KUALA LUMPUR: Glove manufacturer Hartalega Holdings Bhd has slowed down its Next Generation Integrated Glove Manufacturing Complex (NGC) 1.5 plant expansion as the company still sees an oversupply of gloves in the market.
According to Hartalega's chief executive officer Kuan Mun Leong, the company is phasing down its plant expansion plan in view of demand-supply imbalances as buyers are still adjusting their inventory levels.
“We do not want to commission and push up the lines because of the oversupply situation. The expansion started last year and we have deferred it a couple of times now. During the peak of the pandemic, there were a lot of panic buying and over purchases. I think the market needs time to digest all these over purchases, and we are looking at the end of the year, maybe even the first quarter next year,” he said at Hartalega's annual general meeting on Thursday (Sept 1).
NGC 1.5 comprises four plants with 48 lines in total that will produce approximately 396,000 pieces of gloves per annum per line.
Nonetheless, Mun Leong observed that average selling price (ASP) has bottomed out, due to low prices of glove products.
“The Chinese producers are selling below US$20 (RM89.65) and the Malaysian manufacturers are still selling above US$20 for 1,000 pieces. The price adjustments have been ongoing since the middle of last year. People realise that there is no shortage of glove supply, so prices have been normalising,” chief business officer Kuan Mun Keng explained.
Commenting on the rise of glove companies from China, Mun Leong said: “We look upon the Malaysian government to provide a conducive business environment for the glove sector to compete with other countries, as well as business friendly policies that are [favourable] to the cost of doing business. For example, for gloves, it's energy cost and wages.”
Although Malaysian glove products still dominate 51% of the market, he went on to say that the fast emerging expansion by Chinese manufacturers could threaten Malaysia's lion share of the market.
“China accounts for about 20% of global capacity, and Malaysia still leads at 51%. [But] China does have an advantage in terms of energy cost over Malaysia because they use coal to generate electricity,” he said, noting that Hartalega will remain focused on cost optimisation and automation in the face of stiff competition in the market.
Hartalega recorded a 56% decrease in net profit to RM88.3 million for the first quarter ended March 31, 2022 (1QFY23) from RM202.1 million in 4QFY22 after stripping out the one-off Cukai Makmur (Prosperity Tax), which amounted to RM400 million.
The decline was mainly due to the lower ASP and the increases in energy and labour costs, which were partly offset by the decrease in raw material price.
MIDF Research in a report on Aug 10 said that although Hartalega's plant utilisation rate was 69% in 1QFY23, it was expected to drop in the coming quarters due to intensifying competition.
“We gather that the industry is currently running at 55% utilisation. Management has also guided that Hartalega will continue with the NGC 1.5 expansion plan, though commissioning of the lines will depend on the prevailing market supply and demand dynamics,” the research outfit said.
MIDF maintained “neutral” on the counter with a lower target price of RM2.58 from RM3.09.
“The dividend yield is estimated at 2.8%. We believe the pricing and margin compression will continue in FY23 due to weaker demand from customers because of overstocking and subsequent inventory modification, as well as intense competition in the global glove industry,” MIDF added.
Kenanga Research in a report recently downgraded the glove sector to “underweight” from “neutral” due to its supply-demand analysis, pointing towards excess capacity in the sector spanning the next two years.
At press time, Hartalega shares fell 4.22% or seven sen to RM1.59 for a market capitalisation of RM5.54 billion.
Source : The Edge Markets