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VIP Gloves set to benefit from strong outlook for glove market as outlined in new research report

Macquarie Bank said the sector had not seen the peak in glove demand yet, especially with a new swine flu strain in China and the upcoming flu season in the US.

Pfizer - VIP Glove looks set to benefit from strong outlook for the glove market as outlined by Macquarie Research in new research report
VIP Gloves' nitrile gloves are allergy-free, puncture-resistant, have good barrier protection and suitable in medical and high-risk tasks

VIP Gloves Ltd (ASX:VIP) looks set to benefit from strong glove market fundamentals with glove demand expected to remain robust driven by COVID-19, the upcoming US flu season and the discovery of a new swine flu strain in China, according to Macquarie Research.

The research bank expects strong earnings growth to continue for glove manufacturers in 2021, which may cause a further re-rating of the sector.

Nitrile gloves

VIP Gloves manufacturers nitrile gloves, which according to Macquarie Bank, are Type-1 allergy-free, puncture-resistant, have good barrier protection against infection and contamination and are suitable in medical and high-risk tasks.

The company said sales orders had been filled through to the second quarter of 2021, with recent orders at higher sale prices which vary, depending on the specifications and volume.

These gloves are manufactured in Malaysia.

Research note

In a research note titled 'Malaysia Rubber Gloves: 2nd wave is coming; Get ready for the ride', the bank said its investment thesis of a shortage of gloves was still intact as an additional capacity of around 70% next year was only expected to come on board late in the second quarter of 2021.

It said the sector had not seen the peak in glove demand yet, especially with a new swine flu strain in China and the upcoming flu season in the US which peaks between December and February.

“This should support overall glove demand until first half 2021 and only gradually normalise in second half 2021, having assumed a vaccine is available in mid-2021.”

Macquarie Bank said despite ambitious expansion plans from Chinese manufacturers, they would not pose an immediate threat to Malaysian manufacturers as most capacity increases in China would only gradually start in late second quarter 2021 and be rolled out on a staggered basis.

Although there is a potential oversupply risk in 2022, Macquarie Bank analyst Denise Soon said this concern “can be easily eased with the deferment of expansion plans (which we have seen in the past) or absorption from higher China domestic consumption.”

COVID-19 vaccine

Global demand for gloves is expected to normalise gradually when there is a vaccine, which will take stages to commercialise globally. 

Soon said vaccine from Pfizer inc (NYSE:PFE) and German group BioNtech (NASDAQ:BNTX) had shown promising results in early testing and looked to be on track to have the first shot in early 2021.

Despite COVID-19, Macquarie Bank notes that gloves are staples within the healthcare industry and foresees continued shortages in 2021. It projects strong earnings growth to continue for glove manufacturers in 2021 estimates.

New COVID-19 cases, flu season

“New cases globally continue to be on the rise, especially in the United States, Brazil and India. In addition, some countries ie Israel, China, Korea, Europe, are currently undergoing a second-wave of COVID-19.”

As most of the vaccines are still under Phase II clinical trials, it suggests that the availability of a vaccine will likely be in mid-2021.

Macquarie Bank highlighted that the last flu season in 2019 was “one of the worst in five years”. It believes the US healthcare system will be prepared for the annual flu season by stocking up personal protective equipment (PPE) such as medical gloves. The expected stocking up activity should support demand growth in the first half of 2021.

New swine flu

Further a new type of swine flu that can infect humans, with the potential to cause a future pandemic has been discovered by Chinese researchers. The G4 virus is genetically descended from the H1N1 swine flu in 2009.

Macquarie Bank said tests had shown that people who had received seasonal flu vaccines did not have any immunity to the G4 virus, with more than 10% of swine workers on pig farms in the Hebei and Shandong provinces testing positive.

It expects China to take precautionary measures to ensure the virus does not cause another outbreak and hence glove demand from China is expected to remain robust going forward.

Shortages even with capacity additions

The analyst noted that although the market could experience an estimated oversupply of 12 billion pieces of gloves in 2022, this could easily lead to deferment in expansion from existing aspirational players.

Further, with China’s glove consumption currently low at six pieces per capita, and assuming that this will rise to 50 pieces based on its 1.4 billion population, similar to the consumption in Taiwan, the additional glove demand of around 63 billion pieces, will outpace the demand growth assumption of 37 billion pieces in 2022.

Malaysia vs Chinese players

The analyst also noted that Malaysia remains competitive in terms of production cost, mainly on natural gas cost, which is regulated by the government and revised every six months.

There is no significant differential in labour costs between both countries, Soon noted. 

 

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ASX:VIP
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