THE rubber glove industry is facing some headwinds as declining average selling prices crimp revenue and stiff competition compress margins, resulting in depressed earnings for some players in the industry.

On top of that, the recent hike in natural gas prices and increase in electricity tariffs have also driven operating expenses higher for most players.

The challenge is more prevalent for smallish glove manufacturers like Careplus Group Bhd.

The ACE Market-listed rubber glove manufacturer slipped into a net loss position in the third quarter ended Sept 30, 2014, on account of higher production costs, lower average selling prices and higher start-up costs from its two new production lines.

Careplus’ filing with Bursa Malaysia show that the company made a marginal net loss of RM21,000, or 0.01 sen per share, compared with a net profit of RM1.6mil, or 0.67 sen per share, in the preceding quarter. This is despite the company registering a 6.3% increase in revenue to RM37.5mil in the third quarter from RM35.2mil in the preceding quarter.

According to Careplus executive director and group CEO Lim Kwee Shyan, the business outlook for Careplus will remain challenging over the medium term. He points out that while there is no concern over the prospects of sales volume growth for the company, the intense competition in the industry means price undercutting will still be the order of the day for the time being.

“The demand for our products is certainly there, but price competition will be stiff,” Lim tells StarBizWeek in an email.

Analysts say they expect the ongoing price competition among glove manufacturers to hit the smaller players more, as they lack the economies of scale that their bigger counterparts have.

“Unlike the larger glove manufacturers, small players do not enjoy the economies of scale,” TA Research analyst Paul Yap explains.

“Larger players tend to be more efficient in their production and operation, and this enables them to weather the industry challenges better than the smallish players,” he adds.

Ongoing expansion

Taking the challenges in his stride, nevertheless, Lim says Careplus will just have to continue working with its existing customers, while looking at ways to enhance its cost efficiencies.

“The prices of gloves are certainly very competitive in the market now, so we have to look at other avenues such as improving our cost efficiencies and the quality of our products to stay in the competition,” Lim explains.

Lim stresses that Careplus will stick to its expansion plan in order to remain attractive to the group’s investors. He notes there is ample room for the company to expand its operations in order to tap into the growing global demand for gloves.

“The small base that we have implies that our growth potential is huge,” he says.

Lim, who is currently also the president of Malaysian Rubber Glove Manufacturers Association, notes that the global demand for gloves is expected to continue growing at an annual rate of around 8% to 10% in 2015.

The view is in line with the sanguine expectations of most analysts who cover the industry.

Affin Hwang Capital Research, for one, tells StarBizWeek the steady growth in the global demand for gloves will be sufficient to absorb any new incoming supply of the products.

The brokerage points out that demand for gloves in general is inelastic, as they are an essential product in the healthcare industry.

It believes developed markets such as the United States and European Union will continue to support global demand for glove, while potential for further growth is arising from demand by emerging markets, such as China and India, where hygiene standards and health awareness are increasing.

Lim concedes that as Careplus is currently undergoing expansion of its business, incurring higher overhead expenses over the medium term is inevitable. Such investments, nevertheless, will be rewarding for the company in the long run.

Production diversity

While Careplus’ mainstay is in the latex segment, the company has in recent years gradually diversified its product range to include nitrile gloves. This is in line with the ongoing shift in demand from latex to nitrile gloves.

“The demand shift to nitrile gloves has slowed down; having said that, we continue to invest in production lines that produce both latex and nitrile gloves,” Lim says.

Careplus currently produces only 20 million of nitrile gloves per month, while its latex glove production stands at 150 million per month.

By the first quarter of next year, Careplus will have an additional capacity of 30 million gloves per month, Lim reveals.

By then, the company will have five production lines, with a total monthly capacity of 50 million, that can produce both nitrile and latex gloves.

“At present, we still have some latex glove commitment to meet,” Lim says, noting that of the 50 million “flexible” capacity, Careplus will probably run 20 million for latex gloves and 30 million for nitrile gloves per month.

“The final production mix will still ultimately depend on our customers’ preference,” he shares.

