Sharing from remisier
$HARTA / 5168 (HARTALEGA HOLDINGS BERHAD)
$KOSSAN / 7153 (KOSSAN RUBBER INDUSTRIES BERHAD)
$TOPGLOV / 7113 (TOP GLOVE CORPORATION BHD)
*Gloves Sector Flash Update 🧤
- *Two weeks after soft guidance by Harta’s management* in its results briefing, *Malaysian glove companies 🇲🇾* have seen share price declining by 30-40%.
- *Retain our view* that recent selldown is overly pessimistic, and *deep value has emerged* following such drastic retracement.
- *Rating📈.* We’ve previously advocated investors to monitor for inflection point and consider *positioning once the selldown stabilises🌊.* We believe near-term share prices may have bottomed throughout this two weeks’ *price discovery.*
- *Maintain BUY on:* Harta (RM2.16/TP:RM3.14); TOPG (RM0.88/TP:RM1.31); Kossan (RM1.80/TP:RM2.52).
- *Valuations in bargain📊.* Gloves companies under our coverage are now trading at *-1SD below mean PE* on 2026F earnings. Note that sector has been trading between +0.5SD/+1SD throughout 2023-24.
- *Full impact from US order shifts are not reflected yet🇺🇸.* Sept-Dec 24 (4Q24) results are already commendable, but note that US distributors frontloaded purchase from China producers that run double shifts to rush orders before tariffs. This is evidenced from the monthly US gloves import chart flows in 2024.
- *Against 1Q25's softening results🥊,* 2Q25 will see good pick up as US' purchase recover significantly (higher than 4Q24's orders as US distributors will not be able to buy from China anymore).
- *Further analysing US distributor's inventory levels📦.* If US annual normalised gloves consumption c.65b pcs, overstocked inventories in 4Q24 may be only c.7b pieces. This translates to c.1.5 months of excess inventory. Adding back normal inventories level of 1-2months, potential inventory levels at c.2.5-3months.
• *Malaysia production capacity is c.150b 🏭* (big 4 glovemakers) and running at *U-rate of c.60%* averagely (3Q24; before surging order due to US kicks in). If we assume: *i)* US completely stop purchasing from China beginning 2025; *ii)* 30b existing China exports fully flows to MY glovemakers, indicative U-rate shall recover to *c.80% in phases.*
- *Challenging outlook in Europe is not something new🇪🇺,* we've highlighted in our earlier reports that competition in the region will be intensified after US' revised tariffs to China gloves. This however, may be compensated by surging US sales and better margin.
• *China ASP not as low as expected 🔻.* Analysing several invoices of few China glovemakers, Dec 24's ASP for *nitrile gloves* is US$17.30 vs June's US$16. *Latex gloves'* ASP in Dec is US$20.70 vs June's US$19.80. *PVC gloves* Dec US$17.30 vs June's US$15.90.
• *Recall that China glovemakers only turnaround into operational profit in 1Q-2Q24♻️,* which indicates potential breakeven ASP closer to US$16. Note that such breakeven points are when their utilisation rate >90%. With the loss of US market share, U-rate will decline and breakeven cost will rise.
- *Local glovemakers' global market share🌎* for medical gloves is highest at *c.40-55%.* Over past two decades, its been proven that *gloves demand will surge during viral infections😷:* H1N1 (2010), MERS (2012), Ebola (2014), 2020 (COVID-19) are case-studies, so are valuations.
• *About fund flows🚰 .* Malaysia Big 4 glovemakers have combined *market cap of c.RM22b* currently. Excluding family/direct ownership from major shareholders, floating shares are at *c.RM10-11b.* This excludes all institutional holdings.
• *Risk reward is attractive at this level🍀 .* As such, we think that once sellers exhaust, sector offers good trading opportunities. Sector have seen multiple rounds of liquidity squeeze when positive newsflow emerge, surging within c.40-70% trading range in recent two years. *Entry point🚪 :* after selldown stabilises.