Rubber Glove - Growth Industry (still)?

Background

Malaysia is the world’s largest producer and, together with Thailand and Indonesia, commanding world’s market share of 70%. World's and Malaysia's top-3 manufacturers are TopGlove, Supermax, and Kossan.

Recent events

Glove counters were battering down by investors after experiencing a super bull-run since H1N1 outbreak until recently. The near term sentiment was affected mainly because of the following 3 reasons:

1. High latex cost, which accounts for 70% of the bottom line, had hit an all-time high of RM7.78/kg in April as a result of supply concern from El Nino effect.
2. Weakening US$ against RM by 6.4% this year could see earnings contracting, as US accounts for 80% of the export market.
3. Orders slowing down.

Growth-still?

As history shown, glove manufactures are able to pass the operating cost to clients as long as the demand is strong. As for demand side, we can expect demand to stay strong from healthcare industry. Moreover, rising awareness in healthcare standards in emerging countries should help to boost the demand for medical gloves in the long-term.

Seasonally, 2Q tends to be a slower period in terms of orders, and orders should pick up again by end of the year. Meanwhile, latex price has been stabilizing around RM7/kg now. Although still remain high, this could let glove players to price-in their products for the next few months.

Conclusion:

This round of correction presents us an opportunity to accumulate glove jewels, provided that the long-term demand is still intact, and there is no price war between manufacturers as a result of over-expansions.