RHB Bank Singapore analyst Oong Chun Sung has maintained “overweight” on the rubber products sector with Riverstone Holdings AP4 as one of its regional top picks.
In his April 2 report, Oong notes that the industry demand and supply dynamics are showing recovery signs as April - May order volumes seem to have sturdily picked up. The industry-blended average selling prices (ASPs) have also held up at US$20 ($27) per 1,000 pieces, he further points out.
“According to our channel checks, Chinese glove makers’ ASPs are expected to increase to US$16-US$17 from US$15-US$16. The continued narrowing of the ASP gap means the prolonged price war is approaching its tail-end, in our view, which ultimately allows Malaysian manufacturers to compete via product quality rather than price,” adds Oong.
For the month of February, Malaysia’s glove export volumes spiked 6% m-o-m, continuing its positive growth for two consecutive months. Exports value also grew by 7% m-o-m, surpassing export volume growth — this indicates that cost pass-throughs are gradually picking up, Oong says. China glove exports, on the other hand, contracted by 15% m-o-m in February, following a 4% m-o-m growth in the preceding month.
To this end, RHB maintains its 2024 glove demand growth estimate of 7%, which is premised on the recovery of glove restocking activities in 2H2024.
On the supply side, Oong is estimating global glove effective capacity to have reduced by 53.4 billion in 2023. RHB sees marginal changes in global industry supply to 2 billion planned capacity replenishment by Bursa Malaysia-listed Hartalega and 1.1 billion planned capacity by Sri Trang Gloves STG .
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Moving forward, Oong expects sales volumes to pick up sequentially in view of a more balanced demand-supply dynamic by the second half of the year. This, in turn, should lead to an improvement in glove makers’ profitability.
“With the industry’s excess capacity gradually phasing out, we should see the sector achieving demand-supply equilibrium by end-2024. We also expect the risk of price competition from Chinese peers to gradually subside, premised on rising quality concerns resulting in higher rejection rates from the US Food & Drug Administration and Chinese players’ pivoting stance towards sustainability,” he adds.
RHB likes Riverstone for its above peer margin performance, exposure to cleanroom gloves — which should benefit from the recovery in semiconductor sales — and its consistent dividend payout. Oong has a “buy” call on Riverstone with a target price of 93 cents.
As at 11am, shares in Riverstone are trading 1 cent lower or 1.22% down at 81 cents.
