We maintain OVERWEIGHT on the sector. Looking into CY25, we believe the sector will continue to gain traction driven by continuous earnings recovery, higher volume sales, improving supply-demand dynamics, and potential increase in ASPs. The stage is set for a strong demand recovery moving into CY25, underpinned by inventory rebuilding from distributors and further boosted by tariffs on Chinese glove makers. Specifically, there has been an uptick in orders over the past three quarters with glove players expecting double-digit month-on-month growth in volume sales moving into 1QCY25. Our sector top picks are HARTA (OP↔; TP: RM4.35↑) and KOSSAN (OP↔; TP: RM3.00↔), which have more sizeable US sales exposures.

Maintain Overweight. Looking into CY25, we believe the sector will continue to gain traction driven by continuous earnings recovery, higher volume sales, improving supply-demand dynamics and potential increase in ASPs. The stage is set for a strong earnings recovery. Amplifying the optimism are: (i) indications pointing towards a strong demand recovery moving into CY25, underpinned by inventory rebuilding from distributors and faster-than-expected industry consolidation, (ii) glove players are optimistic that ASPs are expected to inch up gradually, potentially by USD1.00 per 1,000 pieces to USD20−USD22 per 1,000 pieces due to the uptick in demand and mitigation against the appreciating MYR against the USD. and (iii) the US imposition of tariff ratchets up to 50% and 100% in CY25 and CY26, respectively (revised up as announced on 13 Sep), making Malaysian glove makers the prime beneficiaries. Our ratings are as follows: HART (OP↔; TP: RM4.35↑), KOSSAN (OP↔; TP: RM3.00↔), TOPGLOV (MP↔; TP: RM1.30↔), and SUPERMX (MP ↔; TP: RM1.30 ↑).

US imposition of tariff ratchets up to 50% and 100% in CY25 and CY26, respectively with a brought-forward timeline, making Malaysian glove makers prime beneficiaries. Generally, glove makers have seen more enquiries from its US customers. The Office of the United States Trade Representative (USTR) has recently unveiled tariff increases on Chinese imports which include a higher tariff of 50% (instead of the 25% announced in May 2024, 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 USD25/1,000 pieces (we assume a base case ASP at USD19/1,000 pieces). This compares with Malaysian players' ASPs currently at USD18−21/1,000 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 that 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. 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.

Tell-tale signs are pointing towards a stronger demand recovery. Indications are pointing to a strong demand recovery moving into CY25, underpinned by inventory rebuilding from distributors. Specifically, there has been an uptick in orders over the past three quarters. The rise in demand comes as the inventories of major distributors across all regions have returned to normal levels. Case in point is the expectation that HARTA is set to hit a sales volume of 2.5b pieces/month in 2HFY25. Already, HARTA has seen 2QFY25 orders reaching 2.3b pieces per month compared with 2b pieces in 1QFY25 and 1.5b−1.8b pieces per month in 4QFY24 and 3QFY23. Meanwhile, TOPGLOV is optimistic that the strong growth momentum will be sustained, as customers continue replenishing their depleting glove stockpiles. The group continues to see MoM uptrend in sales volume in Nov 2024 and expects customers' replenishment activity to pick up in subsequent quarters, underpinned by inventory rebuilding from distributors. It has seen sales order rising 10%−20% MoM. 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.

Valuations. Our valuations are generally based on the sector's early up-cycle phase of between 2x and 4x, i.e. the levels seen emerging from an up-cycle in 2012 and at a discount that we believe is valid due to the emergence of Chinese glove makers. For HARTA, due to its superior pricing power buoyed by its high utilisation rate leading to more optimum economies of scale compared to peers, we raise our TP slightly to RM4.35 based on 3.1x FY26F BVPS (previously 2.8x). In terms of PBV, the 3.1x PBV we attach to our TP is not excessive because the stock is trading at -1.0SD below pre-Covid 5-year historical average 1-year forward of 4.2x. For illustration purposes, if we assume an ASP of USD22 in our earnings model, the stock PER would trade at 50x or +2.0SD above its pre-Covid 5-year historical 1-year forward average.

Players expect to raise ASP by USD1.00 to mitigate the currency effect. Generally, glove players are optimistic that ASPs are expected to inch up gradually, potentially by USD1.00-USD2.00 per 1,000 pieces to USD20−USD22 per 1,000 pieces (compared with our FY25F ASP assumption of USD20−21) due to the uptick in demand and mitigation against the appreciating MYR against the USD. However, due to the lagged impact, ASP hikes will only be felt gradually starting from Nov−Dec 2024. For illustration purposes, assuming a USD1.00 increase in ASP, our FY25F net profit is expected to rise by 50%−70%.

Oversupply is less acute, potentially achieving equilibrium faster than expected. We 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 CY25, following an estimated 20% increase to 368b pieces in CY24. We project the demand for gloves to rise by 12% in CY25 to 368b pieces and resume its organic growth of 9% thereafter. This will result in an excess capacity of 109b. The overcapacity will continue to subside moving into CY26. The fall in excess capacity by 35% to 72b pieces from 264b pieces in 2023 is a key thesis to change to the fundamental improvement in supply-demand dynamics.

Valuations. Our valuations are generally based on the sector’s early up-cycle phase of between 2x and 4x, i.e. the levels seen emerging from an up-cycle in 2012 and at a discount that we believe is valid due to the emergence of Chinese glove makers. For HARTA, due to its superior pricing power due in part to its high utilisation rate leading to more optimum economies of scale compared to peers, we raise our TP slightly to RM4.30 based on 3.1x FY26F BVPS (previously 2.8x). For illustration purposes, if we assume an ASP of USD22 in our earnings model, the stock PER would trade at 50x or +2.0SD above its preCovid 5-year historical 1-year forward average. Additionally, in terms of PBV, the stock is trading below -1.0SD pre-Covid 5- year historical average 1-year forward of 4.2x. For Supermax, we calibrate our TP to RM1.30 based on 0.8x FY26F BVPS (previously 0.5x), in line with its historical discount to sector valuation and concerns over execution risk at its US operation.

Key risks to our recommendation include: (i) stronger-than-expected supply from Chinese players, (ii) weaker-than-expected glove demand, (iii) return of certain overseas players reigniting predatory pricing i.e. price dumping, and (iv) further changes in tariffs which have happened before; recall that after the implementation of the initial 15% tariff on Chinese glove imports, this figure was lowered to 7.5% during phase one of the US-China trade agreement back in 2019.

Source: Kenanga Research -