Why ATS ventured into glove manufacturing?

With the global COVID-19 pandemic, people have made the shift to a newer way of living, or what we call it ‘the new normal’.

As long as the world has not found a cure or a vaccine for Covid-19, we may have to adjust to a “new normal”, meaning a new way of living and going about our lives, work and interactions with other people.

Please bear in mind that we may have to live in the “new normal” for a very long time.

Many diseases caused by viruses have no cure to this day, not even the common cold. There are no vaccines for many viruses either. But we have learned to adapt our lifestyles to live with them.

The vast business opportunities in the healthcare sector that have arisen because of the Covid-19 pandemic have seen many listed companies, including those whose core business is not related to the healthcare segment, venturing into the glove /mask sector this year.

Why glove?  Glove manufacturers have been recording high profits in this unprecedented time. Though interest in glove stocks has subsided of late, companies that have diversified into the glove business are set to come onstream from next year and hope to reap the benefits of strong demand for gloves even in a post-pandemic era.

But one of the main highlights for glove is the declining glove prices have raised concerns over the prospects of the sector.

Investors seem to exit from glove stocks and showing no signs of stopping even though most of the share prices of glove stocks have been battered down by more than half since November last year. However, based on the glove experts, they believe that the floor price of gloves will not return to pre-pandemic levels, owing to changes in the cost structure. This could pose an investment idea for an opportunist like me :).

Demand should sustain. Why I said so?  Similar to other major viral respiratory diseases, health experts believe that Covid-19 will also, be seasonal with winter dominance; this means that a resurgence of Covid-19 cases is likely during every winter. Even with the vaccination, people still will get COVID-19.  Furthermore, with Covid-19 potentially becoming an endemic, I reckon that testing activities might become a norm going forward. Therefore, the demand for gloves is unlikely to suffer from a sharp decline although the Covid-19 situation in some of the major glove consuming markets has improved.

As per KAF’s report, KAF acknowledge that demand for gloves remains intact, and we expect a structural shift in annual demand growth post pandemic to be around 15%, higher than the historical annual average growth of between 8% and 10%.

RHB came out a report on the glove stated that they have collated publicly announced expansion plans by various manufacturers, and subsequently conducted a supply and demand analysis. Their findings suggest that an oversupply scenario is unlikely to happen for the next two years.

Besides that, according to the Malaysian Rubber Glove Manufacturers Association (MARGMA), they expect there will be a shortfall of 80 billion pieces of gloves in 2021 as glove demand continue to outstrip global supply. Moving forward, demand is likely to slowly stabilize post pandemic.

Meanwhile, AT Systemization Bhd, an integrated designer and manufacturer of industrial automation systems and machinery has ventured into glove manufacturing.

With the diversification into the glove manufacturing, the Group had also undertaken the 30% Private Placement and 20% Private Placement to raise the funds required for setting up glove manufacturing plant and facilities as well as working capital for glove business.

Towards the last quarter of 2020, the Group completed 2 private placement exercises in stages and successfully raised proceeds of RM45.71 million on 10 November 2020 and RM113.78 million on 16 December 2020, respectively.

The Group commenced its maiden glove manufacturing facility at Chemor, Perak and has now completed Phase 1 comprising 6 glove dipping production lines. The Group target to complete Phase 2 comprising 4 glove dipping lines by October 2021. With the completion of these additional lines, ATS would have a total 10 production lines with estimated annual capacity of 1.5 billion pieces of medical gloves.

But that’s one thing I’m very amazed at them was ATS has demonstrated its commitment and capabilities over 5 months and the factory is up and running in December 2020. Because glove manufacturing process and set up usually take longer time. Partly they leverage the Group’s automation and precision technology and expertise in manufacturing, hence can speed up the process.

One question I always had in my mind was apparently people said the factory doesn’t exist. Those photos are from somewhere else. Well, I do have doubts at first but after looking at their photos in the annual report and their financial in the last quarter result, I am less skeptical. Frankly speaking, in my opinion, public listed companies are unlikely put inaccurate information in their official documents as the documents will eventually be audited.

The Group has obtained the following certifications, licenses and qualifications from CE Marking Certification, Establishment Registration with FDA of the US, EN374 Test Standard, Medical Device Authority license, ISO9001 and ISO13485. The Group is applying for 510(K) approval from FDA and target to obtain it by 2021. With all these certificates, it proofs that they can produce quality glove unlike those companies which did not have the certified glove.

Looking at AT’s financials, the gloves segment contributes RM8.09 million to the Group’s total revenue in FY2021 (ended 31 March 2021), representing 26.2% of the total revenue despite only being in operation for one quarter during the entire financial year.

They just announced their Q1 Result and I saw glove segment for the quarter itself contributed RM22.2 million. Wow as compared with the RM8 mil previous quarter, there’s almost triple of the last quarter revenue. Let’s see how’s the following quarters revenue contribution from glove operations is going to be like. I will start paying some attention to the counter if its financial performance is turning around, as its share price is coming from a very low base.

Photos from the website