Rubber Gloves Sector - A safe ship in the stormy waters

by mabs Wed 04 Jul 2012, 09:24

Investment highlights

Latex price eases – Average latex price of RM7.31/kg in 1H2012 was 26% lower than RM9.93/kg in 1H2011. A significant decline of latex price could benefit the glove makers as latex cost constitutes more than half of the manufacturing cost to the rubber glove-makers. The easing of Natural Rubber (NR) price was undoubtedly affected by slower growth in China’s automotive industry and European debt crisis, which limit the global demand on rubber. Thus, most of the rubber glove companies posted impressive results in the first half of the year, capitalising on the favourable latex price. We expect the rubber price to continue trend in the region of RM6.5 to RM7 in near term, only to rebound gradually towards the end of the year pursuant to mild pick-up of car sales in China.

Nitrile following suit – On the other hand, YTD nitrile price (by-product of crude oil) saw a yoy decline of 9.3% to USD1587/tonne from an average of USD1749/ton in 2011, whereas crude oil price fell below the USD80/barrel level. Looking forward, we are expecting the crude oil to gyrate at current level as the market demand still dim amid uncertain economic outlook and concerns surrounding the thorny debt crisis in Europe. Therefore, we do not foresee any immediate hike of commodities prices in near term as U.S. Federal Reserve is unlikely to launch the QE3 until 4Q2012.

Stronger USD – The greenback appreciated against RM by c.2% to 3.09/USD in 1H2012 from 3.03/USD in the same period of the previous year. The strengthening of USD would increase the realized earnings of all the rubber glove manufacturers as they export most of their products abroad to key areas such as North American, Latin Americans and Europe. We expect strengthening USD to further boost the rubber glove industry since exports were denominated in USD.

Fairly muted impact of minimum wage policy – As the minimum wage policy coming into effect on 1 January 2013, concern arises on the impact to all glove-makers as the industry is labour intensive. We believe each of the glove manufacturers has their own plan to mitigate the impact of the new regulation. Amongst the players, we expect Top Glove to be most affected by the new policy. Nevertheless, the Group drew up plan to beef up its automation technology in order to reduce human workforce. Whilst, Hartalega will be the least affected thanks to its highly automated production line, and Supermax is also not to be impacted much as most of its labour are already being paid more than RM900 per month, which is the floor price set for Peninsular Malaysia.

We upgrade the sector to OVERWEIGHT from MARKETWEIGHT as we expect the raw material price to continue to languish at the low level in near term, judging on the gloomy manufacturing sector in China and weak demand from debt ridden Europe and US, which economic recovery has been patchy so far. Also, we view the rubber gloves stocks as a defensive play under current volatile market due to resilient demand of surgical gloves from healthcare industry against global economic downturns. Further strengthening USD against RM could be the another positive catalyst to the sector.

Valuation & Recommendation:

Our top picks of the sector are Top Glove (Target Price: RM5.57) for its exclusive market leadership and dominant production capacity, and Hartalega (Upgraded to BUY from HOLD with Target Price: RM4.48) as we like its niche position as the most profitable and efficient manufacturer in the industry, as well as its ambitious capacity expansion plan in the Next Generation Integrated Glove Manufacturing Complex (NGC).

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