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?

The purchase of Latexx Partners shows the big boys are winning

Glove makers are consolidating, that's for sure. This is especially so when the sector is decently large and when the existing winners are doing well. While the article on TheEdge says that it will cause a rerating on the sector, I do not think it will affect the prices of the smaller players much. This is because with the industry consolidating, price and size pressure will cause the smaller players to sell. Latexx is not that small, but it is considerably smaller than both Top Glove and Hartalega or even Kossan and Supermax.

Latexx Partner's owner selling at 29% premium from the current traded price shows that there may not be much more from the value it is trading at now. The price offered by Semperit is slightly more than RM500 million for a company which made RM40 million last year.

According to the Malaysian Rubber Export Promotion Council, a total 40 gloves maker are controlling 63% of the global gloves market in 2012 - up from 65 players with 40% market share in 2000. This consolidation is definitely going to be increased further.

The Balance Sheet of a company which Semperit is acquiring

From there, I like the larger players better - Top Glove, Hartalega. If the strategy is to buy candidates which are to be acquired, make sure these are candidates suitable enough to be taken over - not too strong and not too weak. I however do not think Supermax or Kossan will be candidates for takeover unless the offers that are provided are very attractive.