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Riding on robust demand for gloves

Emelia Tan
Emelia Tan • 7 min read
Riding on robust demand for gloves
Top Glove has a world market share of 26%
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1. What are some notable developments that Top Glove’s shareholders can look forward to?

As the world’s largest manufacturer of gloves, Top Glove has a world market share of 26%. Besides Malaysia, its manufacturing operations are done out of Thailand, China and Vietnam as well. It has a comprehensive product range, which now includes a non-glove segment comprising condoms, face masks, dental dams and exercise bands.

We believe that global demand for gloves will continue to be robust, growing by c.25% in 2021, especially given the current pandemic. Average Selling Prices (ASP) have also been increasing monthly, along with higher raw material and operating costs. We have since allocated 30% of our total capacity for spot orders and are fully sold for the next three months.

Post-pandemic, global demand for gloves is expected to grow at 15%, higher than pre-pandemic given the increased awareness and best practices adopted in medical and non-medical sectors. We have earmarked a capital expenditure of RM10 billion ($3.3 billion) for the next five years to be invested in several key areas including new capacity expansion, enhancement of existing manufacturing facilities, a Nitrile latex plant, a gamma sterilisation plant, land bank for future expansion, industry 4.0 initiatives and improve workers’ facilities.

We adopt a 50% dividend payout policy with payment on a quarterly basis, and we have committed to a payout ratio of 51% for FY2020.

2. What differentiates Top Glove from its competitors?
We have grown exponentially in 30 years to be the world’s largest manufacturer for Nitrile Rubber gloves, Rubber gloves and Surgical gloves.

We have a balanced product mix, allowing us to tap on a wider range of customers globally across medical and non-medical sectors. We now serve 2,000 customers worldwide and export to over 195 countries, and no single customer contributes over 4% of our revenue.

Our operations risk is also lower and diverse as we operate in various countries, including Malaysia, Thailand, China, United States, Germany, Brazil and Vietnam.

3. Describe Top Glove’s financial performance over the past few years. What strategies have you put in place to maintain or accelerate this growth trajectory?

Since listing in Mar 2001, Top Glove has seen steady growth over the past 20 years. During that time, revenue CAGR grew 23.1% and PAT CAGR grew 28.6%. Top Glove delivered strong growth in FY2020 with new highs in revenue of RM7.24 billion (+51% y-o-y) and profit of RM1.9 billion (+417% y-o-y). With more upside in glove demand expected, we look forward to fresh highs in FY2021. We will continue to expand our capacity to meet with the rising global demand for gloves. As global demand is now estimated to grow at a much faster pace by an estimated 25% in 2021 and 15% post-pandemic, Top Glove will continue to expand more intensively by adding 100 billion pieces of gloves per annum by 2025. We will also continue to expand through mergers and acquisitions as part of our growth strategy. Aside from expanding our capacity, we will also continue to focus on innovation, automation, digitalisation and artificial intelligence, towards improving our productivity and efficiency.

4. Can you provide a breakdown of Top Glove’s order book over the next 12 months?
Pre-pandemic, we had a lead time of around 30 to 40 days. Given the increased demand, our current lead time has extended to 620 days for nitrile gloves, 400 days for natural rubber gloves, 250 days for vinyl gloves and 110 days for surgical gloves.

The lead time for natural rubber gloves has shortened since July 2020, following new natural rubber glove production lines coming onstream and the switching of some surgical glove production lines to produce natural rubber gloves. Lead times by product varies.

5. In your view, what are the key demand drivers globally for gloves in the current environment, especially following the Covid-19 pandemic?

We view key demand drivers for gloves to be:
● As a protective barrier for medical personnel in the healthcare sector.
● Increasing hygiene standards and healthcare awareness for both the medical and non-medical sector. Progressively stringent healthcare regulations.
● Healthcare reforms in US and China, and regulations such as OSHA in US, EU-OSHA in Europe, SESI in Brazil.
● Emergence of health threats such as Covid-19, H1N1, SARS, bird flu, Ebola, bio-terrorism.

6. What are Top Glove’s plans to increase its manufacturing production capacity and how much capital spending is budgeted over the next few years for the different phases of its capacity enhancements?

We will continue to expand our capacity to ensure that we are well-positioned to fulfil global glove demand, which is expected to grow from a pre-Covid-19 level of about 10% per annum, to about 15% per annum post-Covid-19, on the back of increased usage in both the medical and non-medical sectors.

We have earmarked RM10 billion of capital expenditures over the next five years from FY2021 to 2025, to provide us with additional capacity of 100 billion pieces of gloves. Factory F41, which is the group’s first factory in Vietnam, is expected to come onstream in October, the initial production capacity for which is 2.4 billion pieces of gloves from its 10 production lines.

7. What R&D plans does Top Glove have to boost efficiency?
Top Glove continues to focus on R&D, invest in talent by recruiting researchers to develop more automation and artificial intelligence, and embark on industry 4.0 digitalisation. We now have 752 researchers and 6 R&D centres as at September 2020. We also employ 1,500 graduates and experienced talents annually to ensure a strong staff force.

Over the years, we have improved our productivity by 80%, reducing from 8.4 workers per million (WPM) pieces of gloves to the current 1.8 WPM and expect this number to continue to decrease. We will continue to invest in R&D towards enhancing the group’s productivity and efficiency — hence Top Quality, Top Efficiency.

8. What is the group’s current dividend policy? Will the group maintain or change this policy going forward?
Top Glove has a dividend payout policy of 50% of PATMI. For FY2020, we have a dividend payout ratio of 51%, with 8.5 sen final dividend to be paid on Nov 3. We intend to maintain this payout policy and dividend payments are on a quarterly basis in January, April, July and November.

9. What is Top Glove’s value proposition to its shareholders and potential investors?
Top Glove has delivered a shareholders’ return of 40,679% over the past 20 years since our IPO in 2001. In just four years of our listing on the SGX, we have generated a total shareholders return of 987% since 2016. We have also seen steady growth since our listing in 2001. During that time, revenue CAGR grew 23.1%, PAT CAGR grew 28.6%, average PAT margin grew 12.2%.

We achieved stellar performance in FY2020, with strong growth in sales quantity of 17% and added additional 21 billion pieces of capacity with production utilization of above 95%. We also saw higher operational efficiency from ongoing upgrading and productivity enhancement, and higher ASPs in line with strong market demand.

10. What do you think investors may have overlooked about Top Glove’s business?

Top Glove is committed to delivering sustainable economic performance and generating attractive returns for our shareholders. We have taken steps to ensure that our internal supply chains are sustainable, by establishing our own plants and factories which include two latex concentrate plants, three chemical factories, a glove former factory and two packaging material factories.

In addition, we have a nitrile latex plant and a gamma sterilisation plant in our pipeline, as we work towards establishing a comprehensive in-house supply chain. This integrated supply chain will enable us to be more competitive in the industry.

As a healthcare products manufacturer, we believe that we are well able to increase our product range in terms of medical gloves, face masks and dental dams to cater to the very strong global demand for personal protective equipment and continue to expand our capabilities in producing healthcare related products.

Emelia Tan is a research analyst with Singapore Exchange

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