AFTER experiencing a downward trend from early this year, glove stocks on the local bourses have seen strong buying interest again as new waves of Covid-19 infections loom globally.

All the glove counters were bashed down to their lows on March 31, 2021 — the lowest since the outbreak of the pandemic — but renewed fears over the resurgence of coronavirus cases and bargain-hunting activity have helped boost sentiment in the sector.

In the past three weeks, most glove stocks soared by more than 25%, with Supermax Corp Bhd (+56.9%) being the top performer among the Big Four, followed by Kossan Rubber Industries Bhd (+37.3%), Top Glove Corp Bhd (+29.4%) and Hartalega Holdings Bhd (+20%).

Small-cap glove stocks delivered even better share price gains. Careplus Group Bhd was up 80.6%, beating Comfort Gloves Bhd (+55.6%) and Rubberex Corp (M) Bhd (+42.7%).

Still, glove stocks are trading at “very undemanding” valuations, with forward 12-month price-to-earnings ratios (PER) below 10 times, except for Hartalega (11.98 times).

Kossan has the lowest forward 12-month PER ratio of 3.24 times, while Supermax, Top Glove, Rubberex and Comfort Gloves are at 4.01 times, 4.6 times, 4.52 times and 4.57 times respectively.

In contrast, the forward 12-month PER ratios of technology stocks such as Vitrox Corp Bhd, Greatech Technology Bhd and Pentamaster Corp Bhd are much higher at 53.42 times, 46.38 times and 41.12 times respectively.

Their peers are not cheap either, with MI Technovation Bhd at 38.88 times, Inari Amertron Bhd (38.65 times), Malaysian Pacific Industries Bhd (31.98 times) Unisem (M) Bhd (28.92 times) and Globetronics Technology Bhd (20.08 times).

But despite the increase in Covid-19 cases in some countries, a glove analyst with a non-bank-backed research house does not foresee it to be a major re-rating catalyst. “The cases are mostly in India. Lockdowns are not as bad as last time. With vaccination, people will wait and see when they buy into glove stocks as nobody wants to lock in at high prices yet,” he tells The Edge.

In addition, foreign fund participation is key in driving up the share prices of glove stocks, not just local investors. “You can see an increase in the participation of foreigners two weeks ago. Some of them have started buying back glove stocks. But the upside is not as significant as last time,” says the analyst, adding that the overall foreign shareholding in local equities is still low.

With the recent strong rebound, the upside in glove stocks appears to be limited.

Nevertheless, the volatility in glove counters does offer trading opportunity. For example, the Employees Provident Fund (EPF) was seen buying and selling Top Glove shares on April 16, before slightly paring down its shareholding to 6.25% from 6.27% a month ago.

However, it increased its exposure in Hartalega to 7.63% from 7.12% during the same period. Similarly, its stake in Kossan is higher at 9.2% from 9.06%.

Fundamentally, the analyst points out, the valuations of glove stocks may not edge higher because of competition from China over the long run. “The Chinese government is very supportive in terms of granting incentives to its glove companies. Their land costs are cheaper compared with Malaysia. For the next two years, it won’t be a threat to Malaysia, but we may feel the impact after that.”

Nonetheless, he says local glove makers will continue to see “good sales” up to 2023, after which the market will be much more dependent on China, which has been aggressively ramping up its glove production.

While the cost of doing business in China has been rising over the years, the analyst notes, the impact will be mitigated by the advanced technology adopted by China, which has resulted in less labour and higher automation levels.

ASPs for Hartalega, Kossan on the rise

Looking at the trend of average selling prices (ASPs), the analyst says, a continued uptrend in 2Q could be expected from Hartalega and Kossan, but Top Glove has seen a 5% month-on-month decline for April and May owing to the forced labour allegation.

Last month, the US Customs and Border Protection directed personnel at all US ports of entry to begin seizing disposable gloves produced in Malaysia by Top Glove. Later, the world’s largest glove maker explained that its gloves produced from factories outside Malaysia can still be shipped to the US.

For Supermax, the analyst says the company could be well supported by its US market venture. “There has been a lot of accumulation [in Supermax’s shares] lately. Maybe Supermax will be part of the US government’s plan to increase local production of PPE (personal protective equipment).”

Last December, Supermax announced plans to venture into the US to manufacture made-in-US medical gloves and other PPE.

