MAYBANK Investment Bank (MIB) is pleasantly surprised by US’ final United States Trade Representative (USTR) modifications on China tariffs, which will raise tariffs on China-made medical and surgical gloves to 50% by 2025 and 100% by 2026 - well above the 25% proposed in May 2024. 

This increase will make Malaysia gloves relatively cheaper, boosting their competitiveness in the US market. 

“We maintain tactical POSITIVE on the glove sector and expect earnings recovery in the next 12-15 months, before additional capacity from China’s overseas expansion picks up in 2026,” said MIB, adding that their top buys are HART and KRI. 

MIB upgrades TOPG to a tactical BUY. The United States Trade Representative (USTR) has unexpectedly accelerated and increased tariffs on China-made medical and surgical gloves. 

The tariff will rise to 50% by 2025 and 100% by 2026, exceeding the 25% by 2026 proposed in May 2024. 

For example, China glove average selling price (ASP) is currently at USD17-18/k pcs. Post tariff hike, it would rise to USD25.5-27/k pcs in 2025 and USD34-36/k pcs in 2026.

MIB expect this latest development to make Malaysia gloves more attractive in the US market. This market has been important for Malaysia glove makers (TOPG: 15% of sales, HART: 50%), which have been losing market share to their Chinese counterparts since 2021 due to intense price competition. 

“While there is a risk that China glove makers may shift their focus to the European market where TOPG has 35% of sales and HART at 25%, we believe Malaysia glove makers could offset the loss of their market share in Europe with stronger sales in the US,” said MIB. 

While Malaysia glove makers are expected to see strong earnings in the next 12-15 months due to rising demand and stabilizing ASP, MIB remains cautious on the long-term outlook due to ongoing competition from China.

Key players like Intco and Bluesail are expanding capacity in Indonesia, Thailand, and Vietnam. Cost efficiency and technology will be crucial for Malaysia producers to remain competitive. 

“We maintain our earnings forecasts and target prices, with BUY ratings on HART and KRI. We upgrade TOPG to a tactical BUY from HOLD with over 20% upside potential to our target prices,” said MIB.

Risk to their calls and ratings include capacity expansion from Chinese counterparts outside of China, allowing them to avoid tariff hikes imposed by the US government and a more aggressive pricing strategy by Chinese glove makers in non-US markets, potentially resulting in lower market share for Malaysia glove makers.

There is also the possibility of aggressive capacity expansion by existing glove players, hikes in raw material prices that cannot be fully passed on, prolonged price wars and oversupply issues, and strengthening of the MYR against the USD. - Sept 17, 2024 

https://focusmalaysia.my/local-glove-manufacturers-get-a-boon-from-us-market/