Tuesday, April 