All three glove players under our coverage, namely Top Glove, Hartalega and Kossan Rubber, posted a stronger set of results in the recent quarter, mainly attributed to increased sales volumes. We believe the glove industry is entering a recovery phase, with uptick in demand as customers replenish their inventories. Additionally, recent development with the US imposing higher tariff rates on China’s surgical and medical gloves from 7.5% to 25% effective by 2026, is expected to divert orders from China to Malaysia. This was largely unexpected and coupled with the normalization of raw material prices and favourable USD/MYR exchange rate trend, we believe the sector is now out of the doldrums and hence, we upgrade the sector from Underweight to Neutral.

• Higher sales volume and utilisation rate. The recent results from the glove players under our coverage indicate signs of improvement in sales volumes, leading to higher utilisation rates and increased QoQ revenue. Top Glove remained in the red, Hartalega reported a minor core net loss of RM1.5m, whereas Kossan achieved a net profit of RM25.1m.

• Unexpected hike in US import tariff on China’s medical gloves. The US Government has announced a tariff increase on the import of China’s medical gloves from 7.5% to 25% effective in 2026. This development is expected to narrow the pricing gap between Malaysian and Chinese glove players, enhancing the competitiveness of Malaysian players and enabling them to regain market share.

• Raw material costs and currency trend. We observed that the raw material prices, i.e. nitrile butadiene and natural latex, have been rising since Jan 2024, which is expected to squeeze operating margins in 1HCY24 but this is expected to normalize in 2HCY24 due to seasonality. Meanwhile, the weakening MYR against the USD will benefit the rubber glove sector by strengthening MYR revenue, although this will also be partially offset by higher raw material costs as they are quoted in USD.

• Upgrade to Neutral. We believe Malaysian glove manufacturers are entering a recovery phase, with rising sales volumes due to customers restock depleting inventories. This indicates a narrower supply-demand imbalance, though pricing pressure and stagnant ASPs will continue to challenge the industry. Hence, we upgrade our ratings on Hartalega, Top Glove and Kossan from Underperform to Neutral, with higher PB multiples and target prices. We are now Neutral on the glove sector, as we generally believe that the earnings growth potential has largely been captured in current valuations.

Source: PublicInvest Research - 6 Jun 2024