• Downgrade to NEUTRAL from Overweight. Our previous sector call has been largely played out, with share prices rallying 40-50% in 2024. Despite operating dynamics remaining favourable for local manufacturers, we expect volume sales to normalise in 1H25 due to front-loading activities. That said, earnings growth may fail to catch up with the sector's premium valuations, indicating that most of the positive news has already been factored in. Riverstone remains our only sector Top Pick for now.
• Valuation. Despite overall operating dynamics remaining favourable for local manufacturers, we believe the sector's valuation has run ahead of its earnings recovery prospects. Putting the numbers into perspective, the current sector forward P/BV of 1.9x is trading at a premium against its pre-COVID-19 5-year historical average of 3.8x. Such a valuation appears hefty compared to the sector's earnings recovery prospects in 2026, which we estimate at 39% of pre-COVID-19 earnings.
• Inability to arbitrage against higher import tariffs. With the effect of the US tariffs taking place in 2025, Malaysian glove manufacturers seem to be facing challenges in reaping the full advantage of the import tariffs imposed on China's manufacturers. Previously, China's manufacturers sold their products to the US at USD17-18, and the ideal post-tariff ASP that Malaysian manufacturers should quote to their US customers is USD25.5-27 by 2025. However, we learnt that efforts to raise prices beyond USD24 by Malaysian manufacturers remain challenging due to the stiff pushback from US customers.
• Possible front-loading activities. Malaysia's glove export volumes declined 11% MoM (+34% YoY) in Nov 2024 vs China's 3% MoM growth. While the export volume growth of the two countries appears dissimilar, this could be attributed to a temporary increase in China's export sales to the US market prior to the deadline of the import tariffs. While Malaysian glovemakers are set to benefit from trade diversion in the US, we expect volume sales to taper off in 1H25 due to a potential frontloading of orders from US customers in 4Q24. The latest US Oct 2024 order volumes surpassed its pre-pandemic 2-year average monthly orders by 50% (Figure 8).
• We downgrade to NEUTRAL based on: i) Expensive valuations; ii) glovemakers' inability to arbitrage against higher import tariffs; iii) persistent limited ASP-cost spread, which may take time to recover; and iv) possible front-loading activities by the US, which may undermine 1H25 volume sales. Despite our downgrade, we believe glove manufacturers that: i) Demonstrate better earnings recovery prospects (Figure 7); ii) have solid balance sheet profiles; and iii) have higher sales exposure to the US, should see limited downside risks. With that, we continue to favour Hartalega and Kossan Rubber (both NEUTRAL), while maintaining our BUY call for Riverstone due to its above-peer margin performance, unique exposure to cleanroom gloves, and consistent dividend payout. Key risks: Increase/decrease in glove ASPs, slower/faster-than-expected capacity expansion, lower/higher-than-expected utilisation rates, and higher/lower-than-expected raw material prices.

Source: RHB Research - 9 Jan 2025