KUALA LUMPUR: The glove industry is believed to be entering a recovery phase, with uptick in demand as customers replenish their inventories.
Public Investment Bank Bhd (PublicInvest) said this indicates a narrower supply-demand imbalance, though pricing pressure and stagnant average selling prices (ASPs) will continue to challenge the industry.
Additionally, the firm said the recent development with the US imposing higher tariff rates on China's surgical and medical gloves from 7.5 per cent to 25 per cent effective by 2026, is expected to divert orders from China to Malaysia.
"This was largely unexpected and coupled with the normalisation of raw material prices and favourable US dollar/ringgit exchange rate trend, we believe the sector is now out of the doldrums.
"Hence, we upgrade the glove sector from 'Underweight' to 'Neutral'.
"We generally believe that the earnings growth potential has largely been captured in current valuations," it said in a note.
Meanwhile, PublicInvest noted that all three glove players under its coverage, namely Top Glove Corporation Bhd, Hartalega Holdings Bhd and Kossan Rubber Industries Bhd, posted a stronger set of results in the recent quarter, mainly attributed to increased sales volumes.
Top Glove remained in the red, Hartalega reported a minor core net loss of RM1.5 million, whereas Kossan achieved a net profit of RM25.1 million.
PublicInvest said the recent results from the glove players indicate signs of improvement in sales volumes, leading to higher utilisation rates and increased quarter-on-quarter (QoQ) revenue.
The firm has also upgraded its ratings on Hartalega, Top Glove and Kossan from "Underperform" to "Neutral", with higher price-to-book (PB) multiples and target prices.
On the unexpected hike in US import tariff on China's medical gloves, the firm said this is expected to narrow the pricing gap between Malaysian and Chinese glove players.
Nevertheless, it said this will also enhance the competitiveness of Malaysian players and enabling them to regain market share.
Meanwhile, PublicInvest also said it observed that the raw material prices, namely, nitrile butadiene and natural latex, have been rising since Jan 2024.
The firm noted that this is expected to squeeze operating margins in the first half of calendar year 2024 (1HCY24) but will normalise in 2HCY24 due to seasonality.
"The weakening ringgit against the US dollar will benefit the rubber glove sector by strengthening ringgit revenue, although this will also be partially offset by higher raw material costs as they are quoted in US dollar," it added.
