Many new hands in glove sector


UOB Kay Hian says that based on its channel check, smaller glove producers like Comfort Glove are also due to realise steep revisions to ASPs. UOB Kay Hian remains overweight on the glove sector.

THE glove craze shows no signs of fizzling out. Even as Covid-19 vaccine hopes intensify, it appears that the interest in glove manufacturing has only increased, particularly among Malaysian companies with no prior experience in the business.

In recent weeks, a number of listed companies have announced plans to set up glove manufacturing facilities.

These include precision engineering outfit AT Systematization Bhd, crude palm kernel oil producer Green Ocean Corp Bhd, construction firm Vizione Holdings Bhd, IT solution provider MSCM Holdings Bhd, automotive battery maker GPA Holdings Bhd and property player Iconic Worldwide Bhd, among others. Rubber-related Karex Bhd, which manufactures condoms, has also ventured into glove production.

Many of these companies have revealed the costs of their ventures, which generally is higher compared to what the big boys of the glove industry incur.

Based on available information on Bursa Malaysia, the average cost per production line for companies such as AT Systematization and Green Ocean is estimated at between RM6mil and RM7mil.

Meanwhile, as for MSCM, GPA Holdings and Karex, the average cost varies at RM9.9mil, RM12.5mil and RM20mil per production line respectively.

For the sake of comparison, Malaysia’s largest listed glove maker, Top Glove Corp Bhd, has earmarked RM3bil in capital expenditure to build 450 new lines with 60 billion pieces capacity between 2020 and 2026. This translates to an average cost of RM6.7mil per production line.

Despite the higher cost incurred to set up glove production lines, the entry of the new players suggests that there are some who still feel the glove sector offers healthy margins.

Some of the new entrants have proposed to undertake a private placement to raise cash to commence their new glove-making operations. The bulk of the cash raised will go towards acquisition of land as well as machinery and equipment, apart from funding working capital.

Many of the companies, being new players in the glove scene, are starting from scratch right from land acquisition, which makes the entire process to commence operations longer.

Others such as GPA Holdings will be using their existing facilities to produce the gloves and would just need to invest in the production lines while the likes of Vizione is buying an operating plant.

On the other hand, MSCM via its subsidiary has rented a factory for the purpose.

A glance over the Bursa Malaysia filings made by these companies shows that glove productions are only expected to commence or pick up in volume in 2021, and to be expanded in phases to achieve the capacity target.

While the plan is to leverage on the high demand for gloves due to the Covid-19 pandemic, sceptics feel the downside risk is for glove demand to gradually decrease if a vaccine is introduced.

In such an event, the new glove ventures by the listed companies will take a hit as oversupply may kick in. Average selling prices (ASP) may likely decline in turn.

“In fact, the growth in the ASPs of gloves have begun to stabilise in recent weeks after rising at a sharper pace earlier this year. That said, the prices are still high, ” says a market observer.

However, UOB Kay Hian Malaysia Research points out that the country’s largest listed glove maker, Top Glove sees steeper-than-expected ASP revision. It also expects Hartalega Holdings Bhd and Kossan Rubber Industries Bhd to see “a lockstep change in ASPs” as well.

“We gather ASPs (for Top Glove) have taken a steeper revision through the months to October. They are due to be raised by 30% month-on-month (m-o-m) as opposed to 10% m-o-m, followed by an additional 5% to 10% m-o-m till year-end.

“Contracted nitrile ASPs could tip at US$100 per thousand pieces by year-end. However, we retain our earnings forecasts for now in the event of ASPs sharply moderating, ” the research house says in a note.

UOB Kay Hian says that based on its channel check, smaller glove producers like Comfort Glove are also due to realise steep revisions to ASPs. UOB Kay Hian remains overweight on the glove sector.

While the elevated selling prices of gloves and high export potential continue to lure more new players, the bigger question is how long could the high ASPs sustain? Will the prices drop from late 2021 onwards and begin to normalise in 2022?

A market observer says the new entrants into the glove making business will feel the pinch as the prices normalise.

“The main issue is whether these companies could really achieve their targeted return on investment once we are back to post-Covid-19 times.

“For example, loss-making AT Systematization wants to invest RM150mil in glove manufacturing over phases. It remains to be seen whether the company could really generate sustainable returns from this venture when prices start to stabilise and trend downwards, ” he says.

For now, the lingering concern is not only centred on the possibility of a drop in glove demand once the global population starts to be vaccinated. On top of that, the ramp-up in production by the existing big glove makers in Malaysia and those in China raise concerns on the competition faced by the new entrants.

It was reported earlier that China glove makers plan to ramp up their nitrile glove production capacities over the next three years. Apart from not having economies of scale, the new entrants also do not have the reach and network of the supply chain large glove companies have.

This might limit the new entrants to grab a decent share of the market. The cost of entry is also high, notwithstanding the other marketing and promotional costs that they need to incur to get their product to the end-customer.

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