• Still OVERWEIGHT; Top Picks: Riverstone, Hartalega, and Kossan Rubber. Last Friday, the Office of the United States Trade Representative (USTR) announced the final modifications concerning the statutory review of tariff actions on China. This entails a new tariff rate on medical/surgical gloves, which will be revised to 50% and 100% (effective 2025 and 2026) from 25% effective 2026 as proposed in May. We expect such punitive moves to have a significant spillover effect on Malaysian manufacturers as Chinese ASPs could potentially surpass the former’s ASPs as early as next year.

• A relief for local players. The previous proposal suggested a 25% import tariff on China-made medical gloves effective 2026. This final modification imposes a higher 50% tariff rate effective 2025 and 100% effective 2026. This could essentially raise Chinese ASPs to USD25.50/1,000 pieces by 2025 and USD34 by 2026 based on the current ASP of USD17. As a result, this could give Malaysian manufacturers a price advantage, given their blended ASPs of USD20-21 could stand to benefit from a potential trade diversion as early as 4Q24. Recall: In Sep 2019, when the US imposed a 7.5% tariff on China-made products, US gloves import volumes from China fell to just 7% in Jan 2020 from pre-tariff volumes of 14-16% (Figure 2).

• Implications for China players. We do not rule out the possibility of Chinese manufacturers reconsidering their expansion plans towards overseas markets to circumvent the tariff. We think such expansions make Chinese makers' products less cost competitive, as their products made overseas do not benefit from cost-savings from using coal in the manufacturing process – they would need to use more expensive alternate fuels .

• Impact to Malaysia’s glove sector. Assuming US glove imports from China fall to 20% and 10% in 2025-2026 from 40% (implying a market share loss of 50% and 75%), this leads to a potential revenue accretion of 11% and 15% in 2025-2026 to local Top 5 players’ combined revenues (based on USD/MYR: 4.30 and ASPs of USD21). However, we think the impact to our TPs should be minimal, given that we only assume a 2-year tariff period without considering the possibility of an extension to 2027 and beyond – for which the effect to our DCF-derived TPs should be material if the tariff is extended beyond 2026 (Figure 3). Note: Our scenario analysis only considers: i) Volume loss from China on a trailing 12 months (TTM) basis (without considering potential growth factors moving forward), and ii) assuming base case ASPs and costs stay unchanged for respective glove manufacturers for 2025-2026.

• Still O/W. All in, we make no changes to our estimates, given that the USChina geopolitical tensions remain uncertain. We think the accelerated punitive move by the US on Chinese producers could yield positive impacts to local players as early as 4Q24. All else being equal, we continue to maintain our call on Malaysia’s glove sector, underpinned by a more balanced demandsupply dynamics in 2H24, recovery of cost-plus mechanisms, and a pick-up in order volumes. Key risks: Decrease in gloves ASPs, slower-than-expected demand recovery, lower-than-expected utilisation rate, higher-thanexpected raw material prices, and a weakening USD against the MYR.

Source: RHB Securities Research - 17 Sept 2024