CIMB Research expects rubber gloves to benefit from US-China trade war


KUALA LUMPUR: CIMB Equities Research expects Malaysian rubber gloves to benefit from US-China trade war as tariffs will shift US glove demand from China to Malaysia.

It had on Wednesday maintained its overweight call with Supermax and Top Glove as its top picks in the sector.

CIMB Research said the US government has recently announced that it will be raising the tariff rate on US$200bil worth of annual imports from China to 25% from 10%.

On top of this, the US government also said that it could potentially further expand the 25% tariff rate to US$300bil worth of Chinese imports. 

“We gather that gloves are among the items that will be affected (HTS codes: 3926.20.10, 3926.20.40 and 4015.19.05). Note that China is one of the world’s largest exporters of gloves, mainly vinyl ones (80% of total export volume) to the US, which are used in the non-medical field.

“We believe the tariff hike will increase the prices of all China glove exports (nitrile and vinyl) to the US. Besides resulting in China-made nitrile gloves to be uncompetitive in terms of pricing, this will also narrow the price gap between vinyl and rubber gloves, as the price discount between vinyl and rubber gloves currently stands at ~75-130%. 

“This will likely result in more US-based importers choosing rubber gloves over vinyl gloves, given the latter’s lower price competitiveness. As at 1H18, 44% of US glove imports were plastic-based (vinyl) gloves,” it said.

CIMB Research said this could lead to higher demand for rubber gloves, which will benefit Malaysian glovemakers. Malaysia supplies an estimated 63% of gloves used globally.

The higher demand for rubber gloves should help ease the stiff pricing competition currently impacting Malaysian glovemakers due to rising capacities.

Also, the recent weakening of the ringgit vs. US$ (since end-1Q19: 2.2%) will further increase competitiveness of Malaysian glove exports. Based on our back-of-envelope calculations, every 1% weakening of the ringgit will increase glovemakers’ EPS by 0.4-0.5%. This assumes no forex cost savings are passed on to their customers.

“We maintain our Overweight call on the glove sector. At 24.9 times CY20 P/E (+0.5 times of five-year historical mean), the sector’s risk-reward profile is attractive, in our view, given its
defensive nature (amid a volatile market) and more favourable operating environment (higher glove demand, and weaker RM vs. US$). 

"Our top sector picks are Top Glove and Supermax. We also have an Add call on Kossan , and a Hold call on Hartalega ,” it said.
 

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