• Upgrade to BUY from Neutral, new MYR3.25 TP from MYR2.22, 14%upside. Our upgrade is premised on recent robust export data thatpotentially suggests a positive sign of demand recovery that coincides withsteady ASP performance. Moving forward, we expect the improvement indemand visibility, coupled with a favourable cost outlook in 2024, to propelglovemakers’ profitability. Our TP on Hartalega incorporates a 2% ESGdiscount, as HART’s ESG score is below the 3.0 country median.

• What triggered our upgrade? Malaysia’s monthly glove exports hasremained on a positive YoY growth trend for two consecutive monthsfollowing a 2% YoY increase in Nov 2023 (Oct 2023: +33%). Despite exportvolumes contracting 25% on a MoM basis, the export value was 1% MoMhigher in Nov 2023. We believe this is may indicate a cost pass-throughsstarting to kick-in and a better product mix in Nov 2023. On this front, webelieve the ability to initiate cost pass-throughs will serve as a crucialcatalyst to drive profitability moving forward. It also indicates risks from aprice war has gradually dissipated. Based on our channel checks,Malaysian glovemakers sold at USD19-20/1,000 pieces in Dec 2023,largely unchanged vs 3Q23. While Malaysian glovemakers suffered weakerASPs in 3Q23 (down 3-7% QoQ), we think the pick-up in export value couldsubstantiate the management teams’ guidance and our expectations of astabilised ASP trend that 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 at 2bn from theNew Generation Complex or NGC’s 1.5bn). Malaysian glovemakers haveyet to announce any plans to commence new capacities in 2024, given thatdomestic industry plant utilisation is still running below 50%. We raised our2024 demand assumptions to 397bn from 386bn previously, whichindicates a 7% YoY growth from 4% growth previously. This is incomparison with the pre-COVID-19 5-year average growth of 14%. Thatsaid, we expect the industry to achieve equilibrium by 2H24, as the bulkinventory stockpiled since 2020-2021 has been gradually consumed and isapproaching shelf-life end (typically 3-5 years).

• Earnings revision and valuation. We raise FY24F-25F (Mar) earnings toMYR175m and MYR294m from MYR147m and MYR191m – taking intoaccount of the better demand visibility and improving plant utilisation rate.Our WACC is lowered 7% from 8% after we trim our cost of equity to 9%from 10% previously. Our DCF-derived TP represents 28x FY25F P/E, ieabove HART’s pre-COVID-19 5-year mean of 27x. Key risks: Drop in gloveASPs, slower-than-expected capacity expansions, lower-than-expectedutilisation rates, and higher-than-expected raw material prices.

Source: RHB Securities Research - 5 Jan 2024