Rubber glove sector
Maintain neutral: Hong Kong last Thursday raised the city’s bird flu alert level to “serious” after three birds were tested positive for the deadly H5N1 virus strain. As a precautionary measure, the city’s health chief began culling 17,000 chickens at the city markets and imposed an immediate ban on all live poultry imports. The source of the outbreak has yet to be identified at this juncture.
During the H1N1 pandemic in March 2009 to August 2010, most glove makers experienced a surge in demand for gloves as governments of developed countries urged healthcare multinational corporations to stock up rubber gloves. Should the situation deteriorate and remain prolonged, we believe Top Glove would benefit most from any surge in demand given its excess capacity (average utilisation rate of 70% currently). Both Kossan and Hartalega, however, would not be able to reap the full benefits of the situation as both companies are running close to optimum capacity. As for Adventa (which primarily manufactures surgical gloves), the company may not benefit much from the outbreak as demand for medical examination gloves increases rather than that for surgical gloves.
The risks include: 1) sharp surge in raw material (latex) and/or energy (natural gas) prices, which may result in margin squeeze; and 2) appreciating ringgit against the US dollar.
We are keeping our earnings forecasts for the glove manufacturers unchanged for now.
We are keeping our “neutral” stance on the sector as it is still too early to determine the potential impact of the outbreak. Furthermore, the outlook over the next two quarters remains challenging given the oversupply situation and the approaching wintering period, which could see latex prices trend higher.
Hence, we are keeping our “underperform” call on Top Glove and “market perform” calls on the other glove manufacturers unchanged for now. —RHB Research, Dec 23
This article appeared in The Edge Financial Daily, December 27, 2011.
Maintain neutral: Hong Kong last Thursday raised the city’s bird flu alert level to “serious” after three birds were tested positive for the deadly H5N1 virus strain. As a precautionary measure, the city’s health chief began culling 17,000 chickens at the city markets and imposed an immediate ban on all live poultry imports. The source of the outbreak has yet to be identified at this juncture.
During the H1N1 pandemic in March 2009 to August 2010, most glove makers experienced a surge in demand for gloves as governments of developed countries urged healthcare multinational corporations to stock up rubber gloves. Should the situation deteriorate and remain prolonged, we believe Top Glove would benefit most from any surge in demand given its excess capacity (average utilisation rate of 70% currently). Both Kossan and Hartalega, however, would not be able to reap the full benefits of the situation as both companies are running close to optimum capacity. As for Adventa (which primarily manufactures surgical gloves), the company may not benefit much from the outbreak as demand for medical examination gloves increases rather than that for surgical gloves.
The risks include: 1) sharp surge in raw material (latex) and/or energy (natural gas) prices, which may result in margin squeeze; and 2) appreciating ringgit against the US dollar.
We are keeping our earnings forecasts for the glove manufacturers unchanged for now.
We are keeping our “neutral” stance on the sector as it is still too early to determine the potential impact of the outbreak. Furthermore, the outlook over the next two quarters remains challenging given the oversupply situation and the approaching wintering period, which could see latex prices trend higher.
Hence, we are keeping our “underperform” call on Top Glove and “market perform” calls on the other glove manufacturers unchanged for now. —RHB Research, Dec 23
This article appeared in The Edge Financial Daily, December 27, 2011.
