Glove sector faces strain but growth expected
Phillip Capital Research said local glovemakers saw some cost relief as raw material and natural gas prices have eased and are showing signs of stabilising.
PETALING JAYA: Phillip Capital Research has turned neutral on the glove sector, as persistent pricing pressure, particularly from Chinese players aggressively expanding into non-United States markets.
It downgraded its call on the sector to 'neutral' from 'overweight' as it foresees the volatile demand outlook continues to cloud near-term recovery prospects through 2026.
'We believe global glovemakers may seize the 90-day tariff grace period to capitalise on higher US average selling prices (ASPs),' it added.
While temporary restocking could support near-term demand, the broader landscape remains under pressure from persistent global oversupply and limited pricing power.
'We expect cautious capacity additions and order volumes to stay volatile through financial year 2025 (FY25) to FY26, as structural imbalances in supply and demand continue to weigh on prospects for a sustained recovery,' it explained.
The research house said local glovemakers saw some cost relief as raw material and natural gas prices have eased and are showing signs of stabilising.
However, it pointed out that the extent of decline is unlikely to translate into meaningful margin expansion, given persistent ASP pressure, especially in non-US markets where Chinese players are actively competing on prices. 'Our channel checks suggest buyers quickly push for price reduction whenever input costs fall, placing further strain on margins.
'Although Malaysia's glove ASPs have become more competitive in the United States following the 145% tariff on Chinese gloves, overall pricing remains tight, with ASP/cost spread still narrow at just US$1 to US$2 per 1,000 pieces,' the research house said.
Although the ringgit has remained relatively stable around RM4.44 since the middle of last year, it projected the dollar and the ringgit will end the year at US$1:RM4.30, implying potential downside risk from the current level.
Based on its sensitivity analysis, every 1% appreciation in ringgit could reduce net profits by 18% for Hartalega Holdings Bhd , 11% for Kossan Rubber Industries Bhd and 5% for Top Glove Corp Bhd .
'That said, most players have cost pass-through mechanisms, allowing for gradual ASP adjustments to help cushion the impact of foreign-exchange fluctuations,' Phillip Capital Research said.
It picked Kossan as its preferred stock in the sector but with a lower 12-month target price (TP) of RM2.24 per share from RM3.15, underpinned by its strong operational efficiency, solid fundamentals and robust net cash position that offers room for potential special dividends.
The research house pointed out that Kossan stands out with the strongest balance sheet among its peers, with a net cash position of RM1.6bil.
This is significantly higher than Hartalega's RM800mil and Top Glove's RM200mil.
'Looking ahead, most glovemakers are guiding for subdued capital expenditure in FY25, suggesting that the cash burn cycle seen during the peak of the supply glut is behind us.
'This signals a stronger emphasis on liquidity preservation.
'In terms of net cash as a percentage of market capitalisation, Kossan takes the lead at 33%, followed by Hartalega at 11%, and Top Glove at 7%,' it added.
Phillip Capital Research has maintained its 'hold' calls on Hartalega, with a lower 12-month TP of RM2.27 from RM2.80, and Top Glove, with a TP of 83 sen from RM1.44.
'Although earnings for both companies may see near-term improvement, elevated competition and policy uncertainty are expected to constrain volume growth and hinder margin recovery.
'Key risks to our call include higher/lower-than-expected ASPs, pace of demand recovery, and aggressive capacity expansion by Chinese manufacturers,' it said.
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
New Straits Times
21 minutes ago
- New Straits Times
Ringgit opens higher against greenback as US-China trade talks resume
KUALA LUMPUR: The ringgit opened higher against the US dollar on Wednesday, as the market resumed its observation on further trade negotiations between the United States (US) and China in London, an analyst said. At 8 am, the local note rose to 4.2290/2380 versus the greenback from Tuesday's close of 4.2360/2420. Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the US dollar index (DXY) see-sawed between 98.962 and 99.358 last night as traders and investors continued to monitor the US-China trade talks.
