This article first appeared in The Edge Financial Daily on March 13, 2018 - March 19, 2018
Rubber sector
Maintain overweight: We reaffirm our overweight call on the sector as we do not see the vinyl supply disruption in China as a one-off event, given the introduction of new environmental regulations. Thus, we are expecting a better earnings outlook driven by robust rubber glove demand. Supermax Corp Bhd now replaces Top Glove Corp Bhd as our top sector pick for its less demanding valuation, while its earnings could yield a positive upside surprise.
An industry player suggested that China produces around 160 billion pieces of vinyl gloves a year, and the winter curtailment (November 2017 to March 2018) in the northern region led some production capacity to shut down. Although the recent ban has ended, we are not expecting all plants to resume operation, as smaller manufacturers might not have the financial strength to invest in more efficient equipment, pushing average selling price (ASP) for vinyl gloves higher. Medical vinyl gloves manufactured in China are also exported overseas.
New directives issued require local provinces in the Jingjinji Metropolitan Region to continue to monitor and regulate new projects to limit harmful gas emission in the region, which is likely to have a negative impact on the vinyl glove supply chain and production costs in China. As the price difference between vinyl and rubber gloves narrows and stability of supply becomes an issue (during winter), we are expecting distributors to push their clients to switch to alternatives such as thermoplastic elastomer gloves or rubber gloves.
Due to the robust demand, manufacturers were able to increase their ASPs recently to pass on the rising production costs (labour, fuel and utilities) and the strengthening of the ringgit to maintain their current margins. We are not concerned about the “Big 4” expanding their capacity by 10% to 15%, despite historical demand growth of 8% to 10% year-on-year (y-o-y), as we see industry players being rational and phasing out their expansion plans to protect margins if needed.
We are reaffirming our “overweight” call on the sector, despite the rubber glove makers’ share prices having increased by over 7.7% year to date. We believe that the key rerating catalyst for the sector will be dependent on solid earnings-growth delivery. We are switching our top sector pick to Supermax (SUCB MK, “buy”, RM2.67) as its valuation remains at a sharp discount to its peers and we expect the company to continue to deliver solid earnings growth (+33% in 2018 estimates), on the heels of a 52% y-o-y surge in its second-half of 2017 earnings. We also reaffirm our “buy” call on Top Glove (TOPG MK, RM9.39) with a higher target price (TP) of RM12.20, and upgrade Hartalega Holdings Bhd (HART MK, RM11.02) to “hold” (from “sell”) on our higher TP of RM11.10. — Affin Hwang Investment Bank Research, March 12
- Geely billionaire goes on a cost-cutting spree to catch rivals
- Ringgit bears emerge as traders weigh a rate cut in Malaysia
- World’s biggest stock rout deepens as Thai market rescue falters
- Oil prices jump; optimism over China's consumption stimulus boosts Asia shares
- GDS seeks record US$3.4 bil loan for data centre ops in Malaysia — Bloomberg
- BMW to develop smart apps for drivers using Huawei devices in China
- Advance your career with a master’s — on your terms
- Police warn Malaysians against rushing into cryptocurrency investments
- Eight Malaysian Consultative Council of Islamic Organisations humanitarian workers killed in Gaza
- Urban Renewal Act: Malaysian developers lead Australia’s urban renewal while reforms stall at home — Nga Kor Ming