New glove capacity plans face challenges

Analysts remain sceptical about the newfound enthusiasm of companies diversifying their core business into rubber glove manufacturing

by SHAZNI ONG/ pic by MUHD AMIN NAHARUL

CONCERNS exist of the RM900 million or so worth of investments that have been proposed in new the rubber glovemaking capacity by various companies seeking to benefit from the Covid-19 pandemic induced demand.

Based on compilations of available recent news reports and Bursa filings in the last two months, the new players have proposed to invest large sums of cash for purchase and lease of land parcels, factories and manufacturing capacities across the country.

The new capacity could add some 20 billion glove pieces annually from almost 70 lines although the exact figure would change depending on execution of plans and demand.

Analysts, however, remain sceptical about the newfound enthusiasm of companies diversifying their core business into rubber glove manufacturing.

JF Apex Securities Bhd research analyst How Chi Hoong is not optimistic about the outlook for the new glovemakers because the industry is viewed as matured after undergoing multiple consolidations of over 200 glove companies in the past.

“The new players have no advantage over the current top four producers in terms of operating efficiency, business relationship, innovation and capacity. Please be mindful that the glove manufacturing industry will go back to volume-driven competition post-pandemic,” he told The Malaysian Reserve (TMR) yesterday.

He expects demand for gloves will likely taper off in the first half of 2021 from a quicker than expected development of vaccines, deceleration of Covid-19 cases, hospitals using fewer gloves, as well as less human interaction and social activities.

“I am not expecting the new players to generate massive profits due to the new plant gestation period and high start-up costs,” he said.

Companies like GPA Holdings Bhd, Titijaya Land Bhd, Kanger International Bhd, CE Technology Bhd, HLT Global Bhd, Aspen Group, LKL International Bhd, MQ Technology Bhd, Vizione Holdings Bhd, Iconic Worldwide Bhd, AT Systematization Bhd, Inix Technology Bhd, MSCM Bhd, Green Ocean Corp Bhd and Karex Bhd are also among the list of new players that have voiced their intentions to go into or expand capacity to meet the new “normal” in demand for glove across the world.

The newsflow has been negative to the stock prices of major glovemakers. Top Glove Corp Bhd fell 35 sen to RM8.34 (post bonus issue) yesterday, while Supermax Corp Bhd fell RM1.42 to RM19.98. Kossan Rubber Industries Bhd’s share price fell RM1.14 to RM13.98 and Hartalega Holdings Bhd eased RM1.46 to RM13.90.

Malacca Securities Sdn Bhd head of research Loui Low believes the move by these companies comes as they struggle to make profit in their existing core business and deem the glovemaking business a more profitable option for the near future.

He believes tagging along with the Covid-19 newsflow and theme as well as the assumed higher margins of gloves as of this juncture, several of the companies are looking for opportunities into this manufacturing business in order to get their companies into a profitable path.

“Some of them will need to wait at least half or one year before starting production, it is in my view — late to the game and likely need a longer period to turn profitable. Getting approval from several bodies in various countries will take some time as well,” he told TMR.

Although the average selling price (ASP) of gloves might not be increasing exponentially in the near term, the demand for gloves will remain as long as Covid-19 cases globally continue to increase, he added.

“As new players in the segment, it is likely they will have to stay in the game longer to reap the fruits,” said Low.

MIDF Research analyst Ng Bei Shan appears to concur, adding that it will take about a year or more to set up a new factory and install the machines before they can start the commercial production.

“The timeline is also highly dependent on the production capacity they target. On top of that, they’ll need to hire experienced staff with the technical know-how to help them accelerate the process.

“It shouldn’t be too surprising if some of the inexperienced start-ups run into initial operating losses because the established players have gone through the learning curve and they are very efficient in terms of production,” she said.

She added that the bigger established manufacturers also have the advantage of being more profitable due to economies of scale.

The newcomers will also have to establish their distribution network to sell to the end users.

“Hence, they have to incur higher upfront sales and distribution expenditures,” she told TMR.