Glove stocks surge

PETALING JAYA: The Biden administration’s latest tariff salvo against China is good news to Malaysian glove makers as it means that their Chinese competitors can no longer undercut them at a huge discount for exports to the United States.

The steep tariffs, in fact, will make Malaysian-made gloves such as generic nitrile medical gloves cheaper than those from China.

Following last Friday’s announcement that tariffs on Chinese medical and surgical gloves will rise by 50% in 2025 and also jump to 100% by January 2026, investors scooped up shares of glove makers on Bursa Malaysia, with all Big Four glove stocks surging by 17% to 30% in just a trading day.

Half of the top 10 most active counters yesterday were glove stocks, with Top Glove Corp Bhd leading the list.

Analysts have also turned bullish on the sector as at least three research houses upgraded their sector rating to “overweight”, namely, CIMB Securities Research, Kenanga Research and Hong Leong Investment Bank (HLIB) Research.

By making Chinese gloves more expensive to American consumers, it could also ease the glove oversupply in the global market, which in turn would raise average selling prices (ASPs) to the benefit of Malaysian producers.

Phillip Capital Research said the tariff increase is likely to prompt Chinese glovemakers to re-evaluate their expansion strategies, which should limit supply in the market.

Operationally loss-making Top Glove, which is the world’s largest glove manufacturer, saw its share price rising by 24.59% yesterday. About 20% of Top Glove’s sales are to the United States, according to Kenanga Research’s data.

The share price of Hartalega Holdings Bhd, which is Malaysia’s largest glove player by market capitalisation, surged by 29.75%. Half of Hartalega’s sales are to the United States based on Kenanga Research’s data.Meanwhile, the share prices of Kossan Rubber Industries Bhd and Supermax Corp Bhd rose 22.95% and 17.72%, respectively. While the United States contributes 50% of Kossan’s sales, Supermax sees a quarter of its sales from the country.

Among the small-cap players, Careplus Group Bhd and Comfort Gloves Bhd saw their stocks rising by 17.31% and 14.86%, respectively.

On Sept 13, the Office of the United States Trade Representative (USTR) announced that tariffs on Chinese medical and surgical gloves will be raised to 50% in January 2025 from 7.5% currently.

It will then be further raised to 100% by January 2026. The USTR said the tariffs target “the harmful policies and practices of the People’s Republic of China that continue to impact American workers and businesses”.

In the first round of the tariff increase to 50%, HLIB Research said the ASP of Chinese glove makers’ generic nitrile medical gloves (three g to 3.5g) could increase from the existing US$16 to US$17 per 1,000 pieces to at least US$24 to US$25.50 per 1,000 pieces.

In comparison, the ASP of Malaysian glove makers stands at about US$19 per 1,000 pieces.

In a note, Phillip Capital Research projects the tariff increase to raise costs by US$12 per 1,000 pieces for Chinese glove makers.

“Historically, Chinese glove makers have a cost advantage due to coal usage, but the higher tariffs are expected to raise costs and erode their cost advantage relative to Malaysia producers.”

It also said the US tariff increase could present opportunities for Malaysia glove makers to gradually raise prices and recommission capacity.

With the tariff expected to trigger a shift in US purchases from China to Malaysia, Hartalega and Kossan are poised to be major beneficiaries, stated the research house.

Looking ahead, Phillip Capital Research forecast the global supply-demand will gradually improve over the next two years, potentially reaching equilibrium by 2026.

“We estimate Malaysia’s annual production output to reach 201-206 billion pieces with a 50% global market share by 2026.”

In a separate note, HLIB Research upgraded its view on the glove sector to “overweight” from “neutral”.

It also maintained its “buy” ratings on Hartalega and Kossan.

At this juncture, the research house kept its earnings forecasts in the financial year 2024 to 2027 unchanged for Hartalega and Kossan.

“We conservatively assume that the higher-than-expected volume and ASP in the fourth quarter of 2024 (4Q24) till 1Q25 could be partially offset by recent and potential foreign exchange volatility amid the Federal Reserve’s impending rate cutting cycle.

“For every 5% ringgit strengthening against the US dollar over a one-month period, there will be about 4% decrease in our 2024 core net profit forecasts for Kossan and Hartalega (assuming no hedging policies and cost-pass-through mechanism in place),” it said.

Meanwhile, Kenanga Research said indications are pointing towards a strong demand recovery moving into the second half of 2024 and 2025 that will exceed the level it had previously assumed, underpinned by inventory rebuilding from distributors and faster-than-expected industry consolidation.

“We expect glove stock prices to re-rate in anticipation of near-term earnings upsurge.

“Moreover, tell-tale signs of predatory pricing by certain overseas players (namely, selling below cost over an extended period to eliminate competition) have diminished as Chinese players’ utilisation hit over 90%.”

Kenanga Research noted that some buyers have already begun shifting their purchases to Malaysia as a risk management strategy.

This could potentially benefit Malaysian players including Hartalega, Kossan, Top Glove and Supermax, it added.

Maybank IB Research expects the glove sector to witness earnings recovery in the next 12-15 months, before additional capacity from China’s overseas expansion picks up in 2026.

“This market (US) has been important for Malaysia glove makers, which have been losing market share to their Chinese counterparts since 2021 due to intense price competition.

“While there is a risk that China glove makers may shift their focus to the European market, we believe Malaysia glove makers could offset the loss of their market share in Europe with stronger sales in the US.”

Maybank IB Research said Europe contributes 35% of Top Glove’s sales and 25% for Hartalega.