Bargain Hunting For Rubber Glove Stocks?

On Star Business: Rubber glove makers' shares hit after downgrade

• Thursday September 16, 2010
  Rubber glove makers' shares hit after downgrade
  By YVONNE TAN
  
  PETALING JAYA: All rubber glove counters took a hit yesterday after a research house downgraded its call on the sector on overcapacity concerns and increasing competition.
  
  “Despite recent sharp share price declines, we see no reason to aggressively buy glove-makers on a six-month basis,” Maybank Research said in its sector note to clients yesterday.
  
  It downgraded the sector from “overweight” to “underweight”.
  
  At the close, the largest glove maker in the world, Top Glove Corp Bhd, was down 4 sen at RM6, Supermax Bhd shed 15 sen to RM4.63 while Kossan Rubber Industries Bhd also slipped 15 sen to RM3.29.
  
  Also on the losers’ list were Hartalega Holdings Bhd and Adventa Bhd, which lost 9 sen and 4 sen to RM4.91 and RM2.62 respectively.
  
  Share prices of the glove makers have generally been on a downtrend in recent months, coming off their peaks reached in July after traders and investors turned cautious on them following the stronger ringgit against the greenback, which would hurt exporters’ revenues which are in US dollars – and rising latex prices.
  
  In the note, Maybank said it was also seeing an “overcapacity emerging in the nitrile gloves market” and highlighted a potential price war largely because of this.
  
  Kossan and Hartalega are the major players in this segment.
  
  “With at least seven original equipment manufacturers qualified to sell their products in Brazil now (versus two in early 2009), players like Top Glove, which was among the early movers there and, hence, enjoyed super-normal margins, will be affected most. Up to 13% of Top Glove’s sales come from Brazil,” it added.
  
  Riding on such factors, the glove stocks under Maybank’s coverage are expected to see their compound annual growth rate for three-year aggregated core net profit taper down to 14% from 17% previously.
  
  Meanwhile, Kossan senior manager for group corporate affairs Edward Yip said the company was still “running at full capacity.”
  
  “Yes, we admit that certain factors are not making the current environment very positive for us but we believe it’s only for the short term. People would still need to buy gloves as it is a necessity.”
  
  He downplayed the strong ringgit affecting its export revenues saying that the company also imported some of its raw materials, which was paid for in the weaker US dollar, thus neutralising the effect of a stronger local unit.

Yes, the strong ringgit ( or issit the extremely week USD? :P ) and rising latex prices are both extremely important factors.

But in regards to overcapacity.

Ah... this issue was highlighted here on this blog on 25th June 2010: Would You Be Concerned With All The Capex In The Rubber Glove Industry

Let me reproduce the entire posting here again (LOL! I am not goating about my post but for quick reference sake) .... and yes, overcapacity would ultimately lead to price war and if that were to happen... profitability would be hurt!

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It makes you wonder about all these capex plans made by out rubber glove makers.

Now do not get me wrong. There's nothing wrong with expansion plans. In fact, it's good to see factories making expansion plans, for it indicates that demand is great.

However, there is a danger.

Demand is not everlasting. It's not forever and ever.

And needless to say, even if demand does not falter, oversupply can occur. Yes, when everyone in an industry sees supply not able to meet demand, people get greedy. Surely, the logical thing to do is to expand production. One starts but they fail to realise that everyone too had jumped onto the bandwagon and starts making huge expansion plans. Next thing you know, the supply is everywhere!

Let's have a simple look.

In today's Business times.

• TOP Glove Corp Bhd (7113), the world's largest rubber glove maker, plans to spend RM80 million until May next year to set up three new plants and increase production lines.
  
  Chairman Tan Sri Dr Lim Wee-Chai said the expansion will bring the number of its factories and production lines to 20 and 459 respectively, producing 41.2 billion pieces of rubber gloves a year.

A 80 million expansion plan.

20 factories and 459 production lines. Meaning 3 new factories would be built.

The article continues...

• Top Glove currently has 17 factories, out of which 11 are in Malaysia, four in Thailand and two in China. They produce 33 billion pieces of rubber gloves a year, or some 33 per cent or more of the world rubber glove. Read more: here

A couple of days earlier, Kossan made the following announcement: Kossan in RM60m expansion

• Kossan in RM60m expansion
  
  By Zaidi Isham Ismail Published: 2010/06/23
  
  RUBBER glove maker Kossan Rubber Industries Bhd (7153) will spend RM60 million in the next two years to expand its operations in Klang, Selangor.
  
