The trade war between the US and China intensified after the US increased tariffs on US$200bn worth of Chinese imports to 25%. Since vinyl and medical rubber gloves were exempted, Macquarie Equities Research (MQ Research) thinks that the impact may only be meaningful if the US imposes tariff on vinyl gloves.

Event

• The trade war between the two largest economies, the US and China, has intensified after the US increased the level of tariffs from 10% to 25% on the previous tariff list. MQ Research sees the impact on this tariff hike to the Malaysia rubber glove sector as minimal as vinyl and medical rubber gloves are excluded. The proposed tariff list will only be finalised by end-June, thus the fundamentals of the sector remain unchanged.

Impact

• Vinyl and medical rubber gloves currently remain tax-exempted. MQ Research’s checks show that only nitrile industrial gloves are now being taxed by a 25% tariff as the current higher 25% tariff is only imposed on the previous final list of goods that was announced in Sep-18. Nonetheless, vinyl and medical rubber gloves are now part of the US Trade Representative (USTR) proposed list of goods that is worth another US$300bn. It would only be finalised at the latest by end-June as the public consultation lasts until June 17 and the public hearing will commence on the same day.
• Immediate impact to glove sector is minimal. A higher tariff on nitrile industrial gloves is unlikely to swing the market dynamic of Malaysia nitrile gloves as only 5-6% of US-imported non-medical rubber gloves (3-3.5bn pcs/annum) are made by China as compared to Malaysia’s total rubber glove export volume of c.160bn pcs.
• Impact may only be meaningful if US imposes tariff on vinyl gloves as 97% of US-imported vinyl gloves are made by China. The market thinks a narrowed price gap between vinyl and nitrile gloves would cause US buyers to structurally shift to Malaysia nitrile gloves. In this case, MQ Research thinks Top Glove and Hartalega would be the beneficiaries with a blue-sky valuation of RM7.57 and RM8.22, respectively, which is based on a +2STD price-earnings ratio (PER).
• …however MQ Research thinks it is unlikely to cause a structural/short-term demand shift, despite having a narrower price gap. This is owing to: i) vinyl gloves are still cheaper with a price discount of 35-53%, ii) sufficient vinyl glove supply in China, iii) the stronger durability feature of nitrile gloves is not necessary for a low-risk task. Additionally, Malaysian glove players also did not benefit last year when vinyl and medical gloves were included on the July-18 proposed tariff list.

Outlook

• MQ Research maintains its neutral stance on the glove sector and keep its forecast status quo, as the proposed list of goods has yet to be finalised. MQ Research’s preferred pick is Top Glove given its margin and earnings resilience coupled with cheaper valuation. Upside risk to MQ Research’s forecast and target price is a stronger USDMYR. Every 10% change in USDMYR would lift earnings by 14-15%.

12-month Target Price Methodology

• TOPG MK: RM5.02 based on a PER methodology
• HART MK: RM4.32 based on a PER methodology

Source: Macquarie Research - 16 May 2019