• Maintain OVERWEIGHT; Sector Top Picks: Hartalega (HART) and Kossan Rubber (KRI), and Riverstone (RSTON). Industry operating dynamics remain in favour of the local glove manufacturers on the back of better demand visibility, supply rationalisation, and ASP stabilisation. That said, the recent weakening USD remains a key hindrance. However, we expect the flow through impact from trade diversion arising from the hike in US import tariff on China (from 2025) to have a net positive effect on the earnings of rubber products companies under our coverage (see our previous report).

• ASP. Industry-blended ASPs are currently hovering at USD20-21/1,000 pieces (pcs), improved slightly from USD20/1000 pcs in 2Q24. According to our channel checks, China glove makers’ ASPs now range between USD18- 19/1,000 pcs, higher from USD17-18 from the previous quarter. That said, we understand that local glove makers are in discussions to pass on the effects of a weakening USD to customers of at least USD1. This would result in the ASP range of within USD21-22 by 4Q24.

• Demand. Malaysia’s gloves export volume surged 66% MoM and 105% YoY in August, outpacing the growth in July (+12% MoM; +43% YoY). Export value surged 15% MoM and 51% YoY to MYR1,583m. Meanwhile, China’s gloves exports grew 5% in August following a 3% MoM contraction in July. That said, we expect 2024 global glove demand growth of 22% (Figure 3) premised on the recovery of glove restocking activities in 2H24. That said, Malaysian Rubber Glove Manufacturers Association (MARGMA) expects global gloves demand to chart a CAGR growth of 10% to 450bn pieces from 2023-2027.

• Supply. We gather that local manufacturers are running within the range of 70-80% according to our latest channel checks. That said, we expect a marginal change in global industry supply of 6bn in 2024 on the back of planned capacity replenishment by HART (4bn as a result of the relocation of production lines to NGC1.5 by end 2024), 3bn by Top Glove Corp (TOPG) (on the resumption of previous capacity that was decommissioned temporarily), 0.3bn planned capacity expansion by Sri Trang Gloves (Thailand) offset against by 1.3bn decommission exercise by RSTON.

• Maintain OVERWEIGHT. We maintain our OVERWEIGHT call on the sector premised on improving cost-pass-through model and restocking activities materialising in 2H24 (as demand-supply dynamics are expected to achieve equilibrium). The hike in US import tariff on China made products is icing on the cake as we expect this could escalate trade diversion outside China, eventually benefitting Malaysia manufacturers. We favour gloves manufacturers which demonstrate strong earnings resilience, solid balance sheet profile, and higher exposure to nitrile products (as latex prices remain volatile due to recent flooding in Thailand). With that, our sector Top Picks are HART and KRI. We also like RSTON thanks to its above-peer margin performance, unique exposure to cleanroom gloves (which should benefit from the recovery of semiconductor sales), and consistent dividend payout. Key risks are labour shortage, weakening of the USD against MYR, higherthan-expected raw material prices, and slower-than-expected demand recovery.

Source: RHB Securities Research - 7 Oct 2024