• D/G to SELL (from Buy), with unchanged DCF-derived MYR1.04 TP (11% downside). While Supermax is poised to record stronger earnings ahead, aided by the US Government's policies to catalyse more domestic manufacturing, we think earnings growth may fail to catch up with its premium valuations, based on: i) Glovemakers' inability to arbitrage against higher import tariffs; ii) limited ASP-cost spread which may take time to recover; and iii) possible front-loading activities by the US, which may undermine 1H25 volume sales.
• Turning cautious in 2025... Several factors contributed to our sector downgrade following the share price rally of companies under our coverage, which saw a 40-50% increase in 2024. The primary reason was the inability of Malaysian glove manufacturers to fully benefit from the import tariff imposed on Chinese manufacturers. We gather that efforts to raise prices beyond USD24 by Malaysian manufacturers have remained challenging, given the stiff pushback from US customers. Secondly, we observed a front-loading trend by US customers, as the latest US Oct 2024 monthly import data surpassed its pre-pandemic 2-year monthly orders by 50%.
• ...after a strong run-up. Supermax's share price rallied 42% in 2024, aided by the recovery in sales volume (as inventory destocking activities ended in 1H24) and an improving cost-pass-through mechanism (which saw industry ASP recover to USD21 from USD19). The higher US import tariff on China could be viewed as the icing on the cake. However, we think the reshuffling of the global supply chain has taken place since mid-Nov 2024, ahead of the tariff's commencement (considering the time required for the shipment of goods). That said, future volume growth may only be supported by organic replenishment rather than trade diversion.
• Earnings revision and valuation. We make no changes to our earnings estimates. Supermax's valuation remains the most expensive among glovemakers under our coverage, currently trading at 0.8x P/B, at 4.9SD above its 2-year historical mean of 0.5x, which we deem as expensive, considering its sluggish earnings recovery prospects.
• Key risks. Increase/decrease in glove ASPs, slower/faster-than-expected capacity expansion, lower/higher-than-expected utilisation rates, and higher/lower-than-expected raw material prices.

Source: RHB Research - 9 Jan 2025