The recent escalation of import tariffs by the US Trade Representative (USTR) on China-made medical and surgical gloves is set to benefit Malaysian glove manufacturers. The USTR’s new tariffs, which will increase to 50% by 2025 and 100% by 2026, represent a significant shift from the previously announced 25% tariffs. This development is likely to lead to a substantial increase in sales volume for Malaysian glove makers, potentially boosting industry volumes by over 40 billion pieces per annum.
CGS International Stock Broking House have maintained an UNDERWEIGHT stance on the sector, despite the positive market shift. The revised tariffs are expected to help Malaysian producers regain market share lost to Chinese competitors. However, this upside could be moderated by several factors, including accelerated inventory dumping by Chinese producers into non-US markets, constraints on Malaysian production capacity, and a strengthening Malaysian ringgit. Hartalega and Kossan are anticipated to benefit more compared to Top Glove and Supermax, given their larger revenue exposure to the US market. Current estimates for glove companies remain unchanged, as this tariff adjustment reinforces the anticipated recovery in industry net profits for FY25-26.
A recent discussion with Top Glove’s CEO highlighted key concerns. These include limitations on near-term sales volume growth due to capacity constraints and challenges in expanding manpower, as well as the potential for minimal price increases for US customers. This is because US buyers are likely to be cautious of the inflationary impact on medical costs, thus capping significant increases in earnings before interest and tax (EBIT) per 1,000 pieces. Additionally, the efforts of Chinese competitors to expand overseas and circumvent tariffs are not expected to have a significant impact before 2026.
The sector’s outlook remains cautious. Analysts have kept an Underweight rating on the glove sector, citing that market valuations may have overly anticipated a robust earnings recovery. Price-to-book value (P/BV) multiples for local glove makers have risen from 1.0-1.3x in early 2024 to 1.2-1.7x, approaching pre-pandemic levels of 3-4x. This valuation appears unjustified given the prolonged suppression of return on equity (ROE), expected to remain below 10% even through FY26. Analysts have issued Reduce calls on Hartalega, Kossan, and Top Glove, while maintaining a Hold on Supermax. The sector faces potential de-rating catalysts, including weaker-than-expected sales growth and profitability. Conversely, risks to the sector’s downside include improved cost pass-through dynamics, stronger-than-expected global demand, and a persistently weak ringgit against the US dollar.
Source: CGS
Title: Tailwinds from more punitive tariffs on China
