Can glove makers sustain the upper hand?

IS the recent rise in rubber glove sector share prices a temporary reprieve rather than a sign of recovery, as the industry could face a long-term secular decline?

This question has been on investors’ minds, given the notable price movements in recent days.

Despite the increase, price-to-earnings (PE) valuations remain significantly overvalued, with some analysts estimating them to be three to four standard deviations above historical averages.

This overvaluation suggests that any near-term price recovery may be neutralised, as valuations have yet to undergo a meaningful correction.

Analysts also point out that industry-wide consolidation among players has also not happened despite difficult operating dynamics.

Valuations for the top two rubber glove manufacturers by volume in the country: Top Glove Corp Bhd and Hartalega Holdings Bhd continue to stay at very high PE valuation levels of 50 times and 78.12 times respectively, implying still high expectations of forward growth despite being in a post-Covid-19 pandemic era.

This is a disconnect to the reality on the ground which indicates a prolonged dire industry outlook amid mounting competition from China-based players and oversupplied global factories coupled with relatively low barriers to entry.

Top Glove’s share price for example appears to be supported by persistent buying by its major shareholder in recent months even as another substantial shareholder Retirement Fund Inc has progressively trimmed its stakes; and also company share buybacks prior.

Top Glove’s latest financial statements as of Aug 31 reveal the company holds RM1.41 billion in treasury shares on its balance sheet.

These shares, amounting to 199.764 million ordinary shares, represent 2.43% of its total share base.

The company’s net gearing remains low at 0.11 times, excluding the RM262.28mil investment in money market funds as of Aug 31.

Top Glove’s strong balance sheet, bolstered by windfall sales during the Covid-19 pandemic, suggests it retains financial buffers to navigate current challenges.

This positions the world’s largest rubber glove maker to potentially pursue consolidation if market conditions align.

However, persistently high valuations in the industry may hinder such moves, as elevated PE ratios among peers fail to reflect on-the-ground realities.

Despite these challenges, Areca Capital’s founder and chief executive officer, Danny Wong, believes a market bottom may already exist for some Malaysian rubber glove makers.

He notes that while industry dynamics remain tough, US tariffs could spark change.

Wong also observes that glove makers’ share prices have already declined to “very low levels”, despite elevated PE valuations.

“If there is a recovery, it can have some room for valuations to be adjusted. So if earnings should grow unexpectedly, the forward PE valuations may actually narrow,” Wong tells StarBiz 7.

“Maybe with the continued high PE valuations, people are already pricing in a recovery now.”

But the appetite for China-based players to compete in this space may not yet be fully reflected in current market prices, as price competition remains intense.

Top Glove’s recent earnings for the fourth quarter ended Aug 31, 2025, marked a return to profitability, with a net profit of RM38.56mil compared to a net loss of RM6.64mil in the same quarter the previous year.

While the company’s statement highlighted ongoing competitive price pressures that required enhanced cost management, its quarterly year-on-year revenue growth was more modest at 6.7%, reaching RM889.62mil.

This suggests that cost management efforts may already be nearing their limits.

As of August 2025, Top Glove’s utilisation rates were approximately 75% of operating capacity.

Additionally, a potential strengthening of the ringgit could emerge as a significant factor in the coming months, driven by cost savings from government subsidy reforms.

According to CIMB Research, the long-term prospects of the rubber glove sector remain bleak, given the unfavourable operating environment caused by persistent price competition.

The research house highlights a recent development where China-based manufacturers have established manufacturing facilities in South-East Asia, particularly in Vietnam, Indonesia and Cambodia, starting in late 2024 and continuing into early 2025.

“This expansion is seen as a strategic response to the higher import tariffs imposed by the US administration on Chinese goods.

“China’s share of US glove imports has dropped to 3% as of July 2025, a significant decline from the 2024 peak of over 40%.

“We anticipate that the threat of aggressive pricing strategies from Chinese manufacturers will persist as they strive to reclaim market share in the United States,” notes CIMB Research.

“However, we do not expect any near-term re-rating catalysts, especially given the persistent weakness in the US dollar against the ringgit and the challenging environment for cost pass-through,” it adds.