We maintain OVERWEIGHT on the sector, following a recent sector upgrade. Indications are pointing towards a strong demand recovery moving into 2HCY24 and CY25 underpinned by inventory rebuilding from distributors and faster-than-expected industry consolidation and further boosted by tariffs on Chinese glove makers that were ratcheted up with brought-forward timeline. We expect glove stock prices to re-rate further in anticipation of near-term earnings upsurge, driven by volumes. Moreover, tell-tale signs of predatory pricing by certain overseas players (i.e. selling below cost over an extended period to eliminate competition) have diminished as Chinese players’ utilization hit>90%. Our sector top picks are HARTA (OP↔; TP: RM3.20↔) and KOSSAN (OP↔; TP: RM2.60↔), which have more sizeable US sales exposures.

Maintain Overweight, OUTPERFORM calls on HARTA and KOSSAN. With market expectations of losses and falling ASPs increasingly being priced in, we see value emerging being derived on a medium-term horizon. Amplifying the optimism are: (i) indications pointing towards a strong demand recovery moving into 2HCY24 and CY25 underpinned by inventory rebuilding from distributors and faster-than-expected industry consolidation,( ii) tell-tale signs of predatory pricing by certain overseas players (i.e. selling below cost over an extended period to eliminate competitors) have diminished as Chinese players’ utilization hit >90%, and (iii) US imposition of tariff ratchets up to 50% and 100% in CY25 and CY26, respectively (revised up as announced on 13 Sept), making Malaysian glove makers the prime beneficiary. We expect glove stock prices to re-rate in anticipation of near-term earnings upsurge which clearly is a positive for the sector. Our sector top picks are HARTA (OP↔; TP: RM3.20↔) and KOSSAN (OP↔; TP: RM2.60↔), which have more sizeable US sales exposures. Our ratings are as follows: HART (OP↔; TP: RM3.20↔), KOSSAN (OP↔; TP: RM2.60↔), TOPGLOV (MP↔; TP: RM1.02↔), and SUPERMX (MP ↔; TP: RM0.83 ↔).

Nascent signs pointing towards a stronger-than-expected demand recovery. Indications are pointing to a strong demand recovery moving into 4QCY24 and CY25 that will exceed our previous assumptions, underpinned by inventory rebuilding from distributors. Specifically, there has been uptick in orders over the past two quarters. The rise in demand comes as the inventories of major distributors across all regions have returned to normal levels. Case in point - HARTA expects to hit sales volume of 2.2b pieces/month in 2HFY25. Already, HARTA has seen 1QFY25 orders hitting close to 2b pieces per month compared to 1.5b-1.8b pieces per month in 4QFY24 and 3QFY23. TOPGLOV is optimistic that the strong growth momentum will sustain, as customers continue replenishing their depleting glove stockpiles. The group continues to see MoM uptrend in sales volume in June 2024 and expect customers’ replenishment activity to pick up in subsequent quarters, underpinned by inventory rebuilding from distributors, indicating early signs of potential recovery in demand. It has seen sales order rising 25%-30% MoM. Tell-tale signs of predatory pricing by certain overseas players (i.e. selling below cost over an extended period of time to eliminate competitors) have diminished. Specifically, glove players under our coverage have seen their ASPs rising over the past two quarters, potentially implying demand is on the path to a recovery boosted by order replenishment.

US imposition of tariff ratchets up to 50% and 100% in CY25 and CY26, repectively with a brought-forward timeline, making Malaysian glove makers prime beneficiary. The United States Trade Representative (USTR) has recently unveiled tariff increases on Chinese imports which includes a higher tariff of 50% (instead of the previously announced, in May 2024, imposition of 25% effective CY26) and 100% on China’s rubber medical and surgical gloves’ exports into the US beginning CY25 and CY26, respectively. Historically, the US accounts for 30%-50% of sales volume of HARTA, KOSSAN, TOPGLOV and SUPERMAX. For illustration purposes, a 50% tariff hike is expected to raise Chinese glove producers’ ASP to USD25- USD26/1,000 pieces (we assume base case ASP at USD19/1,000 pieces). This compares to Malaysian players’ ASPs currently at USD16-21/1,000 pieces and we expect Malaysian glove makers to benefit from the US import tariff hike from 7.5% to 50% on Chinese glove imports in CY25. The net effect is positive for Malaysia as any volume loss in non-US markets can be offset by higher demand from the US considering that US historically accounts for 35%-40% of Malaysia’s total glove volume. We believe given the current geopolitical tensions between the US and China and the tariff hike, American buyers are less likely to source most of their supplies from China. As a result, buyers are diversifying their sources, opting to purchase from other countries including Malaysia which could be a potential beneficiary. Some buyers have already begun shifting their purchases to Malaysia as a risk management strategy, which could potentially benefit Malaysian players including HARTA, KOSSAN, TOPGLOV and SUPERMX.

Faster-than-expected industry consolidation. Oversupply is less acute than we had previously forecasted, in turn potentially achieving equilibrium faster than expected, by 2026. The oversupply situation will gradually improve following signs of players culling production capacity via decommissioning of selective plants and exit of new entrants. From our recent channel checks, we believe the market is witnessing a faster-than-expected industry transitioning into a rationalisation and consolidation phase from massive industry over-capacity. Indications are pointing towards a faster-than-expected improvement in supply-demand equilibrium as players take the opportunity to shut down older plants or productions lines that are no longer efficient and speed up the industry consolidation. We understand that global supply is currently standing at 500b-530b pieces compared to our earlier forecast of 600b pieces.

Oversupply is less acute than we previously forecasted, potentially achieving equilibrium faster than expected. We now expect the oversupply situation to be less acute and gradually improve following signs of players culling production capacity via decommissioning of selective plants and exit of new entrants.

Based on our estimates, the demand-supply situation will only start to head towards equilibrium in CY26 when there is virtually no more net new capacity coming onstream while the global demand for gloves continues to rise by 15% per annum underpinned by rising hygiene awareness. MARGMA projects 12%−15% growth in the global demand for rubber gloves annually from CY23, following an estimated 25% contraction to 300b pieces in CY23. We project the demand for gloves to rise by 30% in CY24 to 390b pieces (due to a low base effect in CY23) and resume its organic growth of 9% thereafter. This will result in an excess capacity of 132b compared to 212b pieces we previously forecast in CY24. The overcapacity will continue to subside moving into CY25.

On the supply side, we had in our recent sector update note factored a reduction of 80b pieces of gloves in the system each in CY24 and CY25. This resulted in the excess capacity falling by 27% to 97b pieces (instead of rising by 4% or 132b as previously forecasted) from 271b pieces in 2023 being a key thesis to change to the fundamental improvement in supply-demand dynamics.

Source: Kenanga Research - 2 Oct 2024