The recent US-China tariff debate had led CIMB Equities Research experts to believe the US glove demand will shift from China to Malaysia. The US government has recently hiked the tariff rate to 25% on US$200 billion worth of annual Chinese imports, and could further expand the tariff rate to cover US$300 billion’s worth.
The hike will likely cause US-based importers to choose rubber gloves over vinyl gloves from China – the increased tariff will mark up the prices of all Chinese glove exports to the US while narrowing the price gap between vinyl and rubber gloves. Vinyl gloves account for 80% of China’s total exports and are widely used in the non-medical field.The price discount between vinyl and rubber gloves is currently about 75-130% – only 44% of US glove imports were plastic-based (vinyl) gloves in the first quarter of 2018.
CIMB Research expects a higher demand for rubber gloves from Malaysia instead, a boon to Malaysian glovemakers – Malaysia supplies an estimated 63% of gloves for global use. Moreover, the higher demand should ease stiff pricing competition impacting Malaysian glovemakers due to rising capacities.
Increased competitiveness of Malaysian glove exports is also estimated along with the weakening of RM against the USD – calculations accord every 1% weakening of the ringgit to increased glovemakers’ EPS by 0.4-0.5%; assuming no forex cost savings are passed on to customers.
CIMB Research maintains its overweight call on the Malaysian glove sector: “At 24.9 times CY20 P/E (+0.5 times of five-year historical mean), the sector’s risk-reward profile is attractive, given its defensive nature (amid a volatile market) and more favourable operating environment (higher glove demand, and weaker RM vs. US$).