Malaysia rubber glove manufacturers could be one of the beneficiaries in the latest trade spat between the US and China, as rubber/plastic gloves are now on the new list of US$200bn worth of Chinese goods on which the US wants to levy a 10% tariff. China is the 2nd largest medical glove exporter into the US, with around 28% market share. Reiterate Overweight on the sector, with Kossan and Supermax being our preferred picks for the sector.

Less Competitors Are Good for Business

The 10% tariff on medical gloves (rubber/synthetic and plastic) will certainly hamper China manufacturers’ competitiveness, as gross profit margins for the efficient Malaysia manufacturers are only at 15-20%, in our view. We believe that Malaysia exporters will be able to benefit from it, building on their 60% market-share base. The introduction of the tariff is also likely to derail China manufacturers’ expansion plans to produce nitrile gloves in the near term. The US consumes 30-35% of the medical gloves that the world produces.

Switching to Other Alternatives

70% of the medical gloves exported from China into the US are vinyl gloves, with the remaining 30% being rubber/synthetic rubber gloves. We believe that the price hike would help to build a better case for distributors, which are already pushing their clients to switch from vinyl gloves to other alternatives like rubber gloves, due to the narrowing price differences. If China were to continue with its strict environment policy during the winter months (starting in October), we expect vinyl glove prices to rise further.

Current Demand Is Sufficient to Meet Supply

We are not concerned about the “Big 4” expanding their capacity by 10- 15%, despite historical demand growth of 8-10% yoy, as we see industry players being rational and phasing out their expansion plans to protect margins if needed. We also believe that the historical demand is not a good indication of the current demand, as it does not factor in the additional demand from the switch from vinyl gloves.

Still Bullish on the Sector

We are reaffirming our Overweight call on the sector, despite the rubberglove makers’ market capitalisation having increased by over 23% YTD. We believe the key re-rating catalyst for the sector will be dependent on solid earnings-growth delivery. There could be further upside risk to the sector, if the US does go ahead with the 10% tariff on rubber gloves from China. Downside risks include strong movement in the ringgit and higherthan-expected production costs. Kossan (KRI MK, BUY, RM8.00) and Supermax (SUCB MK, BUY, RM4.06) are our preferred picks for the sector and top BUY ideas for Malaysia.

Source: Affin Hwang Research - 12 Jul 2018