KUALA LUMPUR: Chinese glove makers' decision to shift their target markets from the US to European and Asian markets will result in a near-term trade diversion from the US to Malaysia, which will benefit most Malaysian players like Hartalega Holdings Bhd and Kossan Rubber Industries Bhd.
Hong Leong Investment Bank Bhd (HLIB Research) said US President Joe Biden recently announced higher tariffs on Chinese medical and surgical rubber gloves from the current 7.5 per cent to 25 per cent effective 2026.
"Based on our scenario analysis, we find that this event will not have a material negative effect on our forecast for 2026," it said.
Meanwhile, the sales volume recovery for the glove sector is expected to gain momentum, driven by customer restocking efforts due to dwindling inventories accumulated during the COVID-19 pandemic.
The investment bank also said trade diversion from the FDA Import Alert and the upcoming increase in import tariffs on Chinese medical and surgical rubber gloves to 25 per cent by 2026 will contribute to this recovery.
"In terms of average selling price (ASP), we believe it has bottomed in the first quarter of calendar year 2024 (1QCY24), and the cost-pass-through mechanism will be progressively reinstated, albeit at a marginal rate, noting that there is still local competition in the nitrile segment.
"Notably, we forecast the glove demand-supply dynamics will reach equilibrium in 2025 (i.e., the global plant utilisation rate will hit ~85 per cent and the ASP for 3.0-3.5g/pcs generic nitrile rubber medical gloves will be ~US$20-21/1k pcs)," it said.
HLIB Research said Malaysia's sales volume has improved 15 per cent to 25 per cent in 1QCY24, compared to the volatile growth trajectory in the past four quarters in 2023.
"However, the ASP trajectory was a mix. For instance, Hartalega's ASP (in ringgit) improved by 2 per cent to 3 per cent in 1QCY24, but other players deteriorated by 2 per cent to 5 per cent.
"Hence, we conclude that the deviation of 1QCY24 sales volume and ASP trajectories compared to global peers was mainly due to price competition among local peers given that some players still have excess capacity," it added.
The investment bank has maintained a 'neutral' call on the sector, with a 'buy' call on Kossan on possible re-rating.
"While we are positive about the improving operating environment for glove players, we think that the recovery thesis for calendar year 2025 (CY25) is fairly priced in after the recent share price rally driven by positive sentiment from the US tariff increase announced back in May 2024.
"Furthermore, most glove makers have not delivered any meaningful earnings at the moment. We maintain a buy rating on Kossan, primarily due to its re-rating upside potential," it added.