The glove industry does not get any respect from the man in the street. There are several misconceptions:
• The industry has thrived only because latex is available locally;
• It is a low-tech industry; and
• It is profitable only when latex prices are low.

Much of the natural rubber latex required by glove makers in Malaysia is imported from Thailand, and in the case of Hartalega Holdings Bhd, most of its nitrile latex is imported from Taiwan and Singapore. The manufacturing of gloves therefore would be better located in Thailand or Taiwan than here.

Besides latex, there are far more workers in Thailand and Indonesia than here. Yet, the big glove manufacturers in the region are here, not Thailand, Indonesia or China.

As for technology, that tends to be associated with the electronics industry. But resource-based industries also employ a lot of technology, which is the competitive tool of the local glove industry.

Malaysia has skilful mechanical engineers and technicians who have developed efficient manufacturing equipment, but the country looks up to westerners and do not sufficiently recognise the skills of local engineers.

Great strides were made in manufacturing efficiencies. Ten years ago, about 1,000 workers were required to produce one billion pieces of gloves a year, whereas today, less than half, or about 450 workers, are needed.

Hartalega, which runs the most automated and efficient facility, needs just 250 workers to produce a similar output.

Low latex prices are not the reason the glove industry has prospered. Bulk latex prices are actually quite high, at about RM4.30 a kg at present, although this is a drop from a record of RM6.90 in July last year.

Ten years ago, latex prices were about only RM1.80 a kg when glove makers made a net profit margin of about 10%. Today, with prices more than double that, the glove makers make the same margins or more.

The glove industry is quite high tech and efficient, contrary to perceptions that it is not.

Hartalega’s net profit margin of 20% and return on equity (ROE) of 38%, for instance, could be the highest in the manufacturing sector of Bursa Malaysia, and among the highest of companies in all other sectors.

The company’s ROE is even higher than that of Public Bank Bhd’s famously high return of 27%. That is, of course, not comparable as Public Bank is a large cap company while Hartalega was a small company that has now reached the mid-cap level.
Hartalega made a net profit of just RM13.5 million in 2004 and after years of steady growth, its latest quarter showed that annualised, its earnings in its latest financial year would approach the RM100 million mark.

The company, which was listed just last year, achieved a total market value of over RM1 billion early last month when its share price reached RM4.15.

This is the industry’s second billion-ringgit company, the first being Top Glove Corp Bhd, which has a market value of RM2.1 billion.
In a year or two, there could be four glove companies in the billion-ringgit league. That would include Kossan Rubber Industries Bhd and Supermax Corp Bhd if their share prices reach the targets set by CIMB Research in a recent report on the sector.
The earnings of both Kossan and Supermax would also approach the RM100 million level next year.

This is an achievement for these companies, which had all started as small and medium enterprises (SMEs) and most were first listed on the Second Board before moving up to the Main Board. Even Top Glove, the biggest in the industry, was first listed on the Second Board. From its humble roots, the industry has come of age.

In terms of market value, glove manufacturers now stand shoulder to shoulder with companies in bigger industries. Top Glove’s market value (RM2.1 billion), for instance, is almost twice that of the biggest steel producer, Ann Joo Resources Bhd (RM1.2 billion). The glove maker is also bigger than the Malaysian Pacific Industries Bhd (MPI)’s RM1.3 billion.

These are not directly comparable as they are in different industries in various stages of their respective cycles. It does show that at this point, the glove makers are valued as much as leaders in the steel and electronics industries. In addition, the glove industry is expected to be resilient, being in the healthcare sector, and is continuing to expand.

Although the glove industry is very small compared with the global steel or electronics industries, Malaysia is the world’s biggest glove manufacturer while its public-listed steel and electronics companies are very small relative to their global peers.

In contrast, Top Glove is the world’s biggest manufacturer of natural rubber gloves, while Hartalega is the world’s second biggest manufacturer of nitrile gloves after Kimberly-Clark, a multinational healthcare products group based in the US.

The latest financial results of glove companies show that they continue to excel. Taiping-based Latexx Partners Bhd announced last Friday its net profit rose to RM11.4 million from a revenue of RM74.4 million, a net profit margin of 15%, for its 2Q2009 ended June 30. These earnings are an increase of 21% from the preceding quarter.

Its CEO Low Bok Tek said in a statement the earnings rise was due to “continuous expansion in production capacity”, in addition to other factors. “The improvement in margins is also due to a better product mix as it shifts the mix from powdered latex gloves to powder-free latex and nitrile gloves,” he added.

Low said another reason for the high profit margin in 2Q is that all of Latexx’s manufacturing facilities are located on one site. This enables the company to have lower indirect costs — it employs fewer plant managers and supervisors, for example, than a company that has plants in four or five locations.

Low said Latexx’s expansion programme is on schedule, with a current installed capacity of about five billion pieces of gloves a year, which will increase to six billion by year-end, and nine billion by the end of next year.

Early this year, its capacity was less than two billion. Latexx is probably the fastest-growing glove company in terms of its capacity expansion from a low base.

There is much scepticism, grudging admiration or lack of understanding of an industry that is relatively new as a mid-sized sector. Natural rubber prices are on the rise again as the tyre industry recovers, and the US dollar could weaken further — that would reduce profit margins at the glove makers until they adjust their prices — but the industry as a force in the manufacturing sector is here to stay.




This article appeared in Cover Story page of  The Edge Malaysia, Issue 766, Aug 3-9, 2009.