Rubber Gloves - Initiating Coverage

by mabs Fri 16 Mar 2012, 10:07

Initiating Cover on Rubber Gloves Sector

We are initiating coverage on rubber glove sector with a MARKET WEIGHT rating. We view 2011 as a revolution year as demand shifted from the conventional natural rubber gloves to the emerging synthetic gloves. The exorbitant hike in latex price and the weakening of USD impacted the rubber glove industry severely, whilst the overcapacity weighed on the sector. However, a man’s loss is another man’s gain, it was a gainful year for synthetic glove-maker, as it fully capitalized on the shift in demand.

As for 2012, we believe the momentum of the demand shift will stay strong, and manufacturers will expand their capacity to meet up the rising demand, thus making the competition even stiffer. Overall, we don’t expect a bullish year for rubber glove industry as the players are still wary of the threat of volatile latex price and unfavourable forex. We do not foresee any immediate catalysts for the sector except outbreak of any major disease.

A fairly defensive sector – The industry is resilience to the economic recession as rubber gloves are necessity items in the healthcare and food industries (accounting for approximately 80%), grows at 8-10% annually for global demand. The world consumed nearly 150 billion pieces of rubber gloves in 2011.

The best investment exposure of rubber glove in the world – Malaysia is the world’s largest exporter and producer of rubber gloves, meeting 60-65% of the global demand. Despite competitions from Thailand, Indonesia and China, we expect Malaysia to stay top as Malaysia is having an inherent advantage in terms of having an abundant supply of latex and possessing higher level of technology.

Stiff competition – The rivalry of the rubber glove industry in Malaysia is intense as the local players strive to gain market share by improving their technology, moving upstream or downstream and increasing capacity in order to create economies of scale.

Latex price and foreign exchange rate are the wild card – Latex price and forex movement are the main factors determine the profitability of rubber glove makers. We expect the latex price to stay stubbornly high, at an average price of RM7.8/kg in 2012 (against current level of RM7.76/kg), following Thailand government’s budget plan to prop up the price, and further stimulated by the pent-up demand once Thailand based carmakers resume production.

Overcapacity - Concern for the industry overcapacity in which it may weaken glove manufacturers’ bargaining power in passing through the cost to consumers. The oversupply situation, particularly in latex glove segment, is mainly due to after-effect of H1N1 in 2010 which led to aggressive capacity expansion and demand shift into nitrile glove segment.

Our top pick is Supermax (Target Price: RM2.14) for its status as a major OBM player which allows them to have a higher pricing power and its near term contribution from the surgical gloves division. We rate HOLD for Hartalega (TP:RM7.48) as it is fully valued although we like its advanced automation and nitrile dominant product mix. Lastly, we are also calling HOLD for Top Glove (TP:RM5.10), as we do not foresee any near term remedy for the Group to back to its old glory days from last year’s slump.