• We reiterate our positive view on the Malaysian glove sector following the briefing by MARGMA yesterday.
• The Malaysian Rubber Glove Manufacturers Association (MARGMA) expects global rubber glove demand to reach 330bn pieces in 2020F, with Malaysian glove makers meeting about 67% of this demand.
• Maintain Overweight, with Top Glove (SGX:BVA) and Supermax Corp as our top picks in the sector.

Expect a Surge in Global Glove Demand Owing to Covid-19

• The Malaysian Rubber Glove Manufacturers Association (MARGMA) expects global rubber glove demand to be robust, reaching 330bn pieces in 2020F (+20% y-o-y) amid the Covid-19 pandemic, which has led to higher usage from medical and other non-medical sectors (such as F&B, retail).
• MARGMA expects the global glove shortage to linger until end-2021, premised on Malaysian glove makers having an average order backlog of 6-8 months, as well as the growing severity of Covid-19 globally.
• MARGMA expects Malaysia to export 220bn gloves in CY20 (+15% y-o-y), supplying 67% of global glove demand.

Higher ASPs for at Least the Next 6-8 Months

• MARGMA estimates that current glove average selling prices (ASPs) range from US$80 to US$160 per 1,000 pieces. It is of the view that ASPs could hold at these levels for the next 6-8 months (glove makers’ current average order backlog) given the acute shortage of gloves currently.
• MARGMA is also of the view that any potential further ASP hikes will be dependent on sell-through (usage) and use-through (inventory levels). Post Covid-19, MARGMA believes that ASPs would not revert to pre-Covid 19 levels (US$19-22 per 1000 pieces) on the back of higher global usage globally and higher operating costs.

Malaysia to Continue to Dominate Global Glove Exports

• MARGMA expects Malaysia’s glove industry to continue to dominate global glove exports in the years to come on the back of:
  1. extensive experience in glove manufacturing (since 1990),
  2. higher operating efficiencies from higher economies of scale and investment in automation, as well as
  3. proven track record among its customers.
• Despite potential capacity increase by China glove makers, MARGMA believes Malaysian glove makers will continue to have an edge in terms of operating cost due to:
  1. China’s higher labour costs, and
  2. its higher energy costs (typically in winter, as well as higher gas prices).

Lack of Manpower Is Still a Concern for the Industry

• The biggest challenge faced by Malaysian glove makers remains a shortage of workers. The industry urgently needs to grow its workforce by some 32% (or 25,000 Malaysian and foreign workers) to cater to the overwhelming demand. But this is hampered by the government’s freeze on foreign worker recruitment since 22 Jun until year-end. Nevertheless, MARGMA expects this issue to be partly mitigated by greater use of automation, as well as more aggressive recruitment of locals (despite higher wages).

No Surprises; Reiterate Our Overweight View

• We maintain our Overweight view on the Malaysian glove sector. In our view, glove stocks remain attractive as key beneficiaries of the strong global glove demand due to Covid-19, leading to expectations of record-breaking profits in the next 2-3 quarters.
• Our sector top picks are Top Glove (SGX:BVA) and Supermax.
• We also have ADD calls on Hartalega and Kossan Rubber.
• Downside risks: stiff pricing competition and/or faster-than-expected success in the development of a vaccine for Covid-19.

Overall Glove Makers Industry Highlights

• MARGMA projects the total export revenue of Malaysian glove makers to reach RM21.8bn in 2020F vs RM18.2bn in 2019. This is based on 60-67% of the world market share.
• There are more than 150 rubber glove manufacturers worldwide, with Malaysia having an estimated market share of 67%, followed by Thailand, China, Indonesia and others at 18%, 10%, 3% and 2%, respectively.
• Global demand grew by 17% y-o-y during the H1N1 pandemic year (2009- 2010) which outperformed the benchmark demand growth of 8-10% p.a. Therefore, MARGMA believes global glove demand will grow by at least 20% in 2020 due to the Covid-19 pandemic and given the higher awareness of wearing gloves as well as stricter regulations implemented compared to the past.
• India has seen its glove consumption rise from 4 to 30 pcs per capita, given its large population of 1.2bn, and the demand for gloves is outstripping supply in the region. The same scenario is playing out in countries with large populations like Indonesia and Bangladesh who have also seen strong demand for gloves due to the rise in Covid-19 cases.
• China’s glove demand remains strong; it is importing more gloves from Malaysia due to the fear of a second wave.
• One of the reasons for the shortage of gloves, especially in the US, was the low level of inventory at medical distributors. This was largely due to the fact that there was an oversupply situation in 2019, which prompted distributors to keep their inventories at just 1 month’s supply, instead of three months previously. Hence, medical distributors did not have enough inventory on hand when Covid-19 broke out in the country, forcing the US government to approach glove manufacturers directly with better ASPs. MARGMA expects the orders from the US government to sustain at least until 1HCY21.
• There has also been new demand for gloves, especially in the non-medical segments (such as airlines and F&B), due to revised hygiene protocols following the Covid-19 pandemic; this will help to sustain the demand for gloves even after the pandemic is over.
• For more information on total industry capacity, average selling prices (ASPs) and technological development of rubber gloves, see PDF report attached below.

Windfall Tax

• MARGMA has mentioned that it has not heard from the government on the potential implementation of windfall tax on glove companies.

Source: CGS-CIMB Research - 15 Jul 2020