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Challenging year ahead for glovemakers despite rise of Omicron variant

Challenging year ahead for glovemakers despite rise of Omicron variant

28 Dec 2021

The sector has dragged the Malaysian equity market to emerge as among the world’s worst performers this year 

THE threat of the Omicron variant has yet to get investors excited about glovemakers again despite the rising infection numbers globally and warnings from health experts the virus could infect far more people than the Delta variant. about:blank

Shares of big four glove counters — namely Top Glove Corp Bhd, Hartalega Holdings Bhd, Supermax Corp Bhd and Kossan Rubber Industries Bhd — have declined by 60%, 48%, 75% and 56% year-todate respectively after some 14 months of sustained selling. 

Smaller rivals like Comfort Gloves Bhd have fallen 64%, Careplus Group Bhd 49% and Rubberex Corp (M) Bhd 61%, year-to-date. 

The sector has dragged the Malaysian equity market to emerge as among the world’s worst performers this year. 

Rakuten Trade Research VP Thong Pak Leng said glove companies profits have been falling since the start of the year due to lower average selling price (ASP). 

He expects ASPs to decline further going forward, and therefore, does not expect earnings of glove companies to recover in 2022 despite the potential of higher demand triggered by Omicron. 

“We have to monitor ASP closely to assess their profitability. The pandemic is at a late stage, therefore ASPs should not increase in the shortto mid-term,” he told The Malaysian Reserve when contacted. 

The emergence of the Omicron has put a floor to the share price downside for the moment. 

Thong said this was because the variant had created fresh fear and concern of another potential outbreak of the pandemic but he believes the uptrend in share price would be a short-term play. 

“This is also partly also due to temporary reallocation of funds from other sectors to glove at the moment. Hence, this could be an overreaction to the situation which has led to the uptrend of glove counters,” he noted. 

Top Glove rose 17 sen to RM2.36 while Hartalega rose seven sen to RM5.60 while other counters rose between four and six sen as news of Omicron infections jumped in Europe and America. 

Moving forward, Thong deduced demand for gloves will continue to grow but at the expense of ASPs and cause earnings of glovemakers to normalise and fall in financial year 2022 and beyond. 

Hong Leong Investment Bank Bhd stated the current headwinds faced by glovemakers are unlikely to be resolved soon, as the operating environment remains difficult until the first half of next year (1H22). 

The investment bank’s analyst Sophie Chua recently noted that ASP of gloves are expected to continue declining in the 1H22, albeit at a slower rate of 5% month-onmonth (MoM), compared to 10% MoM previously. 

She added glove prices had fallen nearly closer to pre-Covid levels, with the current ASP being US$25 (RM105) to US$35 per thousand pieces compared to the pre-pandemic ASP of US$21 per thousand pieces. 

“We note the pricing difference between the US market and the European Union market is also narrowing, at about US$5 now, as opposed to a US$10 gap earlier. 

“In our view, glove prices are likely to reach pre-Covid-19 levels by the second quarter of next year (2Q22),” she wrote in a report on the sector. 

The strong cash position of glovemakers should help them navigate through these challenging times and withstand any impending price wars that might come their way. 

Higher raw material prices coupled with higher operating costs due to enhanced social compliance practices and stricter standard operating procedures are other factors eating into glovemaker margins. 

Chua noted the impending price war arising from Chinese glovemakers trying to gain market share could also exacerbate the situation further. 

Chua noted glove buyers had refrained from stocking up on gloves amid falling ASPs to avoid locking in purchases at high prices. 

“However, with glove prices slowly approaching pre-Covid levels, we think restocking activities could gradually resume in 1H22. 

“That said, we expect utilisation rate for the glove producers to remain below pre-Covid levels of 80% to 85% in 1H22, due to overall softening in demand,” she noted. 

Glove exporters also remain under pressure from allegations of forced-labour practices. 

The US Customs and Border Protection has imposed a ban and Withhold Release Order against producers like Top Glove, Supermax, Smart Glove and Brightway Group. 

The issue not only cause a huge dent on the company’s reputation but also drove away potential institutional investors in the near term. 

Nevertheless, several industry analysts have projected demand for gloves will remain buoyant beyond 2021 as the world continues to fight the Covid-19 pandemic. 

In July this year, the Malaysian Rubber Glove Manufacturers Association projected annual global demand growth of 15% to 20% moving forward with global demand at 420 billion pieces for 2021. 

Source: The Malaysian Reserve

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