Rubber glove demand has been on a tear for the last 18 months.
The outbreak of the pandemic has led to countries stockpiling massive amounts of gloves as medical institutions and hospitals struggle to cope with the surge in infections.
A heightened sense of hygiene has also prompted malls, cruise ships and offices to purchase large quantities of rubber gloves to protect their customers and employees.
The Malaysian rubber industry has recorded exceptional performance in the first half of 2021 (1H2021), driven by exports soaring 150% year on year to RM 44.4 billion.
Malaysian Rubber Council (MRC) CEO Nurul Islam Mohamed Yusof believes that the performance of rubber gloves is set to remain robust despite global vaccination levels ramping up.
This must seem like sweet news for investors in glove companies such as Riverstone Holdings Limited (SGX: AP4) and Top Glove Corporation Berhad (SGX: BVA).
Can these businesses continue to do well? Or are there hidden risks to watch for?
Stock price weakness
Despite the healthy financial performance of the rubber glove companies, their share prices this year have been relatively weak.
Riverstone is up around 8.5% year to date while smaller rubber glove player UG Healthcare Corporation (SGX: 8K7) has declined by 5.1% over the same period.
Top Glove, the world’s largest producer of rubber gloves, fared even worse, plunging by 31.6% year to date to S$1.28.
Yet, all three companies have announced stellar sets of earnings.
Riverstone’s revenue for 1H 2021 has seen a more than threefold increase year on year to RM 2 billion, while net profit surged more than seven-fold year on year to RM 1 billion.
Meanwhile, UG Healthcare saw its net profit for the full fiscal year ended 30 June 2021 expand by 786.2% year on year to RM 118.7 million while Top Glove’s net profit for the first nine months of its fiscal year 2021 jumped more than 12-fold to RM 7.3 billion.
Investors should note that the three rubber glove manufacturers also put in place plans to expand their production capacity aggressively over the next few years.
They are doing so to tackle the surge in demand for rubber gloves.
However, expanding capacity takes time as factories need to be planned and built and production lines need to be commissioned.
For instance, Riverstone’s current capacity is 10.5 billion gloves per annum but will increase to 15 billion by the end of 2023.
Meanwhile, Top Glove’s current capacity stands at 100 billion gloves per annum but will more than double this to 205 billion by the end of 2024.
Elsewhere, UG Healthcare’s annual production capacity is 3.4 billion pieces per annum, and this will increase to 4.6 billion pieces by March 2022.
With many more players ramping up their production, a significant increase in supply is set to come onstream from 2022 onwards.
A decline in glove average selling price
While demand is rising for rubber gloves, the average selling price (ASP) of nitrile healthcare gloves has been headed in the opposite direction.
Executive director for Top Glove, Lim Cheong Guan, reported that ASP for nitrile gloves fell 20% year on year for its 2021 third-quarter earnings.
At the same time, UG Healthcare’s executive director Lee Jun Yih mentioned that for many of its customers, the urgency to stockpile has reduced, leading to a fall in ASP since March 2021.
That said, analysts for the glove sector also expect more weakness in ASP as vaccinations ramp up worldwide, but that these should stabilise at levels higher than pre-pandemic levels.
These indicators seem to point to an exceptional spike in glove ASP last year that cannot be maintained.
However, moving forward, ASP should start to stabilise as countries’ demand for stockpiling normalises.
Glove manufacturers may see a temporary period of weaker ASP leading to reduced revenue due to the higher base last year.
However, over the medium term, revenue and net profit should continue to trend upwards.
Get Smart: Patience is needed
Demand for rubber gloves should remain elevated for the foreseeable future.
Even if vaccination rates increase significantly, demand should remain resilient as heightened hygiene awareness will prompt governments and businesses to stock up on rubber gloves.
Investors, however, should be aware that glove ASP may weaken this year as the spike experienced last year is unlikely to be repeated.
Glove makers’ share prices could also have experienced a similar spike last year as investors piled into their stocks.
Patience is therefore needed as these businesses should do well over the long term.
However, in the short term, there could be more volatility in the share prices of these companies until their ASP stabilises.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.