• Cut to NEUTRAL from Buy, DCF-derived TP of MYR3.70, 2% upside. Hartalega remains in a sweet spot to benefit from the potential trade diversions stemming from the US raising tariff rates on China imports. Still, its earnings growth may fail to catch up with the sector's premium valuation, indicating that most of the positive news is in the price. The latest US import data also point to front-loading activities done in late 2024, which prompted us to remain vigilant on 1H25 volume sales. Our TP incorporates a 2% discount, as Hartalega's ESG score is below the country median.
• Turning cautious in 2025... Several factors contributed to our sector downgrade following the rally of rubber product stocks under our coverage, which saw 40-50% hikes in share prices in 2024. The primary reason was the inability of Malaysian glovemakers to fully benefit from the import tariffs imposed on China manufacturers. Malaysia glovemakers found it challenging to raise prices beyond USD24 per 1,000 pieces, given the stiff pushback from US customers. US customers also front-loaded, as the US' October monthly import data surpassed its pre-pandemic 2-year monthly average by 50%.
• ...after a strong run-up. Hartalega's share price rallied by 46% in 2024, aided by the recovery in its sales volume (as inventory destocking activities ended in 1H24) and an improving cost-pass-through mechanism (which saw industry ASP recover to USD21 from USD19 per 1,000 pieces). The higher US import tariff on China could be viewed as icing on the cake but we think the reshuffling of the global supply chain already took place in mid-Nov 2024, ahead of the tariff's commencement (considering the time required for the shipment of goods). That said, future volume growth may only be supported by organic replenishment rather than trade diversions.
• Earnings outlook. Our 2025 base-case ASP range assumption for Malaysia glovemakers remain at USD21-23 per 1,000 pieces (2024: USD18-21). Also, the Malaysia glovemakers will remain vigilant in staying relevant in non-US markets by closely monitoring their pricing strategies, given that competitors from China are gaining market share. As such, we think the sector's profitability may not recover to pre-pandemic levels until at least 2026, due to a limited ASP-cost spread (USD 1-2 vs pre-pandemic level of USD3-4).
• Earnings revision and valuation. We make no changes to our earnings estimates. HART is trading at 2.8x P/BV, ie 2.2SD above its 2-year historical mean - we deem this as steep, considering its slow earnings recovery prospects. Key upside risks are an increase in its glove ASP, faster-than-expected capacity expansion, higher-than-expected utilisation rate and lower-than-expected raw material prices. The opposite circumstances would constitute downside risks.

Source: RHB Research - 9 Jan 2025