- The press yesterday reported that the Trans Pacific Partnership Agreement (TPPA) – a multilateral deal between the US, Japan and 10 other countries in the Pacific – was concluded. The TPPA is the world’s largest free trade agreement, encompassing 40% of the world’s economic output. The deal will have to next be ratified by the nations involved.

- Details of the agreement have yet to be announced but our preliminary discussions with the various rubber glove companies suggest that the TPPA may be neutral to mildly positive for the rubber glove sector.

- As the TPP seeks to lower trade barriers among other issues, this could mean a reduction or removal of import duties/tariffs for rubber gloves that will improve the market access and competitiveness of Malaysia’s manufacturers vis-à-vis competitors from countries without similar agreements (e.g. Thailand and Indonesia).

- The impact is, however, not expected to be significant given that the US and Japan, which are parties to the TPPA and among the top five export destinations for Malaysian rubber gloves, already do not impose any import duties on rubber gloves (both medical and surgical) as they are considered necessities.

- That said, some benefits might still be derived from exports to other countries like Canada (among top ten importers of Malaysian gloves), which has an import duty of 15.5% on rubber gloves following the expiry of Malaysia’s GSP privilege on 1 Jan 2015. With the TPPA, the amount chargeable may be completely negated or reduced significantly and this could help spur demand. Note that the duties are borne by the customers.

- While not applicable to all manufacturers, the deal could also result in cost savings from elimination or reduction of customs duties on imported machinery or materials used (some manufacturers are exempted from import duties for both nitrile and natural rubber latex). Additionally, red tape on international trade with member countries could be reduced to facilitate trade and reduce trade turnover time.

- We make no changes to our forecasts as the incremental benefits are not only difficult to quantify at this juncture but may also be immaterial. We remain OVERWEIGHT on the sector and have BUYs on Top Glove Corp (FV: RM9.30/share), Hartalega Holdings (FV: RM4.70/share (u.r.)) and Kossan Rubber Industries (FV: RM8.40/share). Supermax Corp remains a HOLD with a FV of RM2.05/share.

- Despite the sector’s strong earnings growth momentum, we expect valuations of the rubber glove manufacturers to overshoot in the near term, buoyed by the upward trend of the USD:RM exchange rate (YTD: +25%). The rubber glove players are prime beneficiaries given their favourable exposure to the USD and relatively resilient earnings profile.

Source: AmeSecurities Research - 7 Oct 2015