As per the forecast by the Malaysian Rubber Glove Manufacturers Association (MARGMA), the global demand for gloves is anticipated to return to pre-pandemic levels in 2023, which amounts to around 280-340 billion pieces. In response to China's increased average selling price (ASP) for gloves, Malaysian glove manufacturers have made the necessary adjustments as well, which are raising the ASP from USD 17.00 per 1,000 pieces to roughly USD 21.00. Consequently, glove manufacturers' stock prices have recently shown a positive trend.

Notwithstanding, Kossan Rubber Industries Berhad (KOSSAN, 7153), one of Malaysia's largest rubber glove manufacturers, has reported unexpected results recently, with its revenue continuing to decline and net losses widening. This development has caused the temporary halt of the upward trend of glove stocks.

Before exploring KOSSAN's latest quarterly performance, let's briefly review the company's background.

KOSSAN was established in 1979 and headquartered in Selangor, Malaysia. KOSSAN has become one of the world's largest disposable glove manufacturers and one of Malaysia's largest technical rubber product manufacturers since its listing on the Malaysian Stock Exchange in 1996.

According to the 2020 annual report, KOSSAN has 23 factories with an annual production capacity of 33.5 billion gloves. The company's revenue comes from three categories: gloves, technical rubber products, and cleanroom products such as gloves, masks, and wipes, primarily used in the electronics and electrical industry.

Most of the company's gloves are sold to foreign markets such as North America, Europe, and Asia-Pacific and have been exported to more than 90 countries nowadays. According to the 2022 annual report, approximately 89.92% of the revenue came from foreign markets, while Malaysia's market share was only around 6.71%.

Now, let's look into KOSSAN's just-released quarterly report.

Revenue Comparison (YoY -42.85%, QoQ -18.02%)

As of March 31, 2023, the company's revenue decreased by approximately RM295.92 million YoY, recording only around RM394.71 million due to intense market competition and declining global glove demand as the pandemic eased.

Based on the news reports, the current average selling price of Chinese gloves is only USD 17.00 per 1,000 pieces, which is lower than Malaysia's gloves at around USD 21.00 per 1,000 pieces. Therefore, it is believed that some orders may have shifted to China.

Among the RM394.71 million in revenue, around RM317.54 million came from glove business, recording a decrease of around 47.91% compared with the same period last year. The sales of cleanroom products also decreased by approximately 26.06% YoY to around RM21.02 million. However, the sales of technical rubber products increased by around 13.86% YoY, achieving RM56.13 million.

Owing to lower average selling prices and sales volume, the company's revenue decreased by around RM86.74 million or 18.02% QoQ.

Net Profit Comparison (YoY -126.91%, QoQ -873.90%)

KOSSAN was evidently impacted by the decrease in glove ASP and sales volume, with a net profit of RM90.10 million for the same period last year turning into a net loss of RM24.25 million. This is due to rising energy costs and employee costs, coupled with increased overall operating costs resulting from lower factory utilization.

Additionally, the performance for the first quarter of the 2023 fiscal year was affected by rising natural gas and electricity prices. As a result, the company's losses continued to widen during the quarter.

Outlook

The glove industry will continue to face unfavorable factors such as rising energy prices and employee costs in 2023. Therefore, the management has indicated that the company will temporarily suspend its recent expansion plans based on the current market conditions.

However, with the recovery of global economic activity and the growth of infrastructure construction, it is expected that the sales volume of the company's technical rubber products will gradually increase.

It is worth mentioning that although the net loss continues to expand, the company holds a huge cash balance of approximately RM1.07 billion, which positively enables KOSSAN to overcome the challenges of the inventory cycle.