Hartalega, Kossan to benefit if trade is diverted to Malaysia: analysts

KUALA LUMPUR: Hartalega Holdings Bhd and Kossan Rubber Industries Bhd are likely to benefit if trade is diverted to Malaysia due to quality issues associated with Chinese gloves along with the incremental US tariff rises. 

Hong Leong Investment Bank Bhd (HLIB Research) said US medical rubber glove distributors are expected to prioritise reputable companies (particularly the listed Big 4) and established business relationships. 

"Hence, we see Hartalega and Kossan as clear beneficiaries, given their listing status and having relatively higher exposure to US customers. 

"Also, Hartalega and Kossan have not been served with a Withhold Release Order (WRO) by US Customs and Border Protection before. All in all, this trend will benefit most Malaysian players, but it is skewed more towards Hartalega and Kossan," it said in a note. 

It added that the global supply-demand dynamics for medical rubber gloves are projected to reach equilibrium by 2025, with global plant utilisation rates improving to 85 percent, up from 65 percent in 2024. This will be driven by customer restocking activities in response to depleting inventories built up during the Covid-19 pandemic, along with a more rational capacity expansion among regional players.

"Hence, we anticipate sustained recovery momentum in sales volumes for glove makers under our coverage. For now, we observed better sales trends among Malaysian players since bottoming out in the second and third quarters of 2023," it said. 

HLIB Research also said that the cost-pass-through mechanism for both Kossan and Hartalega has been gradually reinstated to 100 per cent by November and December 2024, respectively. This was largely underpinned by their strong business relationships with US distributors, which allowed them to capitalise on the "US-premium" pricing mechanism from October orders onwards.

In contrast, other listed peers lagged, achieving only a 70 per cent cost passthrough rate in late 2024. 

Despite Donald Trump's threats on tariffs, HLIB Research viewed that Malaysia is not the primary target, as it is ranked as the 13th largest trade deficit partner with the US in 2023. 

"In any case, should he impose a baseline tariff of 10-20 percent, we reckon Malaysian glove manufacturers are still able to pass this on to US glove distributors. This is because US-made nitrile medical rubber gloves are priced at US$0.01-0.03 per piece (or US$10-30 per 1000 pieces) premium to Malaysian-made ones with an ASP of US$20-21 per 1000 pieces in January 2024. This price difference represents a 49 per percent premium."

HLIB Research downgraded the sector's call to 'Neutral' following strong share price performance since mid-September 2024. 

"While we remain optimistic about the improving operating conditions for glove manufacturers, we believe that the recovery thesis for 2025 is already largely priced in," it said. 

It gave a 'Buy' rating on Kossan with a target price of RM3.

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