Bullish signs are evident, it is a good opportunity to accumulate shares in glove stocks as the storm passes.

The recovery momentum of the Malaysian glove industry is gradually improving, market experts believe that this is a good opportunity to accumulate glove stocks, and specifically mentioned the high-yield Chen Pi Industry and Hershey. $KOSSAN (7153.BMS)$ and Hershey. $HARTA (5168.BMS)$

The research report by Volkswagen Investment Bank on Monday indicated a good sign of recovery in the glove industry, as both product sales and average selling prices are rising, which will all be drivers of revenue growth for industry players.

In the latest quarterly performance, the glove industry players we are focusing on all saw an increase in product sales, leading to a sequential revenue growth.

According to data from the Department of Statistics Malaysia (DOSM), our country's glove exports grew by 14% year-on-year in the first half of the year, while production volume increased by 6% year-on-year. Therefore, analysts predict that overall glove sales will continue to rise.

Despite the losses incurred by Top Glove $TOPGLOV (7113.BMS)$ still incurring losses, but Hartalega and Kossan Rubber Industries respectively recorded core net profits of 36.7 million ringgit and 26.8 million ringgit.

Better pricing position.

"We understand that the average selling price for every 1000 gloves fluctuates between 20 to 21 US dollars, slightly higher than the 17 to 18 US dollars at which Chinese industry players sell."

The analyst continued, as customer inventories are depleted, they are more willing to accept price increases, which narrows the price gap between Malaysian and Chinese players, indicating that market price competition will become more intense.

However, we are bullish on Malaysian players being able to achieve better pricing through continuous increases in average selling prices, supported by stable demand.

At the same time, the factory utilization rates of Malaysian glove manufacturers have improved recently. Among them, the utilization rate of High-pro Rubber Industries has increased from 50% at the end of the 2023 financial year to 60%; Hartalega has increased from 73% to 78%; and Top Glove's utilization rate remains at 50%.

This is because major players are increasing production capacity to meet the growing demand for gloves.

Meanwhile, according to analysts' observations, although the increase is not significant, glove raw material prices continue to rise.

We expect overall raw material prices to return to normal in the second half of the year, thereby supporting the growth space of operating profit margins.

The strengthening of the ringgit does not affect profitability.

In addition, although the ringgit is strengthening against the US dollar $USD/MYR (USDMYR.FX)$ The exchange rate rebounded strongly, but it is expected to have minimal impact on the profitability of operators because the normalized cost of raw materials denominated in US dollars can hedge against fluctuations in glove prices.

Therefore, even if there are fluctuations in the currency exchange rate, it will not significantly impact the operating costs or profits of operators.

Regarding the M outbreak, analysts estimate that it will not cause widespread lockdowns on the scale of the COVID-19 pandemic.

Although there have been new M cases in Southeast Asia, there have not been any related cases reported domestically, and the M vaccine is readily available. We believe that it will not drive glove demand in large quantities like the COVID-19 pandemic, so we take a neutral stance on the matter.

Overall, as the recovery trajectory of glove stocks becomes clearer, analysts have raised their ratings on this sector from 'neutral' to 'shareholding' and are optimistic that the profitability of operators will continue to improve.

Analysts also believe that now is a good time to accumulate glove stocks, especially optimistic about the prospects of high-yield palm oil industry and Hartalega, with ratings upgraded to 'outperform the market'.

It is worth noting that glove stocks have long been excluded from the FTSE Bursa Malaysia KLCI. $FTSE Bursa Malaysia KLCI Index (.KLSE.GI)$ When will it return to its peak?