THE negativity surrounding glove stocks was cemented following Top Glove Corp Bhd’s announcement of its least profitable quarter since the largest glove maker was listed.
In fact, the profit of RM15.3mil was buffered significantly by other non-operating income to the tune of RM45.1mil.
With Top Glove posting a net profit of RM15.3mil, it means that if not for the other income sources, the company would have sunk into the red.
As pointed out by Hong Leong Investment Bank, Top Glove reported a core loss after tax and minority interests (Latami) of RM8.6mil for the quarter.
The research house derived the Latami after stripping out exceptional items, mainly foreign-exchange gains, amounting to RM23.9mil.
Interestingly, despite the headwinds impacting rubber glove makers, analysts were generally taken by surprise by Top Glove’s latest quarterly earnings.
Five major research houses that cover Top Glove said that its third-quarter earnings came in below expectations.
All five research houses lowered their target prices for Top Glove, whose stock slid by 7.4% on Friday to close at RM1.13 per share. Year to date, the stock is down 53%.
Going by Bloomberg data, most analysts covering Top Glove have a “sell” call on the stock.
The consensus target price for Top Glove is RM1.14, just one sen higher than Friday’s close.
Of all the reasons impacting glove makers like Top Glove, the increase in supply is probably the most damaging.
Top Glove executive chairman Tan Sri Lim Wee Chai noted that, just in Malaysia, there are 30 to 40 new players in the industry.
Top Glove executive chairman Tan Sri Lim Wee Chai noted that, just in Malaysia, there are 30 to 40 new players in the industry.
Globally, there have also been new players jumping on the glove manufacturing bandwagon in countries such as China as well as Europe.
Lim says that China’s supply had grown by more than 100% over the last two years.
Top Glove today says that it is only operating at 50% of its capacity, another clear indication of the collapse of glove demand.
The key indicator of rubber glove makers, namely the average selling prices or ASPs of their products is interesting to watch.
While Top Glove’s previous quarter saw a 20% quarter on quarter (q-o-q) drop, it only dropped by 5% q-o-q this quarter.
But as CGS-CIMB Research points out, this is not necessarily an encouraging sign.
“We believe this does not indicate that sector supply-demand dynamics improved as customers are keeping low inventory levels, while new capacity is still aggressively added in the sector.
“We believe this is due to recent cost hikes, and expect lower margins in the near term despite a pick-up in sales going forward”.
JP Apex says, “We foresee the strong market competition from major players to continue to dampen the ASP’s upward momentum.”
Explaining the situation further, UOB Kay Hian Research notes that Top Glove’s management attributed the slower decline in ASPs to ample supply from China producers and “exiting producers holding fire sales of their inventories”.
The research house adds, “Going forward, ASPs are expected to remain range-bound as imbalanced demand-supply dynamics are expected to persist in the near term.
“Deferring expansion plans by major producers will help achieve demand-supply equilibrium.
“Furthermore, smaller-cap producers in Malaysia have on average, realised operational earnings losses over the first quarter of 2022.”
In its defence, Top Glove says that it has a competitive advantage over its China counterparts.
“We still have our customers with us and our technology, research and development and experience give us the advantage. Customers also prefer to deal with us due to our business ethics and our compliance with environmental, social and governance or ESG requirements, which have been verified by many parties,” says Lim.
Will the oversupply abate?
Lim notes that due to declining demand and falling ASPs, producers in China have over the last few months reduced their production by about 50%.
Top Glove itself is deferring its expansion plans.
According to the group, it will not have any expansion plans for the rest of the year, making it settle with a production capacity of 100 billion pieces of gloves per annum.
For 2023, the group plans to expand its production capacity by 10% to 110 billion gloves per annum.
“This is in line with its peers who are also deferring capacity expansion to the second half of this year,” UOB Kay Hian Research says.
Glove makers are also facing higher production costs.
Top Glove’s officials pointed out that the industry continues to face rising cost of production pressure due to global inflation and the Russia-Ukraine conflict driving up oil prices.
Kenanga Research points out that Top Glove will be unable to fully pass on the cost increase due to a few reasons.
One is the current oversupply situation which is expected to remain challenging, and another is the reduced economies of scale arising from volume that is less than optimum, which in turn is occurring due to the soft demand.
It points out, “Glove players are experiencing margin erosion as raw material costs are not adjusting down as fast as ASPs.”
Other glove companies are also seeing declining numbers.
Hartalega Holdings Bhd reported a net loss of RM197.9mil in the fourth quarter ended March 31, 2022 (4Q22) from a profit of RM1.12bil a year earlier.
Kossan Rubber Industries Bhd posted a 91% plunge in net profit to RM90.1mil in 1Q22 ended March 31 from RM1.04bil a year ago.
Supermax Corp Bhd’s net profit in 3Q22 ended March 31, meanwhile, fell 98.71% to RM13.01mil from RM1.01bil.
Top Glove officials, however, reckon that global glove demand will improve with the transition of Covid-19 into the endemic phase as gloves remain an essential item in the healthcare sector.
The deferring of expansion plans by major players will also help ease the oversupply situation and help achieve a demand and supply equilibrium, the officials say.