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rubber-gloves_22_1049THE rubber glove sector is considered a resilient one, with strong demand due to a rising awareness of healthcare, as well as industrial and food and beverage use. But in the race for market share in the nitrile segment, which local producer is the stronger player amid a supply glut that could lead to thinner margins?

Global demand for rubber gloves is expected to grow between 6% and 10% a year, while Malaysia’s production capacity is forecast to increase at a compound annual growth rate of 11%, according to analysts.

“I am a bit worried about how some [companies] will compete with Hartalega Holdings Bhd’s huge incoming capacity upgrades,” says one banker.

Hartalega is progressively rolling out its Next Generation Integrated Glove Manufacturing Complex (NGC), which is expected to raise its capacity by 43% by the financial year ending March 31, 2016 (FY2016).

“Our capacity is expected to grow at a rate of about 21% per annum over the next six years. For FY2016, we expect our output to increase to 18.4 billion pieces [per annum], 43% higher than FY2015,” managing director Kuan Mun Leong tells The Edge.

Hartalega is already in the lead in the nitrile segment with its efficient production and lightweight gloves.

“The NGC will further propel our productivity to the next level. We are targeting to achieve 33% improvement in productivity,” Kuan says, adding that this will put Hartalega in a good position to defend its margins and maintain dominance in the nitrile segment.

Kossan Rubber Industries Bhd will have a total capacity of 22 billion pieces per annum this year, with the addition of six billion pieces.

“This will be our earnings driver for 2015/16,” Kossan general manager Edward Yip tells The Edge. At present, the company commands a market share of a little over 10% in natural rubber (NR) and nitrile gloves.

Nitrile gloves have become the preferred items in the healthcare sector as they do not cause allergies and are more resistant to tears and chemicals.

Top Glove Corp Bhd and Supermax Corp Bhd are also raising their capacities.

Top Glove will add another 7.8 billion pieces to its annual capacity by September 2016. With this, it is aiming to raise its share of the global pie to 30% from 25% now, according to chairman Tan Sri Lim Wee Chai at the company’s first-quarter results briefing last Thursday.

While analysts have expressed concern over Top Glove’s ability to gain market share in the nitrile segment, the company has a strong foothold in the NR glove market with a 30% share. It has an 18% share of the nitrile market and targets to increase this to 25% by 2020.

Supermax plans to develop its Integrated Glove Manufacturing Complex over the next 9 to 10 years, which will raise its capacity by 15.5 billion pieces per annum.

Meanwhile, raw material prices have fallen, resulting in lower average selling prices. Latex prices have fallen to RM3.80 per kg from more than RM4.80 a year ago, according to data from the Malaysian Rubber Board. The price of nitrile has remained relatively flat over the same period, at just above US$1 per kg.

Lower costs are pushing selling prices downward, resulting in thinner margins, and producers will have to compete on cost efficiencies.

As competition stiffens, companies will pass part of the cost savings from cheaper raw materials to consumers instead of going to their bottom lines in order to hold on to market share, says Danny Wong, CEO of Areca Capital Sdn Bhd.

“Further, producers will have to bear higher and still rising costs in electricity and gas, fuel, labour and compliance [such as compliance with the Goods and Services Tax] this year. The producer that can effectively keep production costs down will be the winner,” he adds.

Kossan, for one, is confident on this front. “I don’t think we will face an overcapacity or margin compression. Even with the higher costs in the last few quarters, such as the hikes in gas and electricity charges and labour costs, we still saw an improvement in Ebitda (earnings before interest, taxes, depreciation and amortisation),” says Yip.

For Hartalega, its new facilities are expected to operate at a lower cost, according to TA Securities Research analyst Paul Yap in a Jan 7 note.

According to AllianceDBS Research, Kossan’s earnings are the most resilient to cost hikes, followed by Hartalega.

“We believe Kossan and Hartalega’s relatively resilient profitability are driven by their high exposure to nitrile gloves,” it says in a Dec 2 note. Supermax is said to be the least resilient.

What to buy?

The four main glovemakers listed on Bursa Malaysia have seen their share prices fall over the last one year, with the exception of Kossan, which gained close to 8%.

Kossan and Hartalega shares are looking expensive, both trading at close to 20 times forward price-earnings multiples (PE). That said, both stocks still offer an upside of 1.7% and 12% respectively, based on analyst consensus target prices.

Of the analysts covering the stock, 80% have “buy” calls on Kossan, with the remaining 20% recommending investors to “hold”. For Hartalega, 39% of analysts have “buy” calls and 39%, “hold” calls.

Supermax has the highest upside potential of 47% and also the lowest PE of the four stocks at 10.4 times. Note that its share price has declined 43% this year.

But Supermax is facing uncertainty over the fate of Datuk Seri Stanley Thai, its chief executive, who is being charged with insider trading relating to APL Industries Bhd.

Although the charges have nothing to do with Supermax, it remains unclear how the outcome will affect the leadership of the company. Questions sent to Supermax were unanswered at press time.

A majority of analysts are recommending a “hold” on Supermax, while 28.6% have “buy” calls.

For Top Glove, 45.5% have “hold” calls and 41% say “buy”.

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This article first appeared in The Edge Malaysia Weekly, on January 12 - 18 , 2015.

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