Wednesday, February 16, 2011

Why do I buy Top Glove?

When I decided to make a purchase on Top Glove at RM4.98, several reasons as below caused those decisions to be made:

Macro level

  1. Malaysia is a top rubber gloves producing country with our own technology as well as raw materials supply. Although there are inherent competition from Thailand and Indonesia, we are still a leading country due to mainly the quality of our product. Name me any industries that we are good at except for probably another commodity industry i.e. Palm Oil!;
  2. As far as I know there is no substitute for latex gloves and nitrile gloves i.e. syntetic rubber gloves;
  3. Demand for gloves will naturally be on the uptrend due to demand for better health facilities from emerging countries. Currently, the top gloves importing countries are US and EU. Supermax will show you that percentage of export contribution to other emerging countries are on the up. Ultimately, this is a no brainer thing unless science has found an alternative product;
  4. Besides prices of latex and raw material for nitrile gloves, all the players are on a level playing field except for quality, economies of scale, size etc. Now we head towards micro level, why Top Glove?
  1. It is the largest player by quite a far margin in terms of both revenue and profit;
  2. It has the healthiest balance sheet (net cash of >RM340 million) as compared to its other listed competitors Supermax, Hartalega, Kossan and Latexx Partners which has larger debt;
  3. If you read Top Glove's report, they have this tendency to having eagerness to eliminate competition. Example recently when the latex gloves industry was hit by high latex prices, in their report "Nevertheless, this adverse situation will possibly lead to further consolidation among the industry players and Top Glove is in a good position to further enlarge its business when the opportunities arise." I believe as any industry matures, the competition will substantially reduce. Top Glove is on the right track by virtue of its size, balance sheet and ability to absorb any negative impact on its business. At the end of the day, the glove industry will have fewer players with a handful of them with larger market share collectively;
  4. Top Glove has proven to be the most successful in growing big in terms of capacity, revenue and profit. Why do I need to choose another alternative competitor if it has already proven to us that it is the most successful;
Where are the dangers?
  1. If I am buying short term, volatility will affect the performances of these glove makers especially those large latex gloves producers. I believe Hartalega is the least affected due to their large proportion of produce are nitrile gloves;
  2. Report from Supermax says that nitrile gloves are in fact cheaper than latex gloves at this moment due to the high price of rubber. (Now this is news to me. Will the industry change to nitrile gloves?) While it may opt for a higher percentage of nitrile gloves, I believe there will not be total change. Currently, I believe the high price of rubber is due to speculation largely as in other commodities. The world now has a huge craze over commodity speculation largely due to people like Jim Rogers whom I believe hyped up commodities too much. This is bad for ordinary people like you and me. Well this is another day's story;
  3. While Top Glove is the largest player, it is not the most efficient in terms of profit margin.
I believe on both sides i.e. macro and micro, Top Glove over time will be the winner.

Serious Investing!

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