We believe the disposable medical gloves industry is ushering in an upward inflection point as excess supply and inventory gradually ease off.

Intco Medical’s operating rate is increasing rapidly at this point. As glove prices rebound, we expect its profitability to improve steadily. In the medium/long term, the Company has significant advantages in cost control, technology, and sales channels. With the steady capacity ramp-up at existing production bases and the expansion of overseas footprint, it stands well to become a global leader in disposable medical gloves.

Considering the changes in glove prices and in its share capital (up 20% vs our last estimates), we tweak our 2022E/23E EPS forecasts to Rmb0.88/ 0.97 (vs prior forecasts of Rmb4.66/6.22) and estimate the 2024E EPS at Rmb1.81. We assign 30x 2023E PE to derive a target price of Rmb30 and reiterate the "BUY" rating.

Downstream destocking has come to an end; inflection looms nearer.

The glove industry has been battered by the double whammy of oversupply and excess inventory since 2Q21. Currently, however, we are observing positive changes in the industry: (1) Large-scale production expansion plans are slowing down. According to company announcements, TopGlove lowered its 2025 production target to 110bn gloves (only a 10% increase vs 100bn in 2022); Hartalega announced to adjust the timing of capacity release at its Next Generation Integrated Glove Manufacturing Complex (NGC1.5) to balance market supply and demand; Intco Medical announced that it will dynamically adjust the pace of capacity release at its Shandong and Anqing facilities (with a combined capacity of 90bn gloves). (2) Downstream excess inventory clearance is coming to an end. We expect that the demand for restocking will recover. Our field trips to companies along the supply chain also indicate that leading enterprises have taken the lead to recover with a rebound in order intakes and a rapid increase in operating rates.

Raw material costs remain low; glove prices have upward momentum.

The prices of polyvinyl chloride (PVC) paste resin and nitrile latex have been running at a low level recently, with the average price falling by about 20% and 10%, respectively, compared with 2022. Meanwhile, the current price of nitrile and PVC gloves has been lower than the pre-Covid average. Recently, the Malaysian Rubber Glove Manufacturers Association (MARGMA) are discussing raising glove prices to cope with the pressure of energy prices and labor costs. With glove manufacturers cutting inventories, small- and medium-sized manufacturers exiting the market, and downstream destocking nearing the end, we expect glove prices to gradually rebound in the future.

The competitive moat of Intco Medical continues to strengthen.

The long-term growth rationale for the disposable medical gloves industry, such as the increase in per capita glove consumption and the replacement of PVC gloves by nitrile gloves, remain unchanged. The competitive advantages　　of Intco Medical continue to strengthen as the Company strives to 1) strengthen its cost advantages through coal consumption quotas and extension to the upstream to secure supply of cheap raw materials; 2) promote the optimization of production processes and automation; 3) consolidate its advantages in sales channel expansion, including overseas expansion.

Potential risks:

Price fluctuations of raw materials. Increased competition in the market leads to a further decline in glove prices.

Investment recommendation:

We believe the disposable medical gloves industry is ushering in an upward inflection point as excess supply and inventory gradually ease off. Intco Medical’s operating rate is increasing rapidly at this point. As glove prices rebound, we expect its profitability to improve steadily. In the medium/long term, the Company has significant advantages in cost control, technology, and sales channels. With the steady capacity ramp-up at existing production bases and the expansion of overseas footprint, it stands well to become a global leader in disposable medical gloves. Considering the changes in glove prices and its share capital (up 20% vs our last estimates), we update our 2022E/23E/24E EPS forecasts to Rmb0.88/0.97/1.81 (vs previous 2022E/23E forecast of Rmb4.66/6.22). In terms of valuation, the one-time profit caused by the Covid pandemic has greatly disturbed the valuation range of relevant companies. With the disruptions fading and the glove industry gradually returning to balanced supply and demand, we believe that the valuation range will return to the pre-pandemic average level. Considering that Intco Medical and its comparable companies-Blue Sail Medical (002382.SZ) and Yuyue Medical (002223.SZ)-were trading between 20x-30x PE during 2017-19, and taking into account Intco Medical's industry position, growth potential (we forecast a revenue/net profit CAGR of 19%/44% over 2022-24) and profit elasticity due to glove price hikes, we assign 30x 2023E PE to derive a target price of Rmb30 and reiterate the "BUY" rating.