RHB Research has maintained its ‘neutral’ call on the rubber products sector as the gradual improvement in market dynamics should offer a favourable tailwind for the local glove manufacturers amid continuing challenges in raising average selling prices (ASP).
With client inventory depletion expected to end in the first half of 2023 (1H23), a better order consistency is expected in 2H23, followed by gradual commissioning of new production lines by 2024, it said.
In a note today, the research house said the industry-blended ASP is said to have stabilised at US$20 per 1,000 pieces, in line with the expectation that ASPs may have bottomed already.
It said local and regional glove makers have collectively increased the ASPs since the start of 2023, resulting in the price gap between Chinese and local glovemakers narrowing to US$3 from US$5 previously.
“Malaysian and Chinese glovemakers saw similar export trends in March 2023, with glove exports increasing by eight per cent and 27 per cent month-on-month (m-o-m), respectively.
“This leads us to believe that the near-term customer demand trends are gaining traction despite the likelihood of the sector remaining choppy following the ASP hike,” it said.
Glove makers’ March results also showed an average of 6.7 per cent quarter-on-quarter (q-o-q) inventory level contraction, below their pre-COVID-19 inventory levels.
The research house noted that this could be a reflection of the current industry-low utilisation rate, as glovemakers are reluctant to increase their inventory given the sluggish demand outlook.
“However, we understand that customers are still reluctant to place bulky orders. Advance orders have also been shortened to one month from pre-COVID-19’s three months.
“Industry players are expecting client inventory rationalisation to happen by 2H23, underpinned by glove inventory levels that have built up since 2020, where many are getting closer towards their expiry dates as the typical shelf life ranges from three to five years.
“As such, we maintain our 2023 year-end demand target at 415 billion pieces, representing a four per cent year-on-year (y-o-y) growth from 2022’s numbers,” RHB Research said.
On the supply side, the research house said it expected muted-to-negative industry supply growth for 2023 as glovemakers are contemplating phasing out obsolete production lines.
It also expects to see capacity rationing exercises -- given the low industry utilisation rate of 30 to 40 per cent -- that could lead to better operating efficiencies.
RHB Research added that its ‘neutral’ call on the rubber products sector is also based on a normalised cost outlook by 2H23, with lower gas tariffs and the implementation of cost pass-through initiatives expected to alleviate various headwinds within the rubber glove industry.
“Nonetheless, order replenishment consistency and industry utilisation rates are two crucial re-rating catalysts that could prompt us to upgrade the sector.
“Our sector picks are Hartalega -- owing to its better operating efficiency among local glovemakers, resulting in better margin, and Kossan Rubber, which we like for its exposure to the industrial segment and its pretax profit increases since the second quarter of 2022,” RHB Research added.
Read more at Bernama