• Still BUY, with a higher DCF-derived MYR3.30 TP from MYR3, 11% upside. Hartalega is poised to benefit from the potential trade diversion following the announcement of higher US import tariffs on Chinese glove makers. The execution of the rate hikes remains crucial at this point given the upcoming US presidential election in 3Q24. We continue to like Hartalega given its solid balance sheet and improved market dynamics, which should propel its earnings growth in FY25F. Our TP incorporates a 2% discount, as its ESG score of 2.9 is below the 3.0 country median.

• What’s new. US Trade Representative Katherine Tai released a list of proposed strategic sectors (up to 14) which will be subjected to tariff hikes (or new tariffs imposed for certain products) ranging from 25% to 100%. Notably, medical gloves is included with a proposed tariff hike to 25% from 7.5%, which will take effect in 2026.

• Opportunity to narrow the price gap. The current tariff structure imposed on Chinese glove makers is: i) 7.5% on medical grade gloves; ii) 25% on industrial grade gloves. After incorporating the 25% tariff, Chinese glovemakers’ ASPs would increase to USD20-21.25 per 1000 pieces from the current level of USD16-17. This could essentially narrow the price gap between gloves produced in China and those made in Malaysia, which are currently selling at USD20 (and are not subject to import tariffs by the US).

• New tariffs expected to start in 2026. While the new tariffs are expected to be effective from 2026, this may allow Chinese manufacturers to reconsider their expansion plans into overseas markets to circumvent the tariff hike. In our view, overseas expansions could make Chinese glove makers less cost- competitive (as manufacturers in China use coal, a cheaper fuel as compared to natural gas).

• Earnings revision and valuation. We keep our volume estimate unchanged at the moment as the effect of the import tariff is expected to be seen by 2026. We raised our FY25F-FY26F earnings by 3%, taking into account a higher USD/MYR exchange rate offset by a slight increase in key raw material cost. Post earnings adjustment, our DCF-derived TP represents 33x FY25 PE, above its pre-COVID-19 5-year mean of 27x.

• Key risks. Decrease in gloves ASP, slower-than-expected capacity expansion, lower-than-expected utilisation rate, and higher-than-expected raw material price.

Source: RHB Research - 15 May 2024