of energy subsidies and higher labour costs in the country a have driven this shift, in our view.
“Ultimately, glove average selling prices (ASPs) are a function of (typically global) variable and (local) fixed costs, with a margin that is determined by the marginal cost producer,” CGSI Research explained.
Among Malaysian glove producers, it said Top Glove Corp Bhd has a cost structure similar to Chinese peers, with Hartalega Holdings Bhd and Kossan Rubber Industries Bhd potentially catching up by 2027.
Taking into account the sustained oversupply worldwide, CGSI Research has reduced its sector core net profit estimates by 12%, 11% and 11% for 2025, 2026 and 2027 respectively.
As for valuation of stocks, it said valuations are overpricing recovery.
“We reiterate our ‘underweight’ stance on the Malaysian gloves sector as sector 2027 price-to-earnings (PE) of 19.1 times more than prices in the recovery in earnings.
“Poor results and less-than ideal outlook statements from Hartalega and Kossan in November could also have negative implications on share prices and valuations.
“At 23 times 2027 PE, Hartalega, our top sell within the sector, is the most expensive Malaysian glove producer generating the lowest ROEs (return on equities) with the highest cost structures under our coverage,” CGSI Research added.
At the time of writing, shares of Hartalega were trading at RM1.28, down 86% year-to-date (y-t-d).
Meanwhile, Top Glove shares are down 47%, while Kossan shares have lost slightly more than half their value y-t-d.
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