• U/G to OVERWEIGHT from Neutral. Recent export data suggests apositive demand recovery sign that coincides with steady ASPperformance. Further normalisation in gas tariffs and various cost disciplinemeasures in place could eventually propel profitability in 2024. We alsoexpect a meaningful demand recovery trend by 2H24 before glovemakersrecommence capacity expansions by 2025/2026. Key downside risksinclude weaker-than-expected demand, inability to pass on costs tocustomers, and higher-than-expected operating costs.

• What triggered the upgrade? Malaysia’s monthly glove exports remain ona positive YoY growth trend for two consecutive months following a 2% YoYincrease in Nov 2023 (Oct 2023: +33%). Despite export volumescontracting by 25% on a MoM basis, export value was 1% MoM higher inNov 2023. We believe this may indicate cost pass-throughs starting to kickin and a better product mix in Nov. On this front, we believe the ability toinitiate cost pass-throughs will serve as a crucial catalyst to drive profitabilitymoving forward, more so as it also indicates the risk from a price war hasgradually dissipated. Based on our channel check, Malaysian glovemakerssold at USD19-20/1,000 pieces in Dec 2023, largely unchanged vs 3Q23’snumbers. While domestic glovemakers suffered a weaker ASP in 3Q23,(down 3-7% QoQ), we think the pick-up in export value could substantiatethe management teams’ guidance and our expectations of a stabilised ASPtrend, which could gradually materialise in 2024.

• Demand-supply dynamic. Our 2024 industry supply is now at 376bn vs2023’s 373bn, taking into account 1bn in new capacity from Thailand andHartalega’s progressive capacity transition plan (estimated: 2bn vs NewGeneration Complex or NGC’s 1.5bn). Local players have yet to announceplans to commence new capacity in 2024, given that domestic industry plantutilisation is still running <50%. We raise our 2024 demand assumptions to397bn from 386bn previously, which indicates 7% YoY growth from 4%growth previously vs the pre-COVID-19 5-year average growth of 14%. Thatsaid, we expect the industry to achieve equilibrium by 2H24, as the bulk ofinventory stockpiled since 2020-2021 has been gradually consumed and isapproaching its shelf-life end (3-5 years usually).

• Now OVERWEIGHT. We believe Malaysian glovemakers still have legs torun predominantly in 1H24 on a temporary demand shift to Malaysia amidChina’s Lunar New Year holiday break and ample room for capacityexpansion (post demand recovery by 2H24). We upgrade Hartalega,Kossan Rubber, and Supermax to BUY, with Hartalega and Kossan beingour sector Top Picks. We keep our NEUTRAL rating on Top Glove onweaker-than-peers balance sheet and plant utilisation. We expectimprovements in demand visibility and favourable cost outlooks in 2024 topropel profitability. The consistency of order replenishments, ability toimplement cost pass-throughs, and gradual improvements in utilisationrates remain the key statistics to watch out for and ensure earningssustainability.

Source: RHB Securities Research - 5 Jan 2024