OVERCAPACITY is a term used very much in the glove industry these days. That and rising costs of production.
In fact, the industry has been wrought by more negativity than “positivity” in the past couple of years, a different scenario compared to years ago when competition was much less.
Hartalega Holdings Bhd probably knows this better than anyone else as the company is pretty much one of the most technologically advanced glove makers globally and the first in the world to launch “thin” nitrile gloves, deemed more suitable for surgical operations than the usual “thicker” gloves.
Comparatively, its fastest production lines are able to churn out 45,000 pieces of gloves per hour while its peers operate their fastest lines at an average of about 30,000 pieces of gloves per hour, according to its managing director Kuan Mun Leong.
Malaysian glove makers which control more than half of the world’s glove supply had a few years ago switched to producing more nitrile gloves from rubber gloves in line with stronger natural rubber prices.
Thai glove makers are also upping their game.
“We anticipated early on that competition in the nitrile glove market would intensify and in order to mitigate this, we charted a counter strategy,” Kuan, the 38-year old second generation head honcho tells StarBizWeek.
“While our counter strategy is focused on earnings per share growth, we stand to experience huge gains in productivity as we embark on aggressive expansion.”
Kuan who took over the reins from his father – founder Kuan Kam Hon – in November 2012 appears unperturbed that Hartalega’s net profit margin of 21.7% may erode further given that its peers who are also hoping to cash in on the growing demand for nitrile gloves are busy ramping up production capacity.
However, the firm already reported a lower net profit of RM57.8mil for its third quarter ended Dec 31 compared with the RM60.5mil achieved in the previous corresponding quarter, citing a reduction in its operating profit margin, due to lower average selling prices as well as higher staff costs.
For the nine-month period ended Dec 31 however, its net profit rose to RM184mil from RM172.4mil in the previous corresponding period. Revenue increased to RM826.7mil from RM762.2mil.
At 21.7%, it also very possibly still enjoys the pole position in terms of margins.
“I don’t want to comment on margins but our margins remain good not because we produce mostly nitrile gloves as opposed to rubber gloves but because of our strong productivity and the high output of our lines.”
Kuan was once quoted in a 2010 Forbes article as saying that if the company was pushed to the corner, “we have the margins to defend our position.”
Right now, Hartalega’s nitrile glove production capacity is close to 14 billion pieces of glove per annum, making it possibly the largest nitrile glove player in the world.
More than 90% of its current product mix comprise nitrile gloves, which are known to fetch better profit margins compared to rubber gloves.
Next Generation
“Despite the increasing competition in the nitrile glove market, based on our strong track record we are confident that Hartalega’s profit margins will remain above the industry average (which is below 20%), underpinned by our production technology and innovation.”
Kuan says it is its first mover advantage coupled with innovation capability that has resulted in higher profits for the group for a long time.
“But we did anticipate that industry players would come into the domain (nitrile gloves) that we created.”
In fact, the company had predicted three years ago that competition would heighten, and since then it has communicated to all stakeholders that Hartalega would not continue to maintain profitability levels similar to previous years.
By the time its RM2bil Next Generation Integrated Glove Manufacturing Complex (NGC) in Sepang which will be ready to start its first production line by the fourth quarter is fully completed over an eight-year period, Hartalega’s total installed capacity will increase substantially to 42 billion pieces per annum.
“The NGC is set to provide average year-on-year capacity growth of 15% per annum for the next eight years,” he says.
“The nitrile glove market specifically has been growing at a rate of 20% to 30% for the past few years and we expect this robust growth to continue with an estimated growth rate of 15% to 20% for the next two years.”
Hartalega is taking a “mid-term view” and anticipates that new nitrile capacities coming on stream in the next two years will be taken up by the growing demand in the nitrile glove market.
“Although we are concerned that average selling price continues to impact Hartalega’s top-line, the timing of the incoming NGC capacity should sustain the group’s earnings,” PublicInvest Research tells clients.
Meanwhile, increasing healthcare awareness on a global scale – that is what will continue to fuel the demand for gloves, Kuan says matter-of-factly.
He points out that China’s per capita consumption of glove is 4-10 pieces per capita, compared to the United States where per capita consumption is 140 pieces, suggesting a huge potential exists in the world’s most populous country.
“Hypothetically, if China’s per capita consumption of gloves reaches a level that is similar to the US, it will have a market size of 180 billion pieces per annum, more than the current global glove market size of 150 billion pieces per annum (of which 40% is nitrile).”
Similarly, Hartalega sees “great potential” in India and had set up a distribution centre there last year.
Not quite as optimistic when it comes to preserving margins, one of Hartalega’s competitors Supermax Corp Bhd recently said it expected this year to be challenging given cost and selling price pressures.
As quoted by a local daily, Supermax executive chairman and group managing director Datuk Seri Stanley Thai said the company enjoyed margins of 15% to 16%, but given the capacity that was expected to come onstream coupled with rising costs, he expected to see margins coming down to 9% to 11%.
He predicted glove makers with the highest margins and selling prices would be the ones to suffer the most as customers would have the choice to switch due to overcapacity.
However, like Kuan, Thai expects demand for nitrile gloves to continue to be strong even as the price of latex, the main raw material for rubber gloves, continues to be volatile.
“The technology revolution of the glove industry will continue. We believe the sector will soon be a high-tech industry and we intend to continue to lead the way in innovations,” Kuan says.
Hartalega shares closed 3 sen lower at RM6.78 yesterday.
Source: The Star Online
Published: 15 Mar 2014