Despite the rising demand for nitrile gloves, Lim says he still sees potential in latex gloves, especially on the back of lower natural rubber prices.

He points out that the recent decline in natural rubber prices, in tandem with the decline in global commodity prices, has given some cost advantage to latex gloves.

According to Lim, raw material prices for the rubber glove industry would likely remain stable at current levels in 2015. And with the US dollar expected to remain strong, glove makers should be able to find support for their bottom lines, he says.

Nevertheless, he notes, the industry will continue to be challenged by rising labour costs and shortage of both skilled and unskilled workers.

Careplus’ shares closed unchanged yesterday at 47.5 sen, which represented a year-to-date gain of about 53%.

KUALA LUMPUR: ACE Market-listed glovemaker Careplus Group Bhd said finding the right niche and target market for its products have enabled it to thrive in an industry largely dominated by the “big four” players — Hartalega Holdings Bhd, Top Glove Corp Bhd, Kossan Rubber Industries Bhd and Supermax Corp Bhd.

“We need to find our niche and invest in automation like the bigger players … They may be dealing with big customers, so we concentrate on the smaller-sized ones that still require our products,” Careplus group chief executive officer Lim Kwee Shyan (pic) told The Edge Financial Daily in an interview.

Lim, who is also president of the Malaysian Rubber Glove Manufacturers Association (Margma), said there is a misconception that the glove industry is all about size.

“Careplus’ market share may be less than 1%. But just as there are five to six big players in the industry, there are also another 20 to 30 smaller-sized companies which have remained in the game,” he said.

Currently, Careplus has two factories (Factory 1 and 3) in operation, with another factory (Factory 4) completed last month. The group’s Factory 2 is currently non-operational.

Lim said the group is in the midst of expanding the production lines at Factory 4, which has a 12-production-line capacity, with two nitrile glove production lines targeted to run this year, bringing the group’s total production lines from its three operating factories to 17.

“The group will continue with its expansion plan for Factory 4 by adding new production lines progressively,” he said.

Factory 1 is run by its wholly-owned subsidiary Rubbercare Protection Products Sdn Bhd, while Factory 3 is operated by Careglove Global Sdn Bhd, a joint venture (JV) with Brazilian partner Descarpark Descartaveis Do Brasil Ltd.

“Our Factory 1 and 3 have a capacity to produce 155 million gloves per month, and the two new production lines in Factory 4 will have the capacity to produce up to 20 million nitrile gloves per month,” said Lim.

Careplus’ current product range comprises mainly latex gloves, which constitutes 97% of its total sales and are manufactured under its Rubbercare and Guardian brand names. The other products include surgical gloves, nitrile gloves, as well as medical disposable products such as face masks and respirators.

Lim said focusing on latex gloves is part of the group’s strategy of establishing a core competency, and enhancing it in terms of machine design, space capacity and human resources.

Through Careglove Global, which was set up in 2011, the group manufactures gloves which are exported to the Brazilian market, which accounts for 60% of the group’s total sales.

Prior to the JV, the group’s biggest exports were to Hong Kong and Japan, which now constitute only 20% of its total sales.

Careplus reported a net profit of RM1.56 million for its second quarter ended June 30 of financial year 2014 (2QFY14) on revenue of RM35.24 million. For the 11 months period ended Dec 31, 2013 (FY13), the group recorded a net profit of RM1.2 million on revenue of RM129 million. In June last year, the group had changed its financial year from Jan 31 to Dec 31.

Lim said the group did not perform as well as it should have in FY13 due to the expansion expenditure it had incurred for its Factory 3 expansion.

For FY14, Careplus will focus on organic growth by focusing on growing its existing customer base, as well as its internal functions of information technology (IT) and human resources.

“As long as we have a product that is satisfactory to our customers and we have good internal controls on IT and human resources, we will be able to maintain our profitability in FY14,” said Lim.

Shares of Careplus rose 1.49% to close at 34 sen last Friday, bringing a market capitalisation of RM79.9 million.

This article first appeared in The Edge Financial Daily, on August 25, 2014.

Read It Here