• Upgrade to BUY from Neutral, new MYR2.20 TP from MYR1.45, 16%upside, c.1% yield. We upgrade Kossan Rubber as recent robust exportdata indicates a demand recovery, and also due to its steady ASPperformance. We continue to like Kossan for its relatively robust balancesheet and better-than-peers operating efficiency. Our TP incorporates an8% ESG discount as Kossan’s ESG score is below the country median.

• What triggered our upgrade? Malaysia’s monthly glove exports sawpositive YoY growth for two consecutive months, with a 2% YoY increasein Nov 2023 (Oct 2023: +33%). Despite export volumes contracting 25%MoM, export value was higher by 1% MoM in Nov 2023. We believe thisindicates: i) Cost-pass-through has started to kick-in; ii) a better product mixin Nov 2023. We believe the ability to initiate cost-pass-through will serveas a crucial catalyst to drive profitability moving forward. It also indicatesthat risks from the price war has gradually dissipated. Based on our channelchecks, Malaysia glove makers were selling at USD19-20 per 1,000 piecesin Dec 2023, largely unchanged vs 3Q23. While Malaysia glove makerssuffered weaker ASPs in 3Q23 (3-7% lower QoQ), we think the pick-up inexport value could substantiate management’s guidance as well as ourexpectations of a stabilised ASP trend materialising in 2024.

• Demand-supply dynamic. Our 2024 industry supply is now at 376bn vs2023’s 373bn, taking into account 1bn in new capacity from Thailand andHartalega’s (HART MK, BUY, TP: MYR3.25) progressive capacity transitionplan (estimated 2bn from the Next Generation Integrated GloveManufacturing Complex or NGC 1.5). Malaysia glove makers have yet toannounce any plans to commence new capacity in 2024, as the localindustry’s plant utilisation (PU) is still running below 50%. We raised our2024 demand assumption to 397bn from 386bn previously, reflecting a 7%YoY growth (from 4% previously) vs the pre-pandemic 5-year averagegrowth of 14%. That said, we expect the industry to achieve its equilibriumlevel by 2H24 as the bulk inventory stockpiled since 2020-2021 has beengradually consumed and approaching its shelf-life (typically 3-5 years).

• Earnings revision and valuation. We raise our 2023-2024 earnings toMYR76m and MYR167m from MYR64m and MYR103m respectively,taking into account better demand visibility and improving plant utilisationrates. Our DCF-derived TP represents 23x FY25 P/E, above its pre-COVID-19 5-year mean of 20x.

• Key risks. Decrease in glove ASPs, slower-than-expected capacityexpansion, lower-than-expected utilisation rates, and higher-than-expectedraw material prices.

Source: RHB Securities Research - 5 Jan 2024