Strategy Outlook- Malaysia 2014
Rubber Gloves Sector
2014 Outlook. We believe natural rubber glove industry will continue to grow as demand will remain steady in tandem with the rising popularity and legislation to use rubber gloves and capability of exporting more rubber-based products. Nitrile rubber glove will continue to grow rapidly driven by the increase in demand especially from US and Europe due to its awareness of hygiene and not to mention strict government regulations. The technological expertise in the rubber glove industry is highly looked upon and has placed Malaysia's rubber-based products such as tyres and gloves among the best in the world. We have a Neutral call on the sector driven by steady demand and neutral impact of the fuel price hike and GST. We have a Buy call on Supermax (TP: RM2.85), and Hold call on Hartalega (TP: RM8.13) and Top Gloves (TP: RM6.23).
Still dominating. Malaysia still dominates the global glove market with the presence of the four top rubber gloves manufacturers globally namely Hartalega, Top Glove, Supermax and Kossan. Malaysia is also one of the largest producers of natural rubber due to support given by the government such as full assistance and incentives to planters and agencies to encourage rubber latex plantation in Malaysia. To recap, Malaysia exported 100 billion pieces of rubber gloves in 2012, around 63% of the world‟s supply to 180 countries.
Raw materials. Rubber glove prices are mainly determined by rubber commodity (for Natural Rubber), crude oil and butadiene (Synthetic Rubber) prices. We expect that the prices will stay soft at least over the medium term which will be a boon to players
Rubber City. The government of Thailand and Malaysia has agreed to collaborate on a Rubber City project designed to promote the natural rubber industries of both countries and increase natural rubber prices. A city would be located in the border area linking Dan Prakob in Songkhla's Na Thawee district and Kota Putra in the Malaysian state of Kedah. Thailand will provide good quality latex and other raw material for the Rubber City and Malaysia that would provide low-cost energy and production technology expertise to the project. Living conditions of workers in both countries would improve by this project and tax incentives may be offered to entrepreneurs in the Rubber City.
Fuel price and electricity tariff hike. To highlight, in early September 2013 the local fuel prices for petrol and diesel were adjusted by RM0.20 from RM1.90 to RM2.10 (+10.5%) and RM1.80 to RM2.00 (+11.1%) respectively. As announced recently, the electricity tariff will take effect effective 1st January 2014, in our opinions, at current tariff of 32.2 sen/kwh, we believe the quantum of 16.85% hike is still tolerable for industrial sector as compared to residential/domestic and commercial sector. However, we believe the bottom line of the rubber gloves will be squeezed given the cost of electricity accounting on average 10%-15% of total costs. Additionally, should glove makers can pass down additional electricity the cost to consumers, it will give muted impact to bottom line.
Impact to GST is neutral. Generally, all goods exported out of Malaysia will be zero-rated. This means that GST is not collected for exports by the registered exporter. Nonetheless, GST should be paid on business purchases or raw material costs by manufacturers, as well as rubber glove companies before selling their product but is able to claim credit for the GST paid for the inputs. This means manufacturers should cautiously plan of their cash flow and turnaround time.
The Nitrile Show. The glove makers are aggressively expanding their nitrile production capacity. The demand is strong and we expect it could continue to outperform latex glove in the market share. Providentially, latex and nitrile prices both have been stable. Prices of latex and nitrile are not expected to increase due to maturing plantations in Cambodia and South Vietnam, and expansion capacity by nitrile producers.
Expect strong earnings. The glove makers are expected deliver strong earnings growth as the ringgit weakening against the USD is a positive sign that rubber glove players could get more in revenue generation. The ringgit has weakened by 12% of RM 3.30 from RM 3.29 against the dollar for the past few weeks and it expected to decelerate to an average of RM3.26/Dollar in 2014 against RM3.20/Dollar in 2013.
We have an OVERWEIGHT call driven by steady demand for rubber gloves across the globe, manageable cost factor and weakening in Ringgit against the greenback as alluded before. We have a Buy call on Supermax (TP: RM2.85), and Hold call on Hartalega (TP: RM8.13) and Top Gloves (TP: RM6.23).
Source/Extract/Excerpts/来源/转贴/摘录: M & A Securities
Publish date: 07/01/14