In an April 2 note, Kenanga Research opines that ASPs are unlikely to fall off a cliff moving into the second half of the year. “Juxtaposed against the annual demand growth and new pandemic-led demand, the additional capacity is not a concern. In fact, the estimated new yearly capacity may not actually materialise as scheduled and, hence, [glove makers will be] unable to meet the post-pandemic demand growth of 15% per annum moving into 2022,” it explains.

On another note, the analyst warns that new glove players may suffer post-pandemic as their costs are much higher than the existing players. And this does not mean that their glove manufacturing assets can be easily sold if they opt to exit the industry because big players such as Supermax, Hartalega and Kossan are keener on organic growth given the land bank that they have.

“There is no reason for them to consider M&As (mergers and acquisitions),” he explains.

However, this is something Top Glove may be looking at. “Challenging times can be times of opportunity for us to explore M&As or capture more market share from other players who are not able to weather this difficult period,” its founder and executive chairman Tan Sri Lim Wee Chai tells The Edge via email when asked about the oversupply risk.

He notes that the group has strengthened its balance sheet and with the current net cash position, it is well prepared to overcome any challenges. “Even with the emergence of vaccines, glove demand will not return to pre-pandemic levels, owing to the increased usage and awareness of the importance of hygiene arising from the pandemic, which will be sustained even after the pandemic recedes.”

Nonetheless, Lim says ASPs will be adjusted accordingly to reflect the demand and supply situation. As such, there may be a gradual decline as glove supply normalises.

This year, Top Glove is committed to its production capacity expansion totalling 18 billion pieces from 62 lines. This is expected to bring the glove maker’s total production capacity to 111 billion pieces per annum by the end of this year. As of March 2021, it had an annual production capacity of 96 billion per annum from 47 factories and 784 production lines.

“The number of Covid-19 cases is still on the rise and global glove demand remains very strong. Expansion by other players may lead to oversupply but even if oversupply happens, it is temporary. We believe that with our comprehensive product range, we are well-positioned to mitigate the risk and impact of an oversupply situation.

“Even without the pandemic, glove demand was already expected to grow around 10% every year on the back of strong growth opportunity as usage remains low in developing countries with large populations, but it is on the rise,” Lim adds.

Earlier, the Malaysian Rubber Glove Manufacturers Association (Margma) projected that global demand for gloves will hit 500 billion pieces this year, compared with an estimate supply of 420 billion pieces, representing a shortfall of 80 billion pieces.

Last year, the shortfall was higher at 100 billion pieces, when global demand reached 460 billion but supply was only at 360 billion. The association expects annual demand growth of 15%-20% going forward.

Assuming that Malaysia continues to contribute 68% to the global glove supply with 85% of local production coming from the top four glove companies, a back-of-the-envelope calculation shows that the global supply will be about 387.5 billion pieces this year.

In other words, even as global demand remains unchanged at 460 billion pieces this year, the shortage of glove supply situation will persist.

HLIB Research analyst Gan Huan Wen agrees that the mismatch between the supply and demand will linger despite the ongoing vaccination programmes. “Big glove makers are committed to their expansion plans, but it does not seem to be significant for new players as most of them have not really kick-started their glove manufacturing business.”

Mah Sing Group Bhd, which has pledged to become the fifth-largest glove maker in Malaysia over the next few years, will start production next month after the completion of the testing and commissioning of its two production lines in its first plant in Kapar, Klang.

Supply-demand to reach equilibrium in three years

Allaying the oversupply fears, Margma immediate past president Denis Low highlights that it will take three years before an equilibrium between supply and demand can be achieved. Any new capacity from the local players will be operational on a staggered basis as completion of plants takes 18 to 24 months.

Malaysia accounts for about 68% of global glove supply, followed by Thailand (13%-18%), China (10%) as well as Indonesia and Vietnam.

Low is unfazed by the capacity expansion in countries like the US, China and Thailand. “PPE has become the security item, especially in the US and European countries. It is a security kind of reasoning. They can never be self-sufficient, as it takes years to build big facilities. It won’t affect Malaysia in the interim.

“While Thailand is encouraging local companies to set up plants to capitalise on their resources, that is, natural rubber, they do not have the ecosystem and facilities Malaysian players have. Malaysia is still more conducive for glove manufacturing.

“We are also not fearful of China because it is no longer cheap in terms of costs. Although we are not cheap, we are very efficient and competitive,” he stresses.

On average, Low says, the lead time for the delivery of gloves is at least six months for now, shorter than the one-plus year wait recorded last year.