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AFTER an aggressive capacity expansion over the last few years, glove manufacturers are set to rake in higher earnings in 2015 as some of the new capacity is ready to come on stream. However, they are not stopping in their tracks to build more capacity, so as to meet increasing demand.

Industry players and analysts expect global demand for gloves to increase in tandem with the growing healthcare industry. The stronger US dollar against the ringgit and cheaper raw material costs due to the lower crude oil prices also bode favourably for the industry.

With better earnings prospects, glove makers could be generous in rewarding their shareholders with higher dividends. Nevertheless, most intend to maintain their dividend policies.

According to Top Glove Corp Bhd executive director Lim Cheong Guan, the company will retain its payout ratio of not less than 50% of profit after tax and minority interest. “It is in line with our commitment to increasing shareholder value,” he tells The Edge in an email.

Hartalega Holdings Bhd, too, intends to maintain its minimum dividend payout ratio of 45% while Kossan Rubber Industries Bhd will keep its ratio at 30%. Supermax Corp Bhd did not provide a comment on its dividend policy.

The big four players in the industry with a global market share of 60% — Top Glove (fundamental: 2.5; valuation: 0.9), Kossan (fundamental: 2.1; valuation: 0.3), Supermax (fundamental: 1; valuation: 0.6) and Hartalega (fundamental: 2.6; valuation: 0.3) — have been aggressively building new plants and adding new production lines in the past few years.

According to Kossan general manager of group corporate affairs and business development Edward Yip, the company will see two plants with six double former high-speed advanced technological lines each commencing operations this year.

“These two plants are capable of producing some four billion pieces of gloves per annum,” Yip says in an email.

With the additional manufacturing capacity, Kossan’s total production capacity will expand to 22 billion pieces per annum from 18 billion pieces previously.

Meanwhile, Hartalega will introduce two plants with 12 production lines each, which will be progressively installed until end-2015. In an email reply, the company says the new plants will increase its capacity to 15 billion pieces per annum.

“The 15 billion installed capacity also includes the progressive commissioning of six lines at Next Generation Complex for the first three months of this year,” it says.

Hartalega wants to enlarge its capacity to 21 billion to 22 billion pieces in the financial year 2016.

Over at Supermax, group managing director Datuk Seri Stanley Thai says in email that Plants 10 and 11 will be commissioned in batches and are expected to be fully commissioned by the end of this year. “Some phases of our two new plants have recently commenced production. By December, we shall be able to produce a total of 24.96 billion gloves.”

He adds that when fully commissioned, the plants will have a total of 40 single equivalent high-capacity production lines with installed capacity of 600 million pieces of gloves per month. This will translate into additional 7.2 billion pieces of gloves in 2016.

According to Top Glove’s investor presentation report, it has two plants — F6 and F30 — that are currently undergoing expansion to add 40 new lines that are capable of producing 5.8 billion pieces per annum. The lines are not operational as yet, but with expansion works targeted for completion by September 2016, Top Glove’s production will increase to 50.4 billion pieces from 44.6 billion pieces previously.

Although the influx of new capacity may cause concerns of a supply glut, Affin Hwang Investment Bank Bhd analyst Walter Aw believes the concerns are exaggerated.

“While there are concerns that the sizeable expansion of all four glove manufacturers may potentially cause a supply glut in the industry, we are confident that the incoming supply will be absorbed by the market in tandem with the growth in demand,” he says in a March 6 report.

Aw, who estimates growth of 7% in global demand for gloves and average utilisation rate of 75%, opines that demand still outweighs supply.

Meanwhile, TA Securities analyst Paul Yap projects global demand for gloves to grow at 6% to 8% per annum.

“Overall, we see that new capacity will still be taken up by demand,” he says in a phone interview.

The Malaysian Rubber Glove Manufacturers’ Association (Margma) also believes that global demand for gloves will continue to grow but sees higher growth at 8% to 10%.

“Global demand for gloves will continue to grow as world population increases and purchasing power improves. As such, demand for healthcare will rise, which utilises gloves,” says Margma president Lim Kwee Shyan.

“Overall, we expect earnings to be driven by the completion of new factories,” says TA Securities’ Yap, who holds a “neutral” call on the sector.

However, he notes that competition is likely to intensify, leading to potentially lower margins.

Affin Hwang’s Aw maintains his “overweight” call as he sees the sector being supported by resilient glove demand, stable and lower raw material prices, the stronger US dollar against the ringgit and capacity expansion.

 

This article first appeared in The Edge Malaysia Weekly, on March 16 - 22, 2015.

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