Malaysia Gloves Maker - UOB Kay Hian 2024-01-12: Overhyped Market Expectations Pose Short-term Downside Risk

• As expected, the glove sector’s recovery plot continues to thicken after delivering resilient earnings growth in 3Q23. While more optimism is emerging following better operating matrixes and consensus’ rounds of catch-up upgrades, we deem these to be fairly reflected in the recent aggressive share price movement.
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Imminent operational and earnings recoveries throughout 2024.

• After more than two years of industry consolidation since pandemic highs, various tailwinds are flowing through the Malaysian glove sectors. These include:
  1. improving profitability outlook,
  2. depleting excess inventory which points to demand recovery,
  3. margin expansion on better efficiency and scaled-back capacity, and
  4. moderating input costs.
• As such, we reiterate our view that the sector’s losses have bottomed in end-1H23, and is on the cusp of progressive recovery. We expect sequentially stronger earnings for the sector in 4Q23-2024, led mainly by demand recovery, improving margins amid cost efficiency and better capacity utilisation.

Rationalisation of overhyped market expectations.

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• Realistically, industry players are hoping to see potential meaningful earnings recovery closer to 2H24, with operational profitability (ex-interest income or other non-core earnings stream) only recovering back to pre-pandemic level by 2025.
• We opine that market may be too optimistic and has built up expectations that operating matrixes such as utilisation rate and profitability margin will return to 2019’s levels within the upcoming 2-3 quarters.
• Utilisation rates of domestic glove producers stood at merely 35-45% as of end-3Q23, signifying supply-demand has yet to be balanced and near-term steep ASP hikes are very unlikely.

Recent aggressive share price uptick reflects mean valuations on 2025 full earnings recovery.

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Jack Goh UOB Kay Hian Research | https://research.uobkayhian.com/ 2024-01-12 SGinvestors.io

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