Rubber Products (Gloves, Condoms etc)

[winston]

Price war to squeeze nitrile glove margins this year

KUALA LUMPUR: Malaysian glove makers expect competition in the nitrile glove segment to intensify this year and are bracing themselves for a price war that will result in thinner margins.

“In an increasingly competitive environment, fully passing on cost increases is more difficult. But as it stands, we believe Hartalega is more efficient than our peers and will be better able to weather any cost increases,” Hartalega Holdings Bhd ( Financial Dashboard) managing director Kuan Mun Leong told The Edge Financial Daily in an email.

Nevertheless, the group, which saw its operating profit for the second quarter of financial year 2015 ended Sept 30, 2014, (2QFY15) decline to 23.17% from 31% a year ago, has already been warning its stakeholders that margins will likely continue to be impacted this year.

The declining margins, together with lower selling prices, caused its 2QFY15 net profit to contract 24% to RM48.16 million against RM63.27 millon in the previous year. The world’s largest glove maker, Top Glove Corp Bhd ( Financial Dashboard), also expects a challenging business environment in 2015 for the same reason, though its chairman Tan Sri Lim Wee Chai believes the company’s new capacity for nitrile gloves will enable it to do more business with larger multinationals in developed markets compared with its peers.

Top Glove’s net profit in 4QFY14 ended Aug 31, 2014 eased 5.2% to RM48.42 million from RM45.9 million a year earlier, owing to stiff competition, which resulted in margin pressure. Nitrile gloves accounted for 24% of the total volume of Top Glove’s production in 4QFY14 and its major markets are Europe (31%) and North America (27%).

Further aggravating the situation is the knock-on inflationary effects from last year’s increases in electricity and natural gas tariffs, of which Lim said Top Glove is still feeling the effects. Also looming on the horizon is the goods and services tax (GST) in April.

Nonetheless, Lim believes the industry’s prospects remain promising. Top Glove expects to deliver an improved performance in FY15 due to lower raw material prices and favourable currency exchange rates against the US dollar. “The global demand for rubber gloves from developed and emerging markets is still on the uptrend and is expected to continue growing steadily at a rate of 6% to 8% per annum.”

According to RHB Research head Alexander Chia, competition resulting in average selling price (ASP) pressure is not the main concern, yet. But he noted that if supply grows too fast, price war may emerge and glove makers may slash their ASPs more aggressively to increase sales volumes.

“Intense competition within the industry will exert pressure on margins as glove companies may face challenges in passing through the incremental costs [such as labour costs]. Competition is unavoidable. Those with superior margins or high production efficiency will do better,” Chia told The Edge Financial Daily.

In a note dated Dec 31, RHB Research noted that any heightened competition would not bode well for Top Glove and Supermax Corp Bhd ( Financial Dashboard), “as both are margin laggards in the industry”. Nevertheless, it said the strengthening of the greenback against the ringgit will benefit the industry. “A 3% increase in the exchange rate could lift the industry’s earnings by approximately 2% to 4%,” it said. It maintained its “overweight” call on the sector as it expects global consumption to remain strong and to expand 8% to 10% per annum, led by demand from the healthcare segment.

Its top picks for the sector are Hartalega (target price (TP): RM7.70), Kossan Rubber Industries Bhd ( Financial Dashboard) (TP: RM5.12) and Karex Bhd ( Financial Dashboard) (TP: RM3.89).

Meanwhile, Hartalega’s Kuan said Malaysian glove manufacturers will have to rise to the challenge of cost increases by moving up the value chain in glove manufacturing.

“The only pathway is to innovate in the way that gloves are made and to come out with innovative products and production technologies,” he said, citing its nitrile glove innovation as an example.

“Our nitrile gloves changed the global landscape of the glove market. Before our lightweight nitrile glove, the world’s glove market was dominated by natural rubber gloves (about 95%). Today, the global market share between the two materials is approximately 50:50,” Kuan said.

Despite a weaker profit for 2QFY15, Kuan is confident Hartalega will continue to deliver growth in the coming years. But it does not expect significant growth in its current FY15 ending March as its Next Generation Integrated Glove Manufacturing Complex (NGC) will only be operational towards the end of 2014.

“We encourage investors to look beyond FY15. For FY16, we expect capacity to increase by 43%. With an average capacity growth of 21% per annum for the next six years, we expect continued growth in our earnings per share,” said Kuan.

For FY16, Kuan expects Hartalega’s output to increase to 18.4 billion pieces, 43% higher than FY15.

“Despite margin compression, our profit margin is above the industry average as a result of our high-productivity manufacturing processes, derived from our advanced manufacturing technologies which were developed in-house. In addition, we expect NGC to provide a significant increase in our productivity. NGC will be 33% higher in productivity compared to our existing facilities. In the long run, this will put us in a very good position to defend our margins and maintain our dominance in the nitrile glove market,” Kuan said.

As the developed markets have matured, both Hartalega and Top Glove are looking at emerging markets, such as India and China, for expansion. Kuan said there are vast untapped markets, especially in Asia, where hygiene and healthcare awareness in some countries is still low relative to the West.

“Specifically, due to the low per capita consumption of gloves in China and India, Hartalega realised the enormous potential in these emerging markets,” Kuan said.

For the same reason, Top Glove’s Lim thinks its operations in China will contribute positively to the group’s revenue in FY15, during which it expects to a volume growth of 10%, driven mainly by a consistently resilient demand for rubber gloves, and ongoing quality and automation improvement initiatives.

Source: The Star

[winston]

not vested

Maybank Research retains Overweight on gloves sector

KUALA LUMPUR: Maybank Investment Bank Research expects the glove manufacturing industry to see increasing competition ahead due to the incoming capacities.

However, mitigating factors are the high US$ to the ringgit and low rubber prices.