The Star
32 minutes ago
- The Star
Dollar floored as investors seek that extra hedge
ALL three major US asset classes – stocks, bonds and the currency – have had a turbulent 2025 thus far, but only one has failed to weather the storm: the dollar. Hedging may be a major reason why Wall Street's three main indices and the ICE BofA US Treasury index are all slightly higher for the year to date, despite the post-'Liberation Day' volatility, while the dollar has steadily ground lower, losing around 10% of its value against a basket of major currencies and breaking long-standing correlations along the way. The dollar was perhaps primed for a fall. It's easy to forget, but only a few months ago the 'US exceptionalism' narrative was alive and well, and the dollar scaling heights rarely seen in the past two decades. But that narrative has evaporated, as US President Donald Trump's controversial economic policies and isolationist posture on the global stage have made investors reconsider their exposure to US assets. But why is the dollar feeling the burn more than stocks or bonds? Pension fund-amentals Non-US investors often protect themselves against sharp currency fluctuations via the forward, futures or options markets. The difference now is that the risk premium being built into US assets is pushing them – especially equity holders – to hedge their dollar exposure more than they have in the past. Foreign investors have long hedged their bond exposure, with dollar hedge ratios traditionally around 70% to 100%, according to Morgan Stanley, as currency moves can easily wipe out modest bond returns. But non-US equity investors have been much more loath to pay for protection, with dollar hedge ratios averaging between 10% and 30%. This is partly because the dollar was traditionally seen as a 'natural' hedge against stock market exposure, as it would typically rise in 'risk off' periods when stocks fell. The dollar would also normally appreciate when the United States economy and markets were thriving – the so-called 'Dollar Smile' – giving an additional boost to US equity returns in good times. A good barometer of global 'real money' investors' view on the dollar is how willing foreign pension and insurance funds are to hedge their dollar-denominated assets. Recent data on Danish funds' currency hedging is revealing. Danish funds' US asset hedge ratio surged to around 75% from around 65% between February and April. According to Deutsche Bank analysts, that 10 percentage point rise is the largest two-month increase in over a decade. Anecdotal evidence suggests similar shifts are taking place across Scandinavia, the eurozone and Canada, regions where dollar exposure is also high. The US$266bil Ontario Teachers' Pension Plan reported a US$6.9bil foreign currency gain last year, mainly due to the stronger dollar. Unless the fund has increased its hedging ratio this year, it will be sitting on huge foreign currency losses. 'Investors had embraced US exceptionalism and were overweight US assets. But now, investors are increasing their hedging,' says Sophia Drossos, economist and strategist at the hedge fund Point72. And there is a lot of dollar exposure to hedge. At the end of March foreign investors held US$33 trillion of US securities, with US$18.4 trillion in equities and US$14.6 trillion in debt instruments. Riding out the storm The dollar's malaise has upended its traditional relationships with stocks and bonds. Its generally negative correlation with stocks has reversed, as has the usually positive correlation with bonds. The divergence with Treasuries has gained more attention, with the dollar diving as yields have risen. But as Deutsche Bank's George Saravelos notes, the correlation breakdown with stocks is 'very unusual'. When Wall Street has fallen this year the dollar has fallen too, but at a much faster pace. And when Wall Street has risen the dollar has also bounced, but only slightly. This has led to the strongest positive correlation between the dollar and S&P 500 in years, though that's a bit deceptive, as the dollar is sharply down on the year while stocks are mildly stronger. Of course, what we could be seeing is simply a rebalancing. Saravelos estimates that global fixed income and equity managers' dollar exposure was at near record-high levels in the run-up to the recent trade war. This was a 'cyclical' phenomenon over the last couple of years rather than a deep-rooted structural one based on fundamentals, meaning it could be reversed relatively quickly. But, regardless, the dollar's hedging headwind seems likely to persist. 'Given the size of foreign holdings of both stocks and bonds, even a modest uptick in hedge ratios could prove a considerable foreign exchange flow,' Morgan Stanley's foreign exchange strategy team wrote last month. 'As long as uncertainty and volatility persist, we think that hedge ratios are likely to rise as investors ride out the storm.' — Reuters Jamie McGeever is a columnist for Reuters. The views expressed here are the writer's own.
New Straits Times
34 minutes ago
- New Straits Times
Meta eyes 49pct stake in Scale AI for US$14.8bil
NEW YORK: Meta Platforms has agreed to take a 49 per cent stake in artificial intelligence startup Scale AI for US$14.8 billion, The Information reported on Tuesday, citing two people familiar with the matter. Founded in 2016, Scale AI provides vast amounts of labeled data or curated training data, which is crucial for developing sophisticated tools such as OpenAI's ChatGPT. The deal, which has not been finalised yet, appears to be beneficial for Scale AI's investors including Accel, Index Ventures, Founders Fund and Greenoaks, as well as its current and former employees, the report said. Meta, Scale AI and the startup's investors did not immediately respond to Reuters' requests for comment. As part of the deal, Scale AI CEO Alexandr Wang will take a top position inside Meta, leading a new "superintelligence" lab, according to the report. Meta CEO Mark Zuckerberg has been actively recruiting top AI researchers to boost the company's AI efforts, the report said. The company is fighting the perception that it may have fallen behind in the AI race after its initial set of Llama 4 large language models released in April fell short of performance expectations. Meta delayed the release of its flagship "Behemoth" AI model due to concerns about its capabilities, the Wall Street Journal reported last month. The company is also facing antitrust concerns related to its acquisitions of Instagram and WhatsApp. According to The Information report, the structure for the potential deal with Scale AI could be designed to avoid more regulatory scrutiny. Scale AI was valued at US$13.8 billion in a funding round last spring. It generated about US$870 million in revenue in 2024 and expects more than US$2 billion this year, the report said. The company had more than US$900 million of cash on its balance sheet at the end of last year, according to the report. - REUTERS
