KUALA LUMPUR (July 16): Hong Leong Investment Bank (HLIB) Research has maintained its 'neutral' rating for the glove sector, and said it expects glove makers under its coverage to deliver sequentially stronger earnings in the coming quarters.

This is predominantly underpinned by the commencement of the inventory replenishment cycle, as well as potential trade diversion from the US to Malaysia, as a result of both US Food and Drug Administration import alert issues and higher Chinese import tariffs from calendar year 2026 (CY2026).

In a sector update on Tuesday, the research house said that while it is overall positive on the improving operating environment, it thinks that the recovery thesis for CY2025 is fairly priced in.

“We maintain our 'neutral' rating for the sector, with a sole 'buy' rating for Kossan Rubber Industries Bhd (KL:KOSSAN) for its rerating play,” it said.

HLIB said sales volumes are set to recover meaningfully, while average selling prices (ASPs) would have improved gradually from the second quarter (2QCY2024) and beyond.

The research house said that regionally, Thailand-based Sri Trang Gloves’ 1QCY2024 sales volume reached a fresh new record of 10.1 billion pieces (+14% quarter-on-quarter or q-o-q) since its listing back in mid-2020, with the plant utilisation rate hitting 87% based on the installed capacity of 51 billion pieces.

It said in terms of ASPs in baht, Sri Trang experienced a marginal increase of 1% q-o-q.

It said in China, major players there have been running at full capacity for nitrile medical rubber gloves since 2QCY2023.

“In 1QCY2024, Intco Medical, China’s largest player, experienced a flattish sales volume for nitrile gloves, while the nitrile glove ASP increased by at least 13% q-o-q, based on our back-of-the-envelope calculations.

“All in, we believe that regional competition (latex-focused Thailand and nitrile-focused China) in sales volumes and ASPs from global peers will be limited in the future, as they are currently operating at full capacity with ASP upticks,” it said.

HLIB said that in Malaysia, sales volumes improved 15% to 25% q-o-q in 1QCY2024 (versus a volatile growth trajectory in the past four quarters in 2023).

“However, the ASP trajectory was a mix.

“For instance, Hartalega Holdings Bhd’s (KL:HARTA) ASP in ringgit improved by 2% to 3% in 1QCY2024, but other players deteriorated by 2% to 5%.

“Hence, we conclude that the deviation of 1QCY2024 sales volumes and ASP trajectories compared to global peers was mainly due to price competition among local peers, given that some players still had excess capacity,” it said.

HLIB said while it is positive on the improving operating environment for glove players, the recovery thesis for CY2025 is fairly priced in, after the recent share price rally driven by positive sentiment from the US tariff increase announced back in May against China.

“Furthermore, most glove makers have not delivered any meaningful earnings at the moment,” it said.