The glove manufacturing industry mistakenly expected a pricing fade from the extreme levels caused by COVID-19. Instead, a massive increase in Chinese capacity has flooded the lower end of the market that has dragged all prices down.
The Malaysian Rubber Glove Manufacturers Association (MARGMA) had predicted that the extreme pricing seen during the height of COVID-19 would fade but remain elevated. In mid-2021, MARGMA expected average selling prices to settle 40-60% higher than pre COVID levels but failed to account for a huge increase in manufacturing capacity from the fragmented Chinese industry.
Chinese glove manufacturers were well established prior to COVID- 19, but the global pandemic sprouted grand ambitions to take significant global market share. Intco, for example, went from 15 billion pieces of annual capacity in 2019 to 45 billion pieces in early 2021 and is expanding to 120 billion pieces of PVC and nitrile products by the end of 2022. The company’s stated ambition is to have 30% global market share.
By comparison, Top Glove is currently the world’s largest manufacturer at 112 billion pieces annually.
China’s Blue Sail plans to triple capacity in three years to 64 billion pieces by the end of 2022.
While these are just two examples, the broader trend in Chinese glove manufacturing shows up in US Customs data which shows imports of Chinese rubber protective wear increasing from ~10% to over 30% since the beginning of 2019. Importantly, the upward trend suggests that US customers have no issues buying cheaper Chinese made product which competes at the lower end of the market.
ANN’s products are aimed at the premium end of the glove market, but the lower prices of Chinese sourced product does have a limiting impact on prices across the spectrum. All prices are ultimately measured against the lower end.
The Chinese manufacturers have become the marginal price setters and have disturbed the previously predictable industry structure that gave some price certainty. Hence, MARGMA’s revised pricing expectation of 12-16% above pre COVID levels still looks to be optimistic as some prices are already below this level.
The pricing decline is even more remarkable given the big increase in key input costs such as cotton (21% of COGS), wet latex (5%) and butadiene (15%) and the general upward influence of higher oil prices on petrochemicals.
Investment view
ANN revised its FY22 EPS guidance back in January by 27% at the mid-point from US185cps to US135cps, but we think conditions have become materially worse since then.
Consensus earnings forecasts are below company guidance but still look too high, in our view. ANN’s share price is down 21% so far this calendar year but we see no near term catalyst for a recovery in earnings.
The shifting industry structure prevents a quick reversion to pre COVID conditions. The industry will continue to struggle to adapt to a deteriorating structure, normalising demand, COGS headwinds and an oversupply of single-use gloves.
Risks to investment view
The sharp increase in commodity prices might be temporary and short term in nature if geopolitical tensions abate sooner. If the global glove manufacturing industry can enact a meaningful restructure of capacity and pricing, earnings might not be affected as much as predicted.
Recommendation
We have retained our Sell recommendation
