Malaysia Gloves Sector
A Growing Pie For All Players Malaysia Gloves Sector
&ndash Maybank Kim Eng 2020-06-24

• Demand switch to nitrile gloves (from vinyl gloves) is prevalent in the developed markets and we think China could catch-up with this trend in the coming years. Taking into consideration of the aggressive supply from China, we think industry demand-supply could balance in 2H21, and oversupply risk is likelier in 2022. In our earnings estimates, we have already assumed for lower ASPs in 2021-22E.
• Our top pick remains  Top Glove (SGX:BVA)  (BUY, Target Price MYR21.90) for its faster near-term ASP hikes and undemanding CY21E P/E of 17x (below 5-year mean of 19x).

US: Moving Away From Plastic Vinyl Gloves

Vinyl gloves: The &lsquo poison plastic&rsquo gloves

• Vinyl gloves are made out of polyvinyl chloride (PVC), which produce dangerous quantities of dioxin and other carcinogenic emissions across their life-cycle (from manufacturing to landfill disposal). Additionally, some of the vinyl gloves are also found to contain toxic plasticizer chemicals called ortho-phthalates (THAL-eights) that can leach into food.
• As a result, the demand has gradually switched from vinyl to nitrile rubber gloves in the US, and we note that the trend started as early as 1999, for the medical gloves segment. The key hindrance for switching lies in the cost as nitrile gloves ASP is > 50% higher than that of vinyl gloves.

Medical: Switching started as early as 1999

• Kaiser Permanente, one of the larger healthcare providers in the US, had switched from vinyl gloves to nitrile gloves in 1999 due to the toxicity concern. We note that the plastic medical gloves demand in US peaked in 2008-12, and has been on a steady declining trend since 2013. However, the vinyl medical gloves have yet to be fully phased out, and plastic medical gloves accounted for 5% of US total glove import value in 4M20.

Food industry: Switching accelerated in 2019

• For the food industry, the safer alternatives are nitrile and polyethylene gloves (i.e. PE gloves). The PE gloves are also a type of plastic gloves, but are safer than vinyl gloves as they do not cause dioxin pollution and do not contain the toxic plasticizer. However, the quality of PE gloves is inferior to that of nitrile as PE gloves are loose-fitting, less durable and not impervious to liquids. Hence, if one is not budget-constrained, the preference would still be for the nitrile gloves.
• We note that the demand switch started gradually in 2018, and was only more apparent in the numbers in 2019, with US import value of plastic non-medical gloves falling 22% y-o-y (partially due to lower vinyl glove ASP). In 4M20, US import value of plastic non-medical gloves fell 9% y-o-y (despite higher vinyl glove ASP) and plastic non-medical gloves accounted for 12% of total US gloves import value. Further switching ahead would accelerate the demand for nitrile gloves.

Huge market share gains potential in developing markets

• In US, plastic accounts for c.17% of US glove import value, and we believe rubber gloves could displace 5-10% of the plastic glove market size in the coming years, if US fully phases-out vinyl gloves, and there is still demand for the cheap PE gloves.
• We believe developing markets, such as China and India, are predominantly using vinyl gloves and may also steadily switch to nitrile gloves in the coming years. In total, China and India account for only c.5% of Malaysia&rsquo s export volume, despite their big population size (35% of world&rsquo s population).