A strong demand recovery in the rubber glove sector is expected, underpinned by faster-than-expected supply consolidation further boosted by tariffs on Chinese glove manufacturers by the US authority, according to Kenanga Investment Bank Berhad (Kenanga Research).
Analysts maintained their OVERWEIGHT call on the sector and expect glove stock prices to re-rate further in anticipation of near-term earnings upsurge, driven by volume, against the backdrop of waning and diminishing predatory pricing by overseas players.
The sector’s top picks are Hartalega Holdings Berhad with a target price (TP) of RM3.20 and Kossan Rubber Industries Berhad with a target price of RM2.60. Hartalega and Kossan are known to have more sizeable US sales exposure.
As of 10:36am on Wednesday, Hartalega’s stock traded at RM2.83 and Kossan at RM1.91.
Kenanga Research reported that Hartalega is expected to hit a sales volume of 2.2 billion units/month in the second half of its financial year 2024 (FY24)/FY25 (October 2024 through March 2025). Already, the local glove supplier has seen its 1QFY24/FY25 (April 2024 through June 2024) orders hitting close to two billion units/month compared to 1.5 billion-1.8 billion units/month in 4QFY23/FY24 (Jan 2024 through Mar 2024).
The optimism of the market is supported by indications pointing towards a strong demand recovery moving into the second half of 2024 and 2025 underpinned by faster-than-expected industry consolidation, as noted earlier.
Oversupply is less acute than previously projected, potentially achieving equilibrium faster than expected, by 2026. The oversupply situation will gradually improve following signs of players culling production capacity via decommissioning of selective plants and the exit of new entrants. As indicated by recent channel checks, the market is witnessing a faster-than-expected industry transitioning into a rationalisation and consolidation phase from massive industry over-capacity.
Also, the US imposition of tariff ratchets up to 50% and 100% in 2025 and 2026, respectively (revised up as announced on Sept 13), and Malaysian glove makers are the prime beneficiary.
Historically, the US accounts for 30%-50% of the sales volume of local glovemakers Hartalega, Kossan, Top Glove Corporation Berhad and Supermax Corporation Berhad. For illustration purposes, a 50% tariff hike is expected to raise Chinese glove producers’ ASP to US$25-US$26/1,000 pieces (assuming base case ASP at US$19/1,000 pieces). This compares to Malaysian players’ ASPs currently at US$16-US$21/1,000 pieces.
