Price war to squeeze nitrile glove margins this year

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KUALA LUMPUR: Malaysian glove makers expect competition in the nitrile glove segment to intensify this year and are bracing themselves for a price war that will result in thinner margins.

“In an increasingly competitive environment, fully passing on cost increases is more difficult. But as it stands, we believe Hartalega is more efficient than our peers and will be better able to weather any cost increases,” Hartalega Holdings Bhd managing director Kuan Mun Leong told The Edge Financial Daily in an email.

Nevertheless, the group, which saw its operating profit for the second quarter of financial year 2015 ended Sept 30, 2014, (2QFY15) decline to 23.17% from 31% a year ago, has already been warning its stakeholders that margins will likely continue to be impacted this year.

The declining margins, together with lower selling prices, caused its 2QFY15 net profit to contract 24% to RM48.16 million against RM63.27 millon in the previous year. The world’s largest glove maker, Top Glove Corp Bhd, also expects a challenging business environment in 2015 for the same reason, though its chairman Tan Sri Lim Wee Chai believes the company’s new capacity for nitrile gloves will enable it to do more business with larger multinationals in developed markets compared with its peers.

Top Glove’s net profit in 4QFY14 ended Aug 31, 2014 eased 5.2% to RM48.42 million from RM45.9 million a year earlier, owing to stiff competition, which resulted in margin pressure. Nitrile gloves accounted for 24% of the total volume of Top Glove’s production in 4QFY14 and its major markets are Europe (31%) and North America (27%).

Further aggravating the situation is the knock-on inflationary effects from last year’s increases in electricity and natural gas tariffs, of which Lim said Top Glove is still feeling the effects. Also looming on the horizon is the goods and services tax (GST) in April.

Nonetheless, Lim believes the industry’s prospects remain promising. Top Glove expects to deliver an improved performance in FY15 due to lower raw material prices and favourable currency exchange rates against the US dollar. “The global demand for rubber gloves from developed and emerging markets is still on the uptrend and is expected to continue growing steadily at a rate of 6% to 8% per annum.” 

According to RHB Research head Alexander Chia, competition resulting in average selling price (ASP) pressure is not the main concern, yet. But he noted that if supply grows too fast, price war may emerge and glove makers may slash their ASPs more aggressively to increase sales volumes.

“Intense competition within the industry will exert pressure on margins as glove companies may face challenges in passing through the incremental costs [such as labour costs]. Competition is unavoidable. Those with superior margins or high production efficiency will do better,” Chia told The Edge Financial Daily.

In a note dated Dec 31, RHB Research noted that any heightened compeitition would not bode well for Top Glove and Supermax Corp Bhd, “as both are margin laggards in the industry”.  Nevertheless, it said the strengthening of the greenback against the ringgit will benefit the industry.  “A 3% increase in the exchange rate could lift the industry’s earnings by approximately 2% to 4%,” it said. It maintained its “overweight” call on the sector as it expects global consumption to remain strong and to expand 8% to 10% per annum, led by demand from the healthcare segment.

Its top picks for the sector are Hartalega (target price (TP): RM7.70), Kossan Rubber Industries Bhd (TP: RM5.12) and Karex Bhd (TP: RM3.89). 

Meanwhile, Hartalega’s Kuan said Malaysian glove manufacturers will have to rise to the challenge of cost increases by moving up the value chain in glove manufacturing. 

“The only pathway is to innovate in the way that gloves are made and to come out with innovative products and production technologies,” he said, citing its nitrile glove innovation as an example. 

“Our nitrile gloves changed the global landscape of the glove market. Before our lightweight nitrile glove, the world’s glove market was dominated by natural rubber gloves (about 95%). Today, the global market share between the two materials is approximately 50:50,” Kuan said.

Despite a weaker profit for 2QFY15, Kuan is confident Hartalega will continue to deliver growth in the coming years. But it does not expect significant growth in its current FY15 ending March as its Next Generation Integrated Glove Manufacturing Complex (NGC) will only be operational towards the end of 2014. 

“We encourage investors to look beyond FY15. For FY16, we expect capacity to increase by 43%. With an average capacity growth of 21% per annum for the next six years, we expect continued growth in our earnings per share,” said Kuan.

For FY16, Kuan expects Hartalega’s output to increase to 18.4 billion pieces, 43% higher than FY15. 

“Despite margin compression, our profit margin is above the industry average as a result of our high-productivity manufacturing processes, derived from our advanced manufacturing technologies which were developed in-house. In addition, we expect NGC to provide a significant increase in our productivity. NGC will be 33% higher in productivity compared to our existing facilities. In the long run, this will put us in a very good position to defend our margins and maintain our dominance in the nitrile glove market,” Kuan said.

As the developed markets have matured, both Hartalega and Top Glove are looking at emerging markets, such as India and China, for expansion. Kuan said there are vast untapped markets, especially in Asia, where hygiene and healthcare awareness in some countries is still low relative to the West.

“Specifically, due to the low per capita consumption of gloves in China and India, Hartalega realised the enormous potential in these emerging markets,” Kuan said.

For the same reason, Top Glove’s Lim thinks its operations in China will contribute positively to the group’s revenue in FY15, during which it expects to a volume growth of 10%, driven mainly by a consistently resilient demand for rubber gloves, and ongoing quality and automation improvement initiatives.

 

This article first appeared in The Edge Financial Daily, on January 5, 2015.