The glove manufacturing sector faces a challenging future with persistent overcapacity, weak demand, and high input costs, according to reports by Kenanga Investment Bank (Kenanga). The sector's operating environment in the first quarter of 2024 remained tough, with profitability under pressure from overcapacity, predatory pricing by overseas competitors, and high operational costs despite some recovery in orders.
Kenanga reiterated an UNDERWEIGHT rating on the sector, advising against investment in glove manufacturers due to the tepid profitability and high valuations. The bank highlighted the continued pressure from overcapacity and weak demand, predicting that the challenging conditions will persist through the second half of 2024.
Kenanga reported that overcapacity and predatory pricing have led to a buyers' market, with distributors and buyers seeing no urgency to place sizeable orders or hold substantial stocks. The industry's low utilisation rate of about 45% further exacerbates the situation, making it difficult for manufacturers to raise prices significantly. Additionally, input costs for materials such as nitrile butadiene rubber remain high, and natural gas costs are expected to increase, adding further strain on profitability.
The report also noted some positive developments, such as the decommissioning of older production facilities, which could help ease supply pressure and bring about more rational competition among local players. However, these measures are not expected to significantly improve the overall outlook for the sector in the near term.
Kenanga projected that the glove manufacturing industry will continue to face an oversupply issue throughout 2024, with demand expected to rise by 30% to 390 billion pieces due to restocking, before moderating to an organic growth rate of 15% annually. Despite this, the excess capacity of 212 billion pieces in 2024 indicates that low prices and depressed plant utilisation will continue to be a challenge.
Given the current market conditions, Kenanga has advised investors to avoid all names under their coverage, including Hartalega (HARTA), Kossan (KOSSAN), Top Glove (TOPGLOV), and Supermax (SUPERMX), due to their unsustainable profitability and lofty valuations. The bank has maintained a target price of RM2.33 for HARTA, RM1.48 for KOSSAN, RM0.75 for TOPGLOV, and RM0.83 for SUPERMX, all with an UNDERPERFORM rating.