On September 13, 2024, the US Trade Representative (USTR) announced substantial tariff increases on Chinese imports, including a phased tariff structure for medical face masks and surgical gloves, starting at 50% in 2025 and escalating to 100% by 2026, up from the initially proposed 25% in midMay 2024. We anticipate that the significant hike in tariffs will drive a shift in production towards non-Chinese suppliers, which is likely to benefit Malaysian glove manufacturers under our coverage, namely Top Glove, Hartalega, and Kossan. We view this development positively, especially considering the recent ramp-up in production capacity, as it is likely to enhance the position of Malaysian glove manufacturers and expand their global market share. We anticipate favorable market sentiment for Malaysian glove manufacturers in the short term and hence, reaffirming our Overweight rating on the glove sector.

• What happened? Back in mid-May 2024, the US President Joe Biden has announced a series of new tariffs targeting Chinese electric vehicles, semiconductors, aluminum, steel, and other import. Notably, the import tariff on Chinese-made rubber medical and surgical gloves will rise from the current 7.5% to 25%, effective by 2026. On 13 Sept 2024, the USTR has now introduced a phased tariff structure for medical face masks and surgical gloves, starting at 50% in 2025 and escalating to 100% by 2026.

• Competitive pricing dynamics. We expect Malaysian glove manufacturers to regain pricing power due to the significant tariff hikes. Assuming Chinese players do not absorb the increased tariffs, the current price gap of USD2-3/1k pcs is likely to narrow further. With Chinese gloves currently priced at USD17-18/1k pcs and Malaysian gloves at USD20-21/1k pcs, the higher tariffs are expected to enhance the competitiveness of Malaysian producers by further reducing the price disparity.

• Ramping up new capacity. Malaysian glove manufacturers are ramping up production capacity amid improved utilisation rates. Hartalega is expanding its NGC1.5 line, increasing capacity by 16% by FY25, while Kossan is adding six automated production lines by FY24. Top Glove is completing two new factories, boosting annual capacity by 6% to 69bn pcs. We believe Malaysian glove manufacturers are well-positioned to capture a larger market share, as the US is expected to shift orders away from Chinese suppliers and divert them to Malaysian players following the tariff hikes.

Source: PublicInvest Research - 17 Sept 2024