Is the worst over for glove stocks?

Summary

• The disposable glove manufacturing is turning the corner. The high inventory built up during the pandemic in the supply chain have been largely drawn down. Latest quarterly reports of listed glove manufacturers shown sequential growth in volume and firmer ASP.
• Revenue growth is driven mainly by higher volume and strong US$. On top of restocking, customers could have placed more orders to cope with longer shipping time from the Red Sea conflict, and potential price increase if the US were to raise import tariffs. ASP rose by average 10-15%, to pass through higher raw materials costs.
• Margins have recovered, though these are still below pre-Covid’s level, except for Riverstone. The improvement is in part due to higher output, which gives operating leverage as fixed costs account for 50% of cost of production. The cost of fuel has also eased. Weaker Ringgit and Thai Baht vs US dollar further helped margin expansion.
• Potential risks for the sector are 1) return of capacity that have been idled in 2022/23 when the industry was hit with oversupply; 2) US imposing higher import tariff on the Chinese products. This could divert competition to other markets. Chinese manufacturers might set up production bases outside China, raising the stakes for US to impose tariff on these countries.
• Riverstone stands out in the sector. The company produces both cleanroom and healthcare gloves. 2Q24 revenue grew 10% year-on-year to RM247m, while net profit leapt 55% to RM73m, led by improved product-mix and firmer prices for healthcare gloves. Net margin rose to 29%, highest since 2Q21. The operations generate strong ROIC of 33.1% and ROE of 18%, despite net cash of RM761m.

The disposable glove manufacturing industry is turning the corner

Orders are returning as destocking of the channel inventory built up during Covid is nearing complete. The glove manufacturers, who stocked up in anticipation of higher demand, have also largely cleared out the high-cost inventory.

Revenue is rising again

In the latest quarter, the glove manufacturers that we track report higher revenue both year-on-year and sequentially.

Revenue growth is driven by: 

1. Volume growth. Customers might also be ordering more due to the longer shipping time from the Red Sea conflict, and concern of a price hike in the event that US impose a tariff hike;
2. ASP inches up by 10-15%, more due to the pass-through of higher prices of raw material and energy. Rampant price discounting by Chinese manufacturers appears to have abated. The US imposed a 7.5% tariff on Chinese healthcare gloves in Dec 2021, which shaves off margins from the Chinese manufacturers. The tariff will be raised to 25% in 2026.
3. A stronger US$, in which sales are denominated.

Positive operating margin

Operating margins have improved across the board in the latest reported quarterly/half-yearly results. However, except for Riverstone, margins are still below pre-Covid’s level of 20-25%. 

Margin improvement is due mainly to higher output that drives operating leverage, and lower fuel costs. Fixed costs make up about half of overall cost of production. 

Fuel account for 15% of production cost. Natural gas price has eased 17% YTD.

Weaker Ringgit and Thai Baht against US$ have also widened margin. However, US$ has weakened against regional currencies in recent weeks, in anticipation of Fed first rate cut in Sep.

Higher material prices are typically passed through to customers with a short time lag, except for abnormal situations such as an industry-wide oversupply in 2022/23.

The price of key raw material, nitrile has been on an uptrend since end-23 (YTD: +6.4%). Natural rubber latex price is also higher (YTD: +31.0%), due to seasonal factor, but is expected to decline in 2H.

Risks of return of capacity that were mothballed

When the downturn hit in 2022/2023, many production lines were laid idle, and expansion plans were set aside. 

As demand recover, these lines could be turned on again, adding to risk of capacity increase outpacing demand growth.

The listed glove manufacturers have strong balance sheets that are mostly flushed with cash. They would have strong motivation to utilize the cash when ASP improves.

A potential deterring factor is Malaysia’s intent to impose a 15% cap on foreign labour. 

Tariffs on Chinese producers

US’ higher import tariffs on Chinese goods is a double-edged sword. When this is further raised to 25% in 2026, prices and margins for healthcare gloves could return to the pre-Covid level. 

However, the Chinese products might be diverted to other markets outside the US, posing threats to other producers. 

Chinese manufacturers might set up new production bases in other countries targeted for the US market. Besides rising competition, the bigger risk is US imposes tariffs on the products of these countries. 

Riverstone stands out among the rest

Riverstone is differentiated from the rest due to its specialization in the higher-margined cleanroom gloves. Unlike other glove manufacturers, it remained profitable and improved on its pre-Covid profitability during 2022/23 when the industry was reeling from oversupply. 

It is an own-brand manufacturer, developing high tech cleanroom gloves that are sold directly to customers via its regional offices. Cleanroom gloves are used in controlled environment to prevent contamination and corrosion such as the semiconductor and pharmaceutical sectors. 

Riverstone commenced the production of nitrile cleanroom gloves in Malaysia in 1994, and diversified into premium healthcare gloves in 2009. Its manufacturing bases are located in Malaysia, Thailand and China, with total capacity of 10.5 billion pieces per annum.

About 20% of its output and 50% of sales are derived from cleanroom gloves. ASP is high and stable at about US$90-100 per 1,000 pieces. Some of these products are customized and developed together with the customers. Riverstone is the single-source supplier to most of its cleanroom customers and the customers’ supply chain.

2Q24 revenue grew 10% year-on-year to RM247m, while net profit leapt 55% to RM73m, led by improved product-mix and better prices for healthcare gloves. Net margin rose to 29%, the highest since 2Q21. The operations generate strong ROIC of 33.1% and ROE of 18%, despite net cash of RM761m.

Riverstone is a proxy for Malaysia’s strong FDI inflow into the tech and manufacturing sectors. It is well-poised to benefit from the recovery in semiconductor sector in 2025.

Download the full report here. 

Related links:

• Riverstone share price and share price target
• Riverstone dividend and dividend forecast

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