“Maintain Overweight. We have BUYs on Hartalega (unchanged TP RM8.50), Kossan (raised TP to RM5.90) and Riverstone (unchanged TP S$1.20),” it said.

Maybank Research said the nitrile-skewed glove stocks outperformed the FBM KLCI by 20% in 2014 due to their superior earnings growth prospects and the stronger US$/ringgit towards the end of 2014.

“Looking into 2015, we see several positive external factors for the sector. Glove makers are net beneficiaries of the strong US$, as almost all of their sales receipts are US$-denominated while approximately 50% of their production cost is in US$.

“Additionally, given that the fall in NBR price has substantially lagged the decline in latex and butadiene prices, we see more downside to the price of NBR in 2015. The price of latex may also stay benign in view of weak global demand,” it added.

Maybank Research said eventually, the US$ gains and cost savings from low rubber prices will likely be passed through in this increasingly competitive environment, but with a time lag.

On the capacity expansion, it said the expansion will be aggressive in 2015 with planned new capacity growth of 17% for Malaysia’s Top 4 producers.

“We believe the new capacity could be absorbed by new demand on an expected global glove demand growth of 7% and higher outsourcing orders from the MNCs which are shutting down plants in Thailand and Malaysia.

“Among the stocks under our coverage, we expect Hartalega to report the highest 2-year EPS CAGR (2014-16) of 21%, followed by Riverstone (18%), Kossan (15%) and Top Glove (5%), driven by their respective expansion plans.

“Our top pick is Hartalega (unchanged TP RM8.50, 21 times 2016 PER), the market leader in nitrile glove segment. We also have BUY calls on Kossan (TP raised to RM5.90 (from RM5) as we roll forward our 19 times PER to 2016),” it said.

Source: The Star

[winston]

not vested

Rubber Gloves (OW) - 2015 will be a better year

2014 was a not a particularly auspicious year for the sector, as higher capacity resulted in pricing pressures and weaker earnings.

While competition may be even more intense in 2015, its impact on margins will likely be cushioned by the strengthening USD and falling crude oil prices.

In line with the brighter outlook, we upgrade our sector rating from a Neutral to an Overweight, with Kossan as our top pick.

We increase our earnings forecasts to factor in the stronger USD vs the MYR and potentially lower raw material prices.

We
1. upgrade our calls on Hartalega (now pegged to 2-year historical P/E of 21x CY16 P/E vs. a 10% premium over our target market P/E prev.),
2. upgrade Top Glove (from 14.6x to 16.8x CY16 P/E, a 20% discount to Hartalega) from Hold to Add
3. keep Supermax (from 12.4x to 12.6x CY16 P/E, a 40% discount to Hartalega) at Hold
4. keep Kossan (from 16.4x to 18.9x CY16 P/E, a 10% disc. to Hartalega) at Add.

Kossan remains as our top pick.

Source: CIMB

[winston]

Singapore Gloves Sector: Privatisation catalyst | OVERWEIGHT

Top Glove’s M&A ambitions and weak MYR triggered a share price rally among Malaysia-listed glovemakers.

Singapore-listed glovemakers Riverstone and UG Healthcare are laggards in the rally, possibly due to slower newsflow and investors being too preoccupied with the penny stocks rally.

Maintain BUY on Riverstone and UG Healthcare. Both stocks are trading at deep discounts to peers (20% for Riverstone and 50% for UG in FY16).

Another round of multiple expansions is possible if the rally continues.

Source: Kim Eng

[winston]

Will Malaysia's rubber gloves sector remain robust?

BY WONG WEI-SHEN

Source: The Star

http://www.thestar.com.my/business/busi ... in-robust/

[winston]

Time to pick up shares of rubber glove makers

Malaysia glove makers traditionally rely on cost pass through arrangement with customers, which means that any changes in production cost would reflected in their average selling prices (ASPs).

Since the start of the year, shares in Top Glove Corp Bhd and Hartalega had declined by about 18%, while Kossan Rubber Industries Bhd fell 26% and Supermax Corp Bhd dropped by 15%.

The research house’s top pick for the sector is Top Glove with target price of RM7.10.

Source: The Star

http://www.thestar.com.my/business/busi ... ve-makers/

[winston]

Glove counters fall further on ringgit strengthening

Source: The Star

http://www.thestar.com.my/business/busi ... ngthening/

[winston]

Rubber Gloves – Malaysia

Margin Normalisation Broadly Within Expectations

1Q16 aggregate sector earnings slid 15% qoq due to the appreciation of the ringgit and time lag in passing on the hike in industrial gas prices.

We anticipate a modest recovery in upcoming sector earnings thanks to the recent greenback recovery.

However, we expect this to be a brief phenomenon and note that the sector’s earnings remain susceptible to a further appreciation of the ringgit and structural downtrend in nitrile glove ASPs over the longer term.

Maintain MARKET WEIGHT.

Source: UOBKH

https://research.uobkayhian.com/content ... 838ad97856

[winston]

Export revenue from rubber gloves to hit record RM14.3b

Export revenue from rubber gloves is expected to reach a record high RM14.3 billion this year, up 14%, from RM13.1 billion last year, says the Malaysian Rubber Glove Manufacturers Association.

Source: Bernama

[winston]

Loosening its grip

Increased capacity in NBR gloves could lead to a more intense pricing environment, which would in turn result in short-term margin compression for glove players.

Glove makers could find it tougher to pass on costs to its clients and may have to absorb additional costs to remain competitive.

Short-term view: supply may outstrip demand; long-term view: supply-demand dynamics should iron out eventually as inelastic demand growth catches up.

Hence, we downgrade the sector to Neutral; we remain selective in our stock picks.


https://brokingrfs.cimb.com/3_3AvG8r2aC ... HUdPg2.pdf