• Still BUY, higher MYR2.65 DCF-derived TP (from MYR2.40), 11% upside, c.1% yield. Kossan Rubber stands to benefit from the potential trade diversion following the recent announcement of a higher import tariff on Chinese glove makers. Execution remain crucial at this juncture, as the US presidential elections are set to take place in 3Q24. Kossan remains one of our sector Top Picks, given its solid balance sheet and above-peer margin profile. Our TP includes a 5% ESG discount, as Kossan’s ESG score is below the country median.

• Latest updates. US Trade Representative Katherine Tai released a list of proposed strategic sectors (up to 14) to be subjected to tariffs (or new tariffs imposed for certain products) ranging from 25-100%. Notably, medical gloves were listed with a proposed tariff hike to 25% from 7.5% currently, to take effect in 2026.

• Opportunity to narrow the price gap. The current tariff structure imposed on Chinese glove makers is: i) 7.5% on medical grade gloves; ii) 25% on industrial grade gloves. After incorporating the 25% tariff, Chinese glovemakers’ ASPs would increase to USD20-21.25 per 1000 pieces from the current level of USD16-17. This could essentially narrow the price gap between gloves produced in China and those made in Malaysia, which are currently selling at USD20 (and are not subject to import tariffs by the US).

• New tariffs expected to start in 2026. While the new tariffs are expected to be effective from 2026, this may allow Chinese manufacturers to reconsider their expansion plans into overseas markets to circumvent the tariff hike. In our view, overseas expansions could make Chinese glove makers less cost- competitive (as manufacturers in China use coal, a cheaper fuel as compared to natural gas).

• Earnings estimates. We keep our earnings estimates unchanged as the effect of trade diversions is expected to be seen by 2026. Nonetheless, we take this opportunity to lower our required return assumption to 8% from 9% to factor in the improvement in market dynamics. Post adjustment, our TP is now higher at MYR2.65 from MYR2.40. Our TP implies 34x 2025F P/E, against its pre-COVID-19 5-year historical mean of 20x.

• Key risks: i) Lower-than-expected sales volumes, ii) a weaker-than expected USD against the MYR, and iii) higher-than-expected raw material prices.

Source: RHB Research - 15 May 2024