We downgraded our rating from OVERWEIGHT to UNDERWEIGHT on Gloves sector as we believe the valuation of gloves stocks have priced in the earnings recovery. While steep increase in import tariffs on China-made gloves will benefit Malaysian glove manufacturers, we foresee potential risks that could derail the earnings recovery which include uncertainty surrounding US trade tariff on all imported goods into the US, freeze of foreign labour hiring that will hinder the gloves manufacturers' expansion plan and Chinese glove manufacturers' expansion plan outside of China to circumvent the tariffs. Post the recent strong share price performance of glove stocks, we downgraded recommendations for all gloves stocks, Hartalega (from BUY to HOLD), Kossan (from BUY to SELL) and Top Glove (from HOLD to SELL). For investors who would like to have an exposure to the sector, our preferred pick is Hartalega (HOLD, TP: RM3.60/share) as prime beneficiary of higher tariffs imposed by the US on China-made gloves as Hartalega is a pure-play nitrile glove manufacturer with high exposure to the US market and strong balance sheet.

• Steep increase in import tariffs to benefit Malaysian glove manufacturers. In September2024, the US Trade Representative announced a sharp increase in tariffs on medical and surgical gloves made in China from 7.5% currently to 50% for 2025 and 100% for 2026. Hence, we see US customers diverting their orders from China to non-Chinese manufacturers, benefitting Malaysian glove players. In the recent quarter, Top Glove and Hartalega have started to see some signs of orders diversion which led to huge volume growth ahead of the imposition of import tariff.
• But we foresee potential risks that could derail the recovery. Despite the positives fromsteep tariffs hike, we foresee there will be potential risks that could derail the recovery path for Malaysian gloves manufacturers namely, 1) uncertainty surrounding US trade tariff on all imported goods into the US to address perceived unfair trade practices by foreign manufacturers and protect U.S. workers and businesses. This will narrow the difference between the glove prices from China and other countries; 2) freezing on foreign labour hiring will hinder glovemakers expansion plan; and 3) Chinese glove manufacturers expansion outside of China to bypass the tariff which will further exacerbate the glove oversupply situation.
• Unattractive risk-reward ratio post the recent strong run-up. Post the recent strong share price performance of glove sector, the sector's risk-reward ratio has turned unattractive at current valuations. We downgraded recommendations for all gloves stocks, Hartalega (from BUY to HOLD), Kossan (from BUY to SELL) and Top Glove (from HOLD to SELL). For investors who would like to have an exposure to the sector, our preferred pick is Hartalega (HOLD, TP: RM3.60/share) as Hartalega is a pure-play nitrile glove manufacturer with high exposure to the US market and strong balance sheet.

Source: AmInvest Research - 5 Dec 2024