KUALA LUMPUR (Dec 6): CGS-CIMB Securities has maintained “underweight” on the rubber gloves sector and said the diminishing pricing power of Malaysian glovemakers due to regional competition may lead to lower long-term margins.

In a note on Dec 5, the research house said though it expects the industry to turn profitable by CY25F, the net profit outlook looks unexciting relative to current valuations.

CGS-CIMB has "hold" calls on Supermax Corp Bhd and Kossan Rubber Industries Bhd while keeping its "reduce" ratings on Hartalega Holdings Bhd and Top Glove Corp Bhd.

The research house highlighted three key negative observations in the glove industry that may persist over the next 12-18 months: 1) the Malaysian glovemakers are still being undercut by US$3-4 (RM14.02-18.69) per 1,000 pieces, given the lower cost structure of regional players in China and Thailand, prolonging the challenges in passing on cost escalations, 2) profitability, measured by Ebitda per 1,000 pcs, may settle at a new normal given the eroding pricing power, and 3) elevated glove inventories following pandemic-led stockpiling is limiting strong upside to volume growth in the near term.

“This could cap the improvement in industry utilisation rates, in our view,” it said.

CGS-CIMB estimates the Big 4 (Top Glove, Kossan, Supermax and Hartalega) to swing from aggregate losses of RM456 million in CY23F to a modest profit of RM21 million in CY24F, growing to a RM568 milllion net profit in CY25F.

“We estimate the Ebitda per 1,000 pcs of local glovemakers to recover to 85-95% of their respective pre-pandemic averages by CY25F.

“We also expect some variations to the recovery in utilisation rates, led by Hartalega as it has undergone the largest capacity cut. We believe Top Glove and Supermax may still have plenty of excess capacity to shed, hence their utilisation rates could recover more slowly,” it said.