Glove makers begin diversification amid woes

PETALING JAYA: The rubber glove sector continues to face operational challenges amid bearish demand supply fundamentals with any hopes of a turnaround soon unlikely.

Against the weak industry dynamics, some companies in the sector appear to be ready to diversify their operations and are looking out for acquisition targets.

These include Hartalega Holdings Bhd, which announced on Tuesday it would like to diversify into a related healthcare sector while Careplus Group Bhd said it is diversifying into the electric vehicle (EV) business.

The diversification route is also being taken amid broader continued woes in the industry as they continue to bleed losses.

The losses appear to be persisting amid strong competitive pressures from Chinese producers and a continued overcapacity from local players.

Industry capacity still appears to be far outstripping demand when Hartalega said its capacity utilisation forecast until the end of the year would only be at 40% to 50%.

Operational costs are cheaper in China on cheaper labour costs and the lower cost of heating their plants with coal while Malaysian players employ the more environmental, social and governance-friendly option of natural gas for their glove-making plants.

This results in the average selling prices of gloves that are manufactured in China cheaper by some 30% compared to Malaysian peers, an industry player said.

Despite the industry woes, Rakuten head of equity sales Vincent Lau believed the worst may be over for selected glove makers, especially those with good management that are making wise decisions and with strong cash holdings and margins.

“For some of these companies, the losses are narrowing while companies like Hartalega have seen their share prices stabilising.

“It is important for glove makers to understand the oversupply situation and, if necessary, diversify into other sectors.

“It’s best that they understand the business they diversify into, especially in a related or complementary type of business that can help its core business,” Lau told StarBiz.He said the days of super high profits experienced during the Covid-19 pandemic are likely over for the sector.

“Having a solid cash holding is good and for these players, there is no rush to diversify actually.

“Shares that are backed by cash and net tangible assets is a good security, given the industry woes.

“The bottom might already be in for the sector but a bottoming out process may take longer than expected and may come as late as in 2025,” Lau said.

In a report yesterday, Kenanga Research said it upgraded the rubber glove sector rating to “neutral” from “underweight”.

Against its expectation, there was upside surprise from one player in terms of a narrower loss.

However, it noted that glove makers’ recent second-quarter 2023 results were still firmly in a sea of red.

“Any further decommissioning of older production facilities from local players could take more supply pressures off the sector.

“Industry capacity cutbacks should bring back more rational competition and hopefully stop the bleeding of the players,” Kenanga Research said.