KUALA LUMPUR (June 7): Kenanga Research said despite early signs of rationalisation and consolidation amid massive industry overcapacity, glove makers are not out of the woods yet, as low prices and depressed plant utilisation continue to plague the sector.

The research house said although indications are pointing towards an improvement in supply-demand equilibrium, as players take the opportunity to shut down older plants or production lines that are no longer efficient and speed up the industry consolidation, the situation will only start to improve in 2025. 

“Based on our estimates, the demand-supply situation will only start to head towards equilibrium in 2025, when there is virtually no more new capacity coming on stream, while global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness,” it said in a note on Wednesday (June 7). 

Kenanga noted that Hartalega Holdings Bhd is decommissioning its Bestari Jaya production facility, and consolidating operations at its Next Generation Integrated Glove Manufacturing Complex in Sepang.

“The decommissioning [of the plants] will reduce its production capacity by 30% to 31 billion pieces per annum, and is expected to be completed by end-2023,” it said, adding that the Bestari Jaya facility consists of four production plants, with 40 production lines or 13 billion pieces per annum. 

Similarly, it added that Top Glove Corp Bhd is decommissioning two plants, with an estimated five billion pieces of capacity or 4% of its 100 billion installed capacity. 

On the other hand, it noted that Supermax had decommissioned three older plants, taking out an estimated three billion pieces per annum from its total capacity. 

Following these developments, which is seen to improve the supply-demand equilibrium, Kenanga now applies a smaller discount to the sector’s average historical price-to-book value.

The research house applied a 20%-45% discount, compared with 50%-60% previously, to the sector’s average of 1.7 times during previous downturns (2008-2011 and 2014-2015) due to the faster-than-expected industry rationalisation.

Kenanga’s ratings include Hartalega (underperform; target price: RM1.90), Top Glove (underperform; 90 sen), Kossan Rubber Industries Bhd (underperform; RM1.28) and Supermax Corp Bhd (market perform; 96 sen).

It cited the Malaysian Rubber Glove Manufacturers Association's (Margma) forecast of a 12%-15% growth in global demand for rubber gloves annually from 2023, following an estimated 19% contraction to 399 billion pieces in 2022.

“It believes the supply-demand equilibrium may return in six to nine months. However, we beg to differ, expecting the overcapacity situation to persist at least over the next 12 months. We project demand for gloves to rise by 15% in 2023, which is consistent with Margma’s forecast.”

On the supply side, Kenanga said it is now factoring a reduction of 21 billion pieces of gloves in the system by end-2023.

This, it said, will result in the excess capacity rising by 4% to 115 billion pieces (instead of rising by 22% or 137 billion as previously forecast), from 112 billion pieces in 2022.

Despite the improvement, the overcapacity persists, which means low prices and depressed plant utilisation will continue to plague the industry in 2023.

Kenanga’s 2023 forecasts assume an average selling price per 1,000 pieces of US$20 (RM92.08), translating into an estimated 10% decline over 2022, and an average plant utilisation rate of 50%, versus an estimated 60% in 2022. It does not have any top pick for the sector.