  The plans include two new plants, increasing production lines, buying new machinery, upgrading existing equipment and boosting research and development....
  
  He said the first plant will be completed by October, while the other will be ready by next year, bringing Kossan's number of plants to 12, producing 14 billion pieces of gloves a year, or some 14 per cent share of the world's rubber glove market.

Kossan plans to spend 60 million.

15th April 2010: Update Selldown of glove makers overdone, says Supermax

• Thai said Supermax expected a 40% rise in revenue to RM1.15 billion in FY10, based on current latex prices and bigger capacity with its new plant in Meru, Klang as well as the installation of new production lines
  
  It is allocating RM131 million in FY10 for the setting up of the factories. The Meru plant is expected to be commissioned by July while the first of six plants in Glove City in Bukit Kapar, Klang will be commissioned next year.

Supermax's expansion plan is rm 131 million!

1st April 2010: Hartalega plans RM120m capex

• Hartalega plans RM120m capex
  
  By Chong Pooi Koon Published: 2010/04/01
  
  GLOVE maker Hartalega Holdings Bhd (5168) has allocated RM120 million in capital expenditure for the next two years, part of which will be spent on plant expansion and technology investment, its chief says.
  
  The company, which operates five factories, is in the midst of upgrading an existing plant while completing the fifth one. The new capacity will boost its annual production by three billion pieces of gloves by the end of next year when the plants are fully operational.
  
  It is producing 6.5 billion pieces a year now.

Hartalega is allocating 120 million!

Recently I made the following posting on Adventa: A Look At Adventa's Earnings

• Capex (capital expenditure) guided by management is RM30 million per year which will be funded internally and via borrowings.

Adventa management is saying that capex is about 30 million per year.

Latexx Partners: You have to search their capital commitment statement in their earnings notes reported in May 2008. Quarterly rpt on consolidated results for the financial period ended 31/3/2010. It stands at 63.128 million but for plant and machinery, the amount is 52.5 million..

Let me grab and crank up my cow-cool-lator... not sure if it can handle all these numbers... and if my fat little fingers are not clumsy and retarded... the grand total is 473.5 million.

So how?

Isn't it a little bit incy wincy scared?

And what about other glove manufactures? What if they get the same idea? Expand! Expand! Expand!

How?

And if we take into consideration that perhaps a huge increase in the demand was caused by the H1N1 flu. Now obviously it is possible that this H1N1 flu might not last forever. What if the demand decreases along with the H1N1? Not possible?

Yes, isn't it possible that demand could one day subside? But then with all these expansions, we know that supply would increase dramatically.

Would you be concerned? A little bit?

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Ahhh..... I need to put my disclaimer here as I am only highlighting the possible risk in this sector and I certainly have no idea if it's worth to look for a bargain here.

There's a saying... opportunities comes for a stock is sold down.... and yes, that's so true, especially if the selldown is unjustifiable.

But in regards to the glove sector, perhaps one should consider if the fundamental reasonings is unjust?

Remember if the reasoning is indeed justifiable, ie, strong USD would see lower revenue and higher latex prices would mean higher costs and overcapacity could lead to price wars, then won't it be possible that future earnings could be much 'lower'?

How?

Let me say again... I really have no idea if these stocks could fall more! And who knows the rising stock market might ignore the fundamental reasonings and these stocks could even stage a strong technical rebound.

Oh yeah.. my disclaimer.

Disclaimer
1. I am a nobody.
2. I am not responsible for anyone's investments.
3. I am not a sotong. :D
4. I am certainly not an independent investment advisor.
5. Since I am not an in dependant investment advisor, I cannot guarantee that you should lose money.
6. Most important, I find no motivation to talk about stock price movements. Yeah, I do not indulge in guessing what a stock price will or will not do. So please spare me all the chats that you think this stock will go down by so much or this stock will soar by so much.

TOPGLOVE

SUPERMAX

LATEXX PARTNERS

HARTALEGA

KOSSAN

COMPARISONS