Glove sector downgraded to Neutral amid oversupply, pricing pressure

Public Investment Bank Bhd (PublicInvest) has downgraded the Malaysian glove sector to "neutral" from "overweight", citing a subdued near-term outlook.

The firm said the sector remains under pressure as persistent oversupply, cautious customer sentiment and pricing competition continue to weigh on recovery prospects, said

It pointed out that the latest quarterly results from glove manufacturers under its coverage showed a sequential decline in sales volumes, mainly due to earlier frontloading activities by customers in the United States (US).

"We gather that customers remain cautious, with most adopting a wait-and-see stance, delaying sizeable purchases amid uncertainty from changes in tariff policy," it said in a note.

PublicInvest said that while tariff adjustments have narrowed the average selling price (ASP) gap between China and Malaysia, China's glove prices remain relatively uncompetitive in the US market.

With an 80 per cent tariff imposed on Chinese glove imports, their price stands at US$27 per 1,000 pieces compared to Malaysia's US$20 per 1,000 pieces.

The firm, however, said that the recent invocation of emergency powers has prevented US President Donald Trump from enacting broader tariff hikes.

"Assuming a more conservative scenario where China faces only a 10 per cent reciprocal tariff, China's ASP will be at around US$24 per 1,000 pieces, significantly closing the pricing gap with Malaysia.

"Additionally, Chinese producers may absorb part of the tariff cost to defend market share. This will likely keep global ASPs subdued and limit near-term recovery for Malaysian glove makers," it added.

PublicInvest noted that while Chinese glove manufacturers are losing market share in the US market, they are aggressively expanding in non-US markets.

In particular, they are targeting the European Union by offering highly competitive prices as low as around US$14 to US$15 per 1,000 pieces.

On raw material costs, the firm said natural latex declined by six per cent, while nitrile butadiene prices fell about 22 per cent between April and May this year compared to the January to March period.

While easing costs offer some buffer to sustain operating margins, PublicInvest said they also limit the potential for upward revision in ASPs.

"We anticipate that overall raw material prices will stabilise in the second half of this year. Meanwhile,

The US dollar has weakened against the ringgit to the 4.30 level in May.

"However, we do not anticipate any material impact on operating costs or profitability, as US dollar-quoted raw material costs only constitute about 30 per cent of total costs.

"Any cost savings in ringgit terms will act as a natural hedge against a lower translated revenue," it added.

PublicInvest's top pick in the glove sector is Kossan Rubber Industries Bhd with an "outperform" rating and a target price of RM2.33 per share.

The firm favours the stock for its solid operational execution, strong margin resilience and robust net cash position of RM1.6 billion, which provides ample flexibility to support ongoing investments in automation, digitalisation and cost optimisation initiatives.

Read More: Here