• Replenishment in Rubber Glove Orders Has Pushed Some Rubber Glove Manufacturers to Increase Production Capacity. The Malaysian rubber glove sector has seen a rise in sales volumes, driven by consistent replenishment orders since 2HCY24 and a shift in demand following the announcement of steep US tariff hikes on Chinese gloves, effective 2025. Manufacturers are leveraging this to gain market share among US customers, with Hartalega adding 5bn pieces of capacity at its NGC1.5 facility in September 2024 and Top Glove resuming 4bn pieces of capacity in December 2024. However, after adding the capacity, some players have indicated they will remain cautious, adopting a ‘wait-and-see’ approach to capacity expansion in 2025 to avoid overcapacity risks. This cautious stance suggests that organic growth for the industry is unlikely in 2025, with players prioritizing a balanced supply-demand environment despite near-term demand tailwinds.

• Current average Selling Prices (ASPs) remain flattish. Despite a positive uptick in sales volume, ASPs have remained largely flat at around USD20-21/1k pieces. While Malaysian rubber glove prices saw a modest increase of USD1-2/1k pieces following the US tariff hike announcement, the ability to push ASPs higher remains constrained due to ongoing competitive pressures. Additionally, channel checks indicate a USD2/1k piece price gap between Chinese and Malaysian gloves, with Malaysian gloves priced at USD20-21/1k pieces. With the new tariff, we estimate that ASPs for Chinese gloves sold to US customers will rise to c.USD27-28.5/1k pieces, representing a 35% premium over current Malaysian pricing. This is expected to benefit Malaysian glove players, though Chinese manufacturers are likely to focus on non-US customers. Based on channel checks, Malaysian glove pricing for non-US customers is about USD18-19/1k pieces, while Chinese manufacturers are believed to offer even lower prices, maintaining their competitiveness in these markets.

• The US tariff hike on Chinese glove makers has boosted demand for Malaysian players, but how sustainable is this growth? The 50% US tariff on China-made gloves effective from 2025, has driven higher utilization rates (c.70% currently) and ASPs for Malaysian glove makers, as US customers face increased costs when purchasing Chinese gloves. We understand that customers are slightly increasing their stockpiles ahead of the tariff's implementation. Given this trend of heavy stockpiling before the tariff takes effect, we believe that entering 2025, order replenishments are likely to slow down as customers will already have significant inventory. This reduced need for restocking could lead to lower order volumes for rubber glove manufacturers and therefore affect their operational performance. On top of that, we believe Chinese manufacturers will leverage this opportunity to strengthen their non-US customer base as their pricing is competitive, without concerns about scaled-back production due to the tariff hike. Furthermore, to sustain their US market presence, we do not rule out the possibility of relocating operations outside China such as to Malaysia while maintaining the same pricing. This could in turn, intensify competition for Malaysian players.

• Cost Pressure is Expected to be Manageable as Cost Pass-Through Mechanism is Now Playing a Role. A new minimum wage of RM1,700 which is set to take effect on 1 February 2025, is expected to have a minimal impact on rubber glove manufacturers. This is mainly due to the industry’s ability to apply cost pass-through mechanisms though its competitive. Recall that during the previous minimum wage hike on 1 May 2022, when the rate increased from RM1,200 to RM1,500, the EBITDA of rubber glove manufacturers declined by c.1.7-130.1% QoQ once it took effect. 
  
  However, for this upcoming wage increase, we expect the impact to be less severe compared to the previous hike, as the quantum of the increase is smaller. Roughly, labour costs account for about 20% of the total cost structure for glove manufacturers. In addition, we expect the costs of nitrile and natural gas to remain stable in 2025, aligning with our in-house Brent crude oil forecast which indicates a slight decline compared to 2024. As a result, we anticipate that rubber glove players ‘margins will remain stable throughout the year.

• Maintain UNDERWEIGHT on Rubber Glove sector. We maintain our UNDERWEIGHT stance on the rubber glove sector as we believe the industry's outlook remains pressured by ongoing structural challenges. A recovery to pre-COVID levels is not expected in the near term. While the recent uptick in utilization rates and ASPs may appear promising, we view this as temporary driven by customers' stockpiling ahead of the US tariff hike. Once the tariff is implemented, we anticipate a normalization of orders. We expect the current market optimism to be short-lived as the sector continues to face overcapacity issues and is unlikely to return to pre-COVID levels in the foreseeable future. We have a HOLD call for Top Glove (TP: RM1.14), and a SELL call for Hartalega (TP: RM2.90), Kossan (TP: RM2.00).

Source: BIMB Securities Research - 2 Jan 2025