Investment Highlights

• Steep tariff increase. Last Friday, the U.S. government announced a sharp increase in tariffs on Chinese surgical gloves, raising rates to 50% for 2025 and 100% for 2026F. These are higher than the proposed hike of 25% in May this year. The move aims to address perceived unfair trade practices by Chinese manufacturers and protect U.S. workers and businesses.


• Higher Chinese ASPs. The final modification imposes a much steeper tariff, which will significantly increase Chinese average selling prices (ASPs) to US$25.50/1K pcs by 2025 and US$34/1K pcs by 2026, from the current ASP of US$17/1K pcs. Given that Malaysian manufacturers' blended ASPs of US$19-21/1K pcs currently, Chinese ASPs are expected to exceed those of Malaysian producers by 21%-34% as early as next year. Hence, the reversal of the current price gap between Chinese and Malaysian gloves would enhance the competitive position of Malaysian players.


• Chinese manufacturers to reconsider expansion plan. This development could compel Chinese manufacturers to reconsider their expansion plans, reducing overall market supply. Chinese glovemakers have maintained a cost advantage due to their reliance on coal. However, the new tariffs are expected to increase costs, making their products less competitive compared to Malaysian producers. Meanwhile, Chinese manufacturers might reassess their expansion strategies and redirect focus to overseas markets to avoid the tariffs. However, we think any overseas production by Chinese manufacturers would not benefit from cost savings associated with coal and would rely on more expensive alternative fuels. Even so, China producers may flood current output into Asia and Europe as Malaysian producers expand into the US market to rebalance demand-supply dynamics.


• Advantage for Malaysian producers from trade diversion. Chinese glovemakers may shift their focus to other markets, such as Europe and Asia. To note, the US accounted for 45%-50% of Chinese largest glovemaker, Intco Medical's revenue in 2023. Hence, we see US customers shifting from China to Malaysia. This could benefit Malaysian producers as early as 4Q2024.


• Opportunity for Malaysian glovemakers to gradually raise prices. As current average selling prices for Malaysian gloves are US$19-21/1K pcs, we believe there is room for potential price increases. We anticipate that global supply and demand will gradually balance over the next two years, likely reaching equilibrium by 2026F. In the long run, glove demand is expected to be healthy at CAGR growth of 6%-8%. This growth will be driven by two key factors: a shift in customer preference away from Chinese suppliers and depletion of post-COVID-19 inventory after significant restocking.


• Upgrade to Overweight. We upgrade Kossan Rubber Industries to BUY from HOLD with a higher FV of RM2.52/share (vs. RM2.00/share previously). This adjustment reflects an increase in FY25F-FY26F earnings by 4%-14% and a higher FY25F target PE of 30x (from 25x previously) as Kossan is envisaged to capture more volume from US trade diversion. Meanwhile, we maintain our BUY call on Hartalega with a higher FV of RM3.60/share (vs. RM3.20/share previously) as the stock should be trading at a premium from the US tariff imposition, pegged to FY25F PE of 34x (0.5 SD above 10-year average) from 30x previously. Both Hartalega and Kossan are our sector's top picks due to their significant exposure to the US market at 45%-50% of their revenues. We maintain HOLD on Top Glove (FV: RM1.13/share) which has a lower 15% US market exposure.

Source: AmInvest Research - 18 Sep 2024