Tuesday, August 5, 2008

Rubber Glove Industry, Part II

The rubber glove makers share price plunged by almost 30-50% as investors worried of
(i) skyrocketed latex price. Latex price increased by almost 200% from 2002 to 2007.

(ii) Strengthening of Ringgit. Ringgit strengthened by 15% since late 2005;

(iii) Recent announcement of 71% natural gas increase by the government on subsidies restructuring;

(iv) Slowing down of demand in advance countries.

Surprisingly, top-3 makers are able to maintain their EBITDA around 15% throughout the period of cost increase. Pricing power is OK.

Steep natural gas hike of 71%, electricity is about 6% of sales, impacting bottom line about 4.26%. Supermax announced to increase price by about 7% just last week. I believe other may do the same. This should soften the blow and additional margin recovery for increased latex price.

Rubber glove has been in great demand due to high hygiene standard in advance countries like the US and Europe. Worldwide rubber glove demand has been growing at 12% annually. It is quite unlikely to collapse dramatically as there is no good substitution and cost of US $ 0.05 per pair is nothing to change any consumption habits.

Competition wise, the tough operating environments forced players to consolidate, from 200 manufacturers in the 90s down to 48.

Top 3 players have been increasing their market share very fiercely. They were having less than 5% in the early 2000, they are now having significant market share due to aggressive plant expansion. This business is about volume game. I believe top-3 will do well over the next few years.

They have quite respectable shareholders, local institutional funds like Public Mutual, Great Eastern and foreign institutional players like JP Morgan, Morgan Stanley, Goldman Sachs, Merill Lych and etc.

Major shareholders of Top Glove

Major shareholders of Supermax

Major Shareholders of Kossan Rubber

Valuation. It has come down to a very reasonable, forward PE down from 10-20 x to 4 – 10x.

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