Gloves industry: Still attractive?

After Top Glove's expectedly good performance, I had wanted to update on position as to where some of these companies stand. As I have mentioned before, the gloves industry is one which we should look at if we are investing in Malaysian market, largely because we are doing so well in this area of business globally. Most of the companies are doing well, however as I have repeated before, the industry is definitely consolidating.

My rationale for its consolidation is due to as the industry matures, the number of players that are still around would definitely reduce. This is a typical consolidating, maturing profile of any industry be it in the B2C or B2B. Now, I have taken out 5 gloves companies from Bursa and did some comparisons. Companies that I have pulled out are the obvious - Top Glove, Hartalega, Supermax, Kossan and Latexx Partners.

Click on the picture to enlarge

I wanted to have a view on where these companies stand. 

These are the conclusions:

1. Among the 5, the one that definitely stand out is Hartalega - due mainly to its position in the nitrile gloves business which enjoy much higher margin. These margin is certainly reducing however due to more and more players starting to introduce and promote their lines of nitrile gloves.
2. The margin for the industry is thinning. Why is it so? - I feel that firstly between 2009 to 2010, the industry was enjoying a good run due to higher demand caused by some global epidemic as well as the growth in the healthcare demand due to awareness. As demand increases, the increase in supply will definitely follow later on. The current margin scenario of 10% - 12%, is probably a typical margin which we will see more over time.
3. Industry is still growing at 9% while the number of players are reducing - which is good for any of the larger players.



Chart on Net Margin of gloves companies

4. For the manufacturers, gloves is more or less a homogeneous product as long as the quality is up to mark. There is no 1 brand that is domineering the rest. Net margin is pretty much between 10% to 22%. This scenario will continue.
5. Top Glove continues to be the dominant player in terms of revenue. I have the tendency to think that part of Top Glove's strategy is to increase its market share in the industry and to do that, it has no qualms over reducing its margin to compete. It, in fact can and has the balance sheet strength to do that. Top Glove in fact is the prime mover into consolidating the industry. In "Three Kingdom's" term, Top Glove is the Cao Cao during the time when he was expanding his empire in Northern China. Look below, among the listed few, Top Glove's revenue is twice the size of the 2nd largest - Kossan.
6. As for Hartalega, it continues to build on its strength which is margin and nitrile gloves.

Revenue numbers in RM'000

With the above comparison, I still prefer the 2 companies i.e. Top Glove and Hartalega over the rest. The former due to its balance sheet strength and size while the latter is due to the higher profitability margin it is able to sustain compared to the rest. And of course, I still continue to like the industry due to the growth prospects and Malaysian companies dominance in the sector.

Net Profit chart (in RM'000)

Frankly, I would like to see EPF putting more money into this industry. Why is it not doing so?

Rubber gloves companies buying land: Just when you thought Top Glove is wrong

Some people were questioning the rationale for a rubber gloves company such as Top Glove into moving upstream - i.e. buying land for cultivation of rubber trees for the gloves. Kossan is now doing the same - and getting some flaks from CIMB.

I would presume because of the volatility of commodity prices, it is very difficult to predict what can happen in the future. What CIMB Research is saying is that these rubber gloves companies can hedge their future positions. Perhaps, we can learn from Airasia few years ago when they hedged their positions in fuel futures and the company had to write off hundreds of millions in derivatives losses. In hedging, it can go either way, as we do not know where prices of commodities are heading.

I am just wondering, wouldn't buying land and cultivating rubber trees itself is a form of hedging? - for the very long term in fact. (Perhaps, better than paying banks for hedging fees) I am suspecting that the reason why these companies are into cultivating their own rubber trees could be due to supplies as well besides the high volatility in prices. We sitting here sometimes may not know the difficulties or challenges companies get in terms of supplies. Remember, gloves is not the largest consumer of rubber. Perhaps tire is. Hence, these guys can't act like Nestle or Starbucks in capitalizing on their scale into cornering coffee supplies.

Let me give another example. When the Kuok group was owning a large chunk of sugar refinery and distribution in Malaysia, they had no problem getting supplies at fair price as they have large trading desks for supplies of these raw material for sugar. Now Felda is the largest supplier of processed sugar in Malaysia after buying these stakes from the Kuok's family - see what happened to prices of sugar over last few years.

Going back to rubber - The biggest question for these companies which are buying land is what can they do better with the cash reserves that they have. Branding, distribution, expansion OR buying land for cultivation? I guess the biggest question now is whether for gloves is there such importance in the need to have very strong brands in rubber gloves. Condoms - we have seen it in Durex! In gloves, probably Kimberly Clark is one of the strongest.

There may be in gloves as branding may bring confidence in the buyer's perspective of quality. When there is a strong brand, the pressure to pricing may be reduced. However, one thing I know is that condoms it is a B2C consumer business where branding is very very important - see Apple, Coke, Toyota, even Kimberly Clark's Kleenex or Kotex. B2B business such as rubber gloves where they are selling to healthcare companies, the need for branding is not that prevalent - important still but not that much.

Additionally, sitting here I am also wondering - if these companies start to create their very own strong brands, what happens to being OEM as that's what they do best now? Buyers may opt for other suppliers as they have started to compete directly against the likes of Kimberly-Clark, Ansell and several other brands. These are players who have very strong network at the healthcare space. Will this be a strategy where the companies are shooting themselves on their foot?

I guess there are many questions which we do not have the answers in terms of strategy where these rubber gloves players are going on their own to create the raw material supplies themselves. It may not be the wrong move judging from some of the examples in other industries that we have seen before.