Wednesday, April 14, 2010

Glove Industry

Few days ago, Am Research issued a report on the glove industry. It raised its concern on the over expansion of the industry players like Topglove, Supermax, Kossan, Hartalega and others. Good job by Am Research, it pointed clearly that there might be margin squeeze due to the over expansion which may cause supply excessively more that demand, appreciation of Ringgit Malaysia and increase of raw material cost. It argues that the profit margin of these companies might be “normalized” to previous level before epidemic of H1N1.

A friend of mine call me, he said he intend to take this opportunity to buy more Topglove and Hartalega. I asked him, do you agree with the arguments of Am Research? I warned him that what Am Research pointed out make sense at surface. I said if you are no sure than what is the reason to buy more, then don’t buy? Then he asked for my opinion, my view will be as below:-

1. This industry still will grow (this market will never shrink – especially for disposable type). There are still huge potential from China and India market due to their level of awareness. The demand of latex glove from these market will increase substantially. While nitrile glove will gain more footings in developed country like US & Europe.

2. Over the past years, glove makers are growing under this so called ““normalized” period of time. So what is so special about the current state of demand over supply for the previous few months? Public Bank is growing year after year although margin is under squeezed, because the overall market is still growing; and it is able to eat into other players’ market share. Similar to glove industry, the most efficient player (latex glove – Topglove, nitrile glove – Hartalega) will grow more than the average growth rate of the industry. They are able to take market share of others. Stay away from inefficient players.

3. The business franchise of this industry still intact. There is no substitute for their product, it so simple. They also still able to pass the cost increase and the Ringgit appreciation to customers. Which business in Malaysia possesses these competitive advantages? Just let me know, sure I will bet big on that.

4. Trust the best captain of this industry instead of analyst. At no time an analyst will know the business better that the player. Analyst will remain as analyst; the businessman will make more money. As investor just applied business-like investment approach and strategy.

I definitely welcome the price dropped, and ready to buy more if the price is right.


  1. Do you think the industry benchmarking is/shld always stand around pe 20-30? No doubt stocks is good . But is this a value buy at current price?

  2. Ivan, investing is invest for the future of the business not the current or previous state of the business. Past success or track record is only a guide not a absolute parameter to gauge the future of a business. If you want to make money from your stock investing, you must able to evaluate the future of a business. If you not able to do that or the future of a business is uncertain, how you going to apply your investment technique? Read what Philip Fisher had said, look for a company which is able to increase sales and net profit substantially in the coming years. I am of opinion that both Topglove and Hartalega fit into this category.

    Value is not something static. Future of a business would add value or destroy value. In other word, value rely on the future of a business. Some stock seem appear "overpriced" (so called high PE) at the moment, but it might be cheap after sometime.

    Topglove is going to earn EPS around 90-92 Sen for FY2010 (August), so if you study carefully it is not expensive. It is trade at PE 20-30 to its previous EPS not it future EPS. If it still able to grow at a moderate mid teen percentage, which i believe it can, it seem to be reasonably price. Again, Warren Buffett said, it is better to bet on a good company at reasonable price than a inferior company at cheap price.

  3. Hi 2ndbrother, thanks for your sharing toward glove industry. I was thinking the impact of ringgit appreciation and wondering will this reduce glove company cost? For example, raw material and energy cost?

    How do you think about the CEO of Topglove and Harta? It seem like Topglove CEO is more ambition to lead Topglove to another higher stage. Currently Topglove market cap is around 30-40b. Do you think there is high possibility that it will grow above 100b in 10yrs like previously IOI do?

  4. I agreed with what you said where investing should always look into the future. I guess Topglove should be the Top leader in this industry. But i was lacking.. not like you , perhaps interm of experiences or, ability/sight to evaluate the future value of a business. Hope you can write something to share with us on how to evaluate future earnings.

    Will you consider time factor when entering?For me, given a choice, i will enter based on the consideration of timing follow then by counter selection.

  5. retnuoc, appreciation of Ringgit is not a issue, so dont misled by it. So do the up and down of raw material and energy cost.

    Sure, Dr Lim of Topglove is more ambitious than Mr. Kuan of Hartalega. However if Hartalega able to use their in-house technical skill toward latex glove, definitely will pose a threat to Topglove. If you believe that Topglove is going to make 500-600 Million years ahead, its market capital is able to reach 1 Billion.

  6. The glove makers have risen a lot in market cap for the past two years but I wont call that a bubble. I have heard many friends calling the glove industry a bubble but when I look at the valuations, they are not expensive and are not cheap either.

    The growth story will come to an end sooner or later. I studied Top Glove when it was trading at RM4.00++. It is a good company but I think that the high growth story is unsustainable. This is because the glove makers are helped by a tail wind for the past 2 years, eg. weak Ringgit, low raw material prices, the outburst of H1N1 etc. As a result, I watch the stock goes from RM4.00++ to RM12.00++. I am kicking myself why didnt I buy the stock!!!

    I am not an expert in the glove industry but I think the glove makers are going to make more money in the next few years but not as much as the past 2 years. Trees dont grow into the skies. One should be more careful in such industry where almost every player is selling identical products. The glove makers arent going to lose money anytime soon.

    It is not a bubble!!!

  7. Brother, glove counter has been tamed badly recently. I had jumped in to supermx today. All indicator are showing stocks oversold. Do you think now is the right timing to buy in?