• We believe that concerns on a decline in ASPs remain unwarranted at this juncture, with expectations of ASP hikes up to at least 1QCY21F.
• The Malaysia glove sector is currently trading at 24.3% discount to its 5-year mean, in spite of its strong earnings prospects in the next 12 months.

Outlook of Glove Makers Remains Bright

• We gather that order visibility of glove makers is robust up to at least end-1HCY21F, a testament to the current strong global glove demand. In our view, the acute global shortage of gloves is likely to worsen as COVID-19 cases worldwide show no signs of slowing down.
• Note that many developed markets (with high glove usage per capita), such as the US and UK, have continued to record new highs in daily COVID-19 cases. We expect the situation to worsen as more western countries head towards the wintering period in 4Q20, which could lead to further spikes in COVID-19 cases.

Acute Shortage Driving ASPs Higher

• In term of ASPs, glove makers are expecting further hikes up to at least 1QCY21F. This is on the basis of the recent increase in raw material prices as well as the acute global shortage of gloves.
• Based on our estimates, glove ASPs could rise by 10-45% q-o-q in 4QCY20F to US$50-100 per 1,000 pieces, which is above our current forecasts. However, we gather that certain glove buyers are willing to offer fixed ASPs (at a substantial premium to current ASPs) with a minimum 1-year contract tenure to secure glove supply. In our view, this should provide certainties of ASPs for CY21F if glove makers agree to these contracts.

Windfall Tax May Have Long-term Negative Consequences

• On the potential windfall tax, glove makers and Malaysia Rubber Glove Manufacturer Association (MARGMA) indicate that there has been no engagement with the government on this matter. In our view, the implementation of a windfall tax on the glove sector would have long-term negative implication as this will drive glove makers to countries with more conducive environments (e.g. labour, tax incentives, utilities, etc).

Glove Stocks Under Selling Pressure for the Past Two Weeks

• Glove stocks have been sold down with the recent newsflow on COVID-19 vaccine development. However, we think the eradication of the virus may take a while longer, given that:
  1. no COVID-19 vaccine candidates have passed Stage 3 and 4 of clinical trials,
  2. current limited production capacity may hamper mass availability, and
  3. potential mutations of the virus.
• Also, we believe that glove demand is unlikely to taper off even with a vaccine, as glove use will in fact increase when masses rush to be vaccinated.

Reiterate Overweight Call on the Sector

• We reiterate our Overweight view on the sector. We believe that concerns on potential declines in ASPs from CY21F onwards are premature at this juncture, as signs are showing that ASPs may stay elevated for a longer period (up to end-CY21F).
• Despite its bright prospects, the Malaysian glove sector is trading attractively at 16.7x CY21F P/E, a 24.3% discount to its 5-year mean P/E of 22.1x. In our view, this has largely priced in concerns of a potential windfall tax and discovery of a COVID-19 vaccine.
• Reiterate our sector Overweight call, with Top Glove (SGX:BVA) and Hartalega as our top picks.

Source: CGS-CIMB Research - 11 Sep 2020