• Downgrade to SELL from BUY, with a lower TP of MYR0.75 from MYR1.06, 13% downside. The easing of US-China trade tension is expected to pose a threat to Top Glove Corp's earnings growth in view of a risk of China taking market share in the US. Although the potential impact to TOPG is expected to be minimal, we are of the view that the 90-day grace period for tariffs could potentially change the US glove industry's market dynamic, which is currently dominated by Malaysia. We raised our risk premium assumptions to reflect a higher risk in association with the easing of the trade tension.
• Narrowing ASP gap. The tariffs on China will be reduced from 145% to 30%, with the 20% duties on the import of fentanyl from China still in place. This effectively brings the import tariffs on medical examination products from China to 80% (50% + 30%). Based on China latest ASP of USD15/1,000 pieces, the post-tariff price would be USD27 vs Malaysia ex-tariff ASP of USD23 (USD21 + 10%), with the 90-day grace period lasting until 8 July before the 24% reciprocal tariffs take effect. All in, the ASP gap between Malaysian and Chinese players is set to narrow to just USD4 from USD21 previously. For 2026, China ASPs could reach as high as USD31.50, taking into effect the 100% tariffs imposed under former US President Joseph Biden, ie Malaysia could remain competitive in 2026 should the 100% tariffs remain in place.
• Potential impact. Based on our analysis, for every 10ppts US market share loss to China competitors, the potential volume loss to Malaysia players could be in the 1-7% range. While the major breakthrough in trade negotiations from the world's two largest economies could bring more good than harm, we think the local glove sector (which benefited from the higher US tariffs on Chinese products) could face greater uncertainty in earnings recovery outlook should the US-China trade relationship improves. The 90-day grace period could potentially change the dynamic of the US glove market, which is currently being dominated by Malaysia (69% market share as at 1Q25 vs China's 3.6%).
• Earnings revision and valuation. Our earnings estimates remain largely unchanged. We raised our risk premium assumptions to take into consideration the higher risk associated with the easing of trade tensions between China and the US. Post adjustment, we derived a lower TP of MYR0.75. Our DCF-derived TP implies a 1.3x FY26 P/B, which is 1.3SD below its 3-year historical average and includes a 2% ESG premium as TOPG's ESG score is 3.1.
• Key risks: Deteriorating US-China relationship, increase in gloves ASP, faster-than-expected capacity expansion, faster-than-expected utilisation rate, and lower-than-expected raw material price.

Source: RHB Research - 13 May 2025