Local glove sector turnaround to be boosted by US tarriff on China glovemakers
25 May 2024
The glove sector has rebounded from its downturn a year ago, according to Malacca Securities’ research head, Loui Low.
Low said that industry players are witnessing a resurgence in profitability, and he anticipates that the heightened import tariffs levied by the United States on China will eventually benefit the industry overall.
“With these factors, volume will be coming back and average selling prices (ASPs) will be maintained. That should provide upside to the glove sectors,” he told Business Times.
According to several analysts reports, the glove industry appears poised for further recovery with the latest financial results of two of the four largest companies in the nation, Kossan Rubber Industries Bhd and Hartalega Holdings Bhd, showing a return to profitability.
For the first quarter ended Mar 31, 2024 (Q1 2024), Kossan posted a net profit of RM31.45 million compared to a deficit of RM24.25 million a year ago, driven by contributions from its glove division.
Meanwhile, Hartalega posted a net profit of RM12.7 million for the financial year ended Mar 31, 2024, versus a loss of RM235.14 million the previous year. It also logged a net profit of RM15.12 million in the fourth quarter ended Mar 31, 2024, versus a loss of RM319.85 million in the same period last year.
In a research note, Maybank Investment Bank Bhd (Maybank IB) said Kosan’s results came within its expectations, albeit being below consensus’.
Given the improving demand for gloves and better pricing power , the firm raised its earnings forecast for the company for financial year 2024 (FY24) until FY26 by nine per cent to 34 per cent.
“As the margin outlook is improving due to stronger glove demand and higher average selling prices, by its Chinese counterparts, we expect Kossan to report better earnings in the coming quarters as it passes on the higher raw material costs,” it said in a note.
The firm maintained “buy” on the stock with a higher target price (TP) of RM2.72 versus RM2.70 previously.
Maybank IB also raised its earnings forecasts for Hartalega by 35 per cent and 19 per cent for FY25 and FY26, respectively, after factoring in the company’s FY24 results, a better utilisation rate, and a higher production capacity of 36 billion and 37.5 billion pieces per annum for FY25 and FY26, respectively.
It noted that the margin outlook for Hartalega is improving due to stronger glove demand and higher ASP from its Chinese counterparts, as well as better cost efficiency after decommissioning its Bestari Jaya facilities.
Based on the firm’s conference call with the company’s management, it was noted that sales momentum for Hartalega remained strong, and utilisation rate is expected to improve to more than 80 per cent in the coming months.
Hartalega’s management also indicated production lines, which are expected to add 2.3 billion pieces per year, are ready to accommodate the rising demand. The company is carefully planning to increase its capacity to 36 billion pieces per year by the end of FY25.
It kept its “Buy” call on the company with a higher TP of RM4.50.
Kossan’s results also came in within Hong Leong Investment Bank Bhd’s (HLIB Research) expectations, making up 13.2 . 2 per cent of its full-year estimates and 16.9 per cent of consensus’.
HLIB Research expects Kossan to deliver sequentially stronger earnings in the coming quarters, underpinned by the commencement of the inventory replenishment cycle, potential trade diversion from the United States (US) to Malaysia as a result of US Food and Drug Administration import alert issues, and a higher import tariff on China in 2026, as well as a higher profit margin from economies of scale.
“On top of the recovery thesis in 2025, we do believe there are potential re-rating prospects for Kossan, considering its more favourable balance sheet and income statement profiles vs Hartalega.”
“Glove inventories amassed during the pandemic are believed to be near depletion, while its peer, Hartalega, received c.2.2 billion pieces of glove orders per month from March onwards.
“Furthermore, we gather that customers are more willing to accept a higher ASP in Q2 2024 to allow glove makers to pass on higher raw material and natural gas prices,” it said in a note.
In a separate note, the firm added that Hartalega’s earnings for FY24 were in line with its forecast at 99 per cent but came below consensus at 32 per cent.
“In terms of capacity, Hartalega’s internal target is to increase from 32 billion pieces per year in FY24 to 36 billion in FY25 by commissioning NGC 1.5. Nevertheless, this is dependent on market conditions.”
The research firm kept its “Buy” call on Kossan with an unchanged TP of RM3.23 and maintained “Hold” on Hartalega with an unchanged TP of RM3.62.
Conversely, Public Investment Bank Bhd is cautious about Kossan’s operational landscape as it expects ASPs to remain stagnant.
The US government has announced a tariff increase on the import of China’s medical gloves from 7.5 per cent to 25 per cent effective in 2026.
“This development is expected to narrow the pricing gap between Malaysian and Chinese glove players, enhancing the competitiveness of Malaysian players and enabling them to gain a larger market share.
“However, we believe the near-term outlook remains challenging due to the sector’s adjustment to global oversupply.
“Additionally, the anticipated normalization of the dollar and ringgit exchange rate and rising operating expenses, particularly for natural gas and raw materials, suggest further difficulties for the industry’s operating environment despite recent signs of improved demand,” it stated in research notes for both Kossan and Hartalega.
It said Kossan’s results were within its estimates at 28.5 per cent but below consensus expectation at 17.1 per cent of the full-year forecast, respectively.
However, it said Hartalega’s FY24 core profit came in below both the firm’s and market expectations at 60 per cent 52 per cent full-year forecasts, respectively.
“The discrepancy in our forecast was mainly due to lower-than-expected ASPs.”
The firm reiterated its “underperform” call for both stocks, with a higher TP of RM1.48 for Kossan and an unchanged TP of RM2.07 for Hartalega.
Source: NST
