GIVEN the super profits that glove-making companies have been making since Covid-19 emerged, the question of volume and bottom line sustainability invariably crops up at every stage of the pandemic.
This has become even more apparent now that the average selling price (ASP) of gloves appears to have peaked in the first quarter.
Careplus Group Bhd, a mid-sized player among glove makers, is confident it is well placed to cope with any vagaries in the ASP as demand remains buoyant.
“We anticipate a 15% to 25% reduction in gloves’ ASP in the second quarter and coming months. This is the sentiment across the industry. Due to that, Careplus is anticipating revenue to fall 10% to 15%, but our profitability will be supported by higher volume, which will keep growing quarter on quarter to meet the high demand for gloves,” Careplus Group CEO Lim Kwee Shyan tells The Edge in a virtual interview.
The extraordinary spike in demand for its products occurred in early 2020 after the coronavirus outbreak and just as the company had completed an intensive series of investments to ramp up its production capacity.
The move was well timed. Lim explains that as a latecomer to glove manufacturing, Careplus made sizeable investments in the three to four years leading up to the pandemic, which impacted its bottom line for three years.
The company incurred losses from as early as the third quarter ended Sept 30, 2016 (FY3Q2016). It turned profitable again in FY4Q2019, eking out a net profit of RM783,000 on the back of RM108.7 million in revenue.
“Those were tough times for us as we could not be profitable during that gestational period of heavy investments (to build capacity). In addition, the competition was intense from 2017 to 2019. During that time, many glove companies delayed their expansion plans,” Lim recalls.
The tide has turned for Careplus. For FY1Q2021, it posted a net profit of RM123.5 million, 107 times more than the RM1.14 million it made in FY1Q2020. Revenue increased 130% to RM241.3 million compared with RM104.7 million a year ago.
Careplus is, of course, a much smaller player compared with the bigger glove manufacturers.
A producer of surgical, latex and nitrile gloves, its market share among Malaysian manufacturers is an estimated five billion pieces of the 250 billion to 300 billion pieces produced by the industry today.
But the pandemic brought the company new buyers, which after a selection process, it will retain as long-term customers. Careplus will work closely with existing and new customers to sustain demand for its products even in the post-pandemic era, Lim says.
“With or without the pandemic, you will certainly have to reach out to new marketplaces for your added capacity. The pandemic had certainly made this process easier for us,” he explains.
As for the company’s increased volumes, Lim says it is “back to the basics of ensuring products are produced competitively and of good quality”.
Increased volumes make for better economies of scale, and will increase Careplus’ competitiveness and help it to stay profitable.
The company’s listing, which is being transferred from the ACE Market to the Main Board of Bursa Malaysia, is slated to be completed by the fourth quarter.
“Since joining the ACE Market, our market has grown considerably. We are now ready for a larger group of investors and believe the Main Board will give us better exposure,” Lim says.
In FY1Q2021, Careplus produced over a billion pieces of gloves and estimates it will be able to add another four billion to five billion pieces to total production over the year.
“The biggest challenge now is worker availability owing to the Movement Control Order. We are running at 60% capacity. Workers are reluctant to come out to work in spite of being unemployed [for fear of the high infection rate]. This could set us back in 3Q and 4Q2021,” Lim points out.
He says the company is on track to have a total of 57 production lines with a production capacity of 10.5 billion pieces by December 2022. The group has allocated RM500 million in capital expenditure over the three-year period (2020 to 2022), with RM400 million committed since the start of the pandemic early last year.
RM150 million of the total will come from bank borrowings or will be generated internally via a fundraising exercise in the form of a private placement exercise when the price is acceptable, Lim says.
Currently, Careplus has 34 production lines with a capacity of 5.18 billion pieces a year.
Construction to reach 40 production lines with a new capacity of 6.5 billion pieces a year should be achieved by June or July, and by year-end, there will be 48 lines and a capacity of 8.7 billion pieces yearly.
“This will be reflected in our financial results later. Note that the annualised utilisation of capacity is about 85%. It gets rather ‘tight’ at 90%, therefore, running at 85% capacity, or 32 million to 36 million gloves per hour, is a very good rate.”
Careplus’ five production plants are located in Negeri Sembilan — two of which are running at full capacity, while another two are under construction. Its fifth factory is operated with Ansell Services (Asia) Sdn Bhd, to which Careplus disposed 50% equity interest for RM26.97 million in December 2019. Ansell Services is a subsidiary of ASX-listed Ansell Ltd, a glove maker with a market capitalisation of AU$4.6 billion and manufacturing capacity of over 10 billion gloves per annum.
Careplus’ wholly-owned Careplus Properties Sdn Bhd has two locations for warehousing in Negri Sembilan — a newly bought 10-acre site with a single-storey retail complex that it acquired for RM35.5 million, and its existing 73.5-acre parcel in Chembong.
Widening reach in export markets, ESG audit
Where the glove maker’s main export market was once Central America, its attention has now shifted to North America.
“We had previously focused on Brazil. The shift was [a natural progression] as part of our expansion plans to focus on North America, where demand eventually surpassed that in the Central American market by 45% to 46%. Meanwhile, demand from the latter region dropped to 33%, and 15% in Asia-Pacific,” Lim says. He adds that Careplus has a niche market for latex gloves in Central America and margins are good.
The company, which has “some presence in the UK and Italy”, intends to expand its reach in Europe.
Currently, Careplus is not identifying nor in talks with potential partners for future undertakings as its hands are full.
On its practices and policies for environmental, social and corporate governance, Lim says the company is audited based on Sedex Members Ethical Trade Audit 4 pillar. Careplus subscribed to the audit platform in late 2019.
Subjecting the company to the audit allowed for transparency, whereby non-compliance could be highlighted, rectified and improved upon.
“The audit informs us of our weaknesses and need for change in order that clients can know us better. We also ensure standard operating procedures are observed by workers. As it takes much self-discipline, we conduct forums and meetings with them to make sure that they practise the SOPs [in private and public]. In addition, we have spent a fair bit on their hostels [so that they can practise physical distancing]. We cannot afford to make savings here as the industry won’t tolerate that.”
Outlook for gloves
“The demand for gloves this year and next will be good. The pandemic has made glove manufacturers and users aware of having security of supply,” Lim says.
For FY2020, Careplus declared a special dividend of two sen per ordinary share amounting to RM11 million, which was paid out on March 24.
While the Careplus does not have a fixed dividend policy, Lim says shareholders can expect a similar dividend payout in the next one to two quarters should it achieve its financial targets, adding that it will be a “fine balance” as the company still requires substantial capex between now and the following year.
Careplus’ share price soared 20.5 times to hit a record high of RM4.30 on Aug 7, 2020, from 21 sen on March 20, 2020, making the company the best-performing glove stock in the year.
Last Friday, its share price closed at RM2.18, giving it a market capitalisation of RM1.2 billion.