PETALING JAYA: It is still too early to price in any potential oversupply risks associated with the China + 1 strategy in Indonesia, says Hong Leong Investment Bank (HLIB) Research.
The research house said based on its channel checks, a Chinese glove maker is diversifying their manufacturing facilities to Indonesia.
This is to evade the incremental US tariff on Chinese-made medical rubber gloves which is taking effect in 2025 and 2026.
“However, we believe it is too early to price in any potential oversupply risks primarily due to the awareness of the American Medical Manufacturers Association of this geographical diversification,” HLIB Research said in a report yesterday.There is also the uncertainty surrounding Indonesia’s overall operating cost advantages compared with Malaysian competitors, along with the execution risks involved.
“Nevertheless, Indonesia presents a new operating landscape for Chinese glove makers, further complicating the potential for large-scale expansion. Besides, any new expansion move will take time to roll out,” HLIB Research added.
The research house has singled out Kossan Rubber Industries Bhd
and Hartalega Holdings Bhd as clear beneficiaries of any trade diversification from US medical rubber glove distributors to Malaysia.
This was not only due to the companies’ listing status but also because they have relatively higher exposure to US customers.
“Given quality issues associated with Chinese gloves, along with the incremental US tariff increases in 2025 and 2026, we stick by our previous view that the sales volume recovery journey will be asymmetrical.
“If trade is diverted to Malaysia, we believe US medical rubber glove distributors are likely to prioritise reputable companies and established business relationships (with proven track records and it could take at least three months of qualification procedures for a new business relationship),” HLIB Research said.
The research firm said Kossan and Hartalega also fit the description as they have not been served with a Withhold Release Order (WRO) by US Customs and Border Protection before.
“All in all, this trend will benefit most Malaysian players, but it is skewed more towards Hartalega and Kossan,” HLIB Research said.
Meanwhile, the research house noted that average selling prices have bottomed out in the first quarter of 2024.
The cost-pass-through mechanism for both Kossan and Hartalega have been gradually reinstated to 100% by November / December 2024, respectively.
“This was largely underpinned by their strong business relationships with US distributors, which allowed them to capitalise on the “US-premium” pricing mechanism from October orders onwards,” the research house said.
In contrast, HLIB Research said other listed peers lagged, achieving only a 70% cost pass through rate in late-2024.
“The reinstatement of the mechanism is particularly crucial, amid a volatile foreign exchange climate and potential rise in labour costs – planned minimum wage hike, introduction of a multi-tier levy system for foreign labour, along with possible Employees Provident Fund contributions for non-citizen workers in 2025,” the research house said.
