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This article first appeared in The Edge Financial Daily, on February 11, 2016.

 

KUALA LUMPUR: ACE Market-listed glove maker Careplus Group Bhd, in anticipation of the industry’s projection of 8% annual growth in demand for gloves for the next five years, has jumped on the expansion bandwagon.

It has set in motion plans to expand its capacity to produce as much as 10 billion pieces of gloves annually by 2020, which it expects will be able to improve its profit margin from the current 3% to 12% due to better economies of scale, and grow its global market share from 1% now to 4% in five years.

The Senawang-based glove maker’s current annual capacity is 2.4 billion pieces, which it produces from 20 production lines from its three factories in Senawang.

To up its capacity, the company aims to add six production lines every year, starting this year, said Careplus executive director and group chief executive officer Lim Kwee Shyan.

The double former glove production line Careplus is installing can produce 20 million pieces per month, be it latex or nitrile gloves. So by mid-2016, Careplus will have 26 production lines with an annual capacity of 3.8 billion pieces.

“Each production line will cost about RM6 million, so the capex (capital expenditure) is about RM36 million per year,” said Careplus executive director and group chief executive officer Lim Kwee Shyan in an interview with The Edge Financial Daily recently at the company’s headquarters.

That is a potential capex of RM180 million up to 2020. Lim said Careplus’ expected capex will be funded by bank borrowings, internal funds, and the proceeds of the conversion of its five-year warrants, which are expiring in August.

Careplus plans to up capacity amid the recent aggressive expansion among the bigger glove makers like Hartalega Holdings Bhd and Top Glove Corp Bhd, which have been enjoying a profitable run in recent years as demand outpaces supply, in the face of low raw material prices and a weaker ringgit in contrast to most other major currencies.

The spate of expansion has sparked concerns among industry observers that it will bring about severe margin compression in the near future, with smaller players like Careplus likely to face the brunt of it as they may not be as competitive as the bigger players.

To this, Lim said there will still be space or demand for smaller players to fill. Citing the expected demand for gloves of about 200 billion pieces this year, there should be another 16 million more needed for the following year, at the 8% annual growth rate.

“If [it was] totally up [to] the big boys’ capacity expansion, there is nothing near the 16 billion [more for the market],” he stressed.

Though he did not deny the possibility that there could be some margin compression moving forward, Lim, who has a direct and indirect stake of 35.84% in Careplus, opined that the demand for gloves is still growing strong, so the outlook remains positive, based on the current number of players in the market.

“We (the glove industry) have done reasonably good, but not to the extent where everyone wants to jump in,” he shared, adding that this is due to the high barriers of entry into the glove industry.

Without the proper ecosystem, capacity and production line, it is difficult for any new entrants into the industry, he explained.

The year 2015 has been a tremendously good year for the glove industry — which saw the share prices of most glove counters outperforming the broader market. To Lim, 2016 will likely see the glove industry continuing its winning streak.

In a note dated Jan 13, Hong Leong Investment Bank Research analyst Nick Foo Mun Pang said going into 2016, the outlook for the rubber products sector is expected to remain favourable as catalysts — like the strong US dollar and subdued latex prices — will continue to underpin the sector’s robust earnings throughout most of 2016.

However, he warned that vigorous capacity expansion could potentially outpace demand in 2016.

Contrary to Lim’s belief, Foo said if the capacity expansion plans of the world’s top four largest glove makers, namely Top Glove, Hartalega, Kossan Rubber Industries Bhd and Supermax Corp Bhd proceed as scheduled, global demand needs to grow at a substantially higher pace to absorb the additional supply coming from their expanded capacity.

The four collectively control about 40% of the global market share, based on their output last year.

“Consequently, there is a possibility of oversupply of gloves due to the higher installed capacity, which could lead to erosion of pricing command among glove players towards the second half of 2016,” he noted.

It remains to be seen how the industry-wide capacity expansion will impact the market.

Meanwhile, in the nine months ended Sept 30, 2015 (9MFY15), Careplus’ net profit jumped 63.3% to RM4.54 million from RM2.78 million a year ago, while revenue grew 27.12% to RM139.99 million from RM110.12 million.

The improved earnings were mainly due to sales of gloves from Careplus’ five new production lines, as well as the increase in the average selling prices of its products, due to the strengthening of the US dollar.

Careplus closed unchanged at 47 sen yesterday, valuing it at RM178.57 million. The counter has risen 62% over the past 12 months.

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