To survive in the glove industry, it is very important to keep the per unit cost as low as possible to generate a profit. Genarally, glove manufacturers want to drive unit cost down by increasing their volume of production. Many small glove manufacturers failed because it takes a lot of expensive investments to reach a suitaible economies of scale to maintain a profit. And in order to expand further in a compeititve market, they will have to lower prices which causes them to lose money with no surplus capital to fund their expansion.This is the reason why the top 5 glovemakers- Topglove, Hartalega, Kossan, Supermax and Sri Trang- maintained their dominance in the industry for many decades. The unit cost of production and sale prices keeps decreasing in inflation adjusted terms, making it ever more difficult for new entrants to compete.

Irregardless, the glove market is huge, up to 300 billion pcs a year in 2019. It is impossible for the top 5 or even top 10 glove manufacturers to supply the entire market. There will be niches or untapped markets where smaller incumbent players can take advantage of. Here is where profitable tiny glovemaker like Comfort and Rubberex comes in. 

Comfort is already producing about 5 billion pcs of gloves p.a, with a greater focus on specialty gloves. Rubberex however, produces only 1 billion nitrile gloves p.a., 52 million pcs p.a and 25 million pcs p.a. of household and industrial gloves respectively. Yet, Rubberex has a decent track record before the pandemic. It recorded consecutive profits year after year, albeit, little growth in revenue. Its revenue is roughly split between nitrile gloves and industrial/household gloves.

How Rubberex being a tiny glove manufacturer in comparison, managed to generate a decent EBI margin of 6.29%?

The medical gloves segment is the mainstay of the glove market. To truly grow into an established global glove manufacturer, you need to be competitive in the medical glove market. Rubberex did quite well in this area. Its sales of nitrile gloves grew from RM 18.8 million in 2015 to RM 91.5 million in 2016. However, we do not know how much profits it made from its nitrile gloves segment. It is important to know this because it tells us about its cost structure which is a good measure of its competitiveness.

But we can rougly estimate its selling price per 1000 pcs of gloves in 2019. Assuming it sells 900 million gloves in 2019 based on a utilization rate of 90%, its selling price per 1000 pcs is around RM 100. I could be wrong about this because Rubberex may have sold more gloves than its production capacity. However, this is unlikely as studying other glove companies, they consisitently sell lower volume of gloves than their production capacity. Topglove disclosed its sales volume in 2019, while Kossan's sales volume is estimated in an analyst report. By dividing their revenue by their sales volume, we can estimate their selling price per 1000 pcs to be around RM 90. The two big glove manufacturers has an EBI margin of 9.3% to 10% in 2019. 

Based on EBI margins alone, we can tell that the big manufacturers are more cost efficient. We also know that from our rough estimates, they sell their gloves at a lower price than Rubberex. Hartalega sells their gloves at a higher price than the rest. From its disclosure of sales volume, and dividing its revenue by it, it records a selling price per 1000pcs of around RM 97. This is closer to Rubberex's estimated selling price of RM 100. But note that Hartalega is the most innnovative glove manufacturer out there, they should sell at a premium given that their products have the best quality.  

The selling price also not do not tell us the quality difference between Rubberex and the big glove manufacturers. Which makes the comparison more difficult. However, Topglove and Kossan supplies to well known glove brands with the high quality in the market. Therefore, my analysis assumes that Rubberex's price premium is not justified by having better quality. In my opinion, to remain profitable, Rubberex has to sell at a higher price to cover its higher cost per unit. Even so, its EBI margins still lags the big glove manufacturers by a few percentage. 

A couple of dollars change in ASP can move a glove manufacturer's profit by a huge quantum. For example, if Topglove's ASP is down by 2 dollars in 2019, it will go into a net loss. This is the razor thin margins that glove manufacturers are operating at. That's why a cost pass through mechanism is vital in any glove contract. If raw material cost increases by 10% without glovemakers passing on the cost, their net profit would at the least halved. 

This may illustrate how difficult it the glove industry is, especially for small players. While Rubberex's nitrile gloves segment grew strongly from 2015 to 2019, the competition in this period for nitirle gloves was not intense coupled with weakening ringgit. In fact the growth was particularly slow from 2017 to 2019, where its nitrile glove sales only grew by RM 20 million. In order to expand quickly, it may have to sacrifice its profits to lower its selling price to a level where glovemakers like Kossan and Topglove is operating at. This is impossible, While there a certain parts of the market who will accept a high selling price, as you grow bigger, you will have to conform more to the market price where most customers are willing to accept.

Rubberex has done fantastically well in a game of volume where its bigger competitors are 20, 30 times larger than it is by finding its niche and untapped markets. However, as we can see from its stagnant growth in revenue in the past decade, staying within a small territory did not bring it anywhere. Rubberex is clearly aware of this. They took the leap and ventured into nitrile glove production in 2015. However, lacking the superior cost structure and product innovation of its bigger competitors, Rubberex will face a hard time advancing in such an intense competition. 

That was before the pandemic. Now during the pandemic, how different are the conditions?

It is true that Rubberex were blessed with a windfall of RM 300 million from the pandemic which gave them much needed capital to expand to achieve greater scale in production. It is planning to increase in capacity to 10 billion gloves. But so are the big glove manufacturers. In fact, the big glove manufacturers will be adding far more capacity and further reducing the required unit cost to survive profitably. Competition is dynamic. While Rubberex will grow big, its already massive competitors will grow even bigger. When the supply shortage resolves, to obtain more customers to meet its production capacity, it may have to get used to selling at lower prices. This will mean\ even with better economies of scale and process innovation, it may not see improvement in its margins back in 2019, putting it in the same situation vis-a-vis the big glove manufacturers as seen in 2019. 

We have not even consider the worse scenario which many investors fear will happen. It seems the stock market is preparing for such a scenario. That the China glove manufacturers will flood the market with huge supplies that are not met by demand. The established Malaysian glove makers have sufficient margins, quality products, reputation for reliability and established network to absorb any impact to their selling price to overcome the possible oversupply situation. We do not know if the oversupply will occur, even if it did, it will normalise again because the glove industry is ever growing. The large glove manufacturers have nothing to fear. However, it is the smaller glove manufacturers who will face a harder time and may emerge from the calamity far weaker than they were before the oversupply hits. 

Conclusion

Perfect competition do not exist, if it does, the lowest cost producers with the best quality would have dominate the market entirely. Yet, we can see this isn't the case. However, in the long run and on a larger scale, players will have to conform to the rules of perfect competition. Rubberex has clearly proven itself based on its fantastic track record. However, my concerns are how will it chart its journey to becoming an established glove manufacturer where it can get its fair share of the market, and not eat what is left of a meal eaten by a lion. Nevertheless, it still has a great advantage over the new glove entrants. With a war chest of hundreds of million of ringgit and a few established factories, versus the new glove entrants who are still on the drawing board. You should not worry too much about the new glove entrants, rather the focus should be on the rise of China's glove manufacturers.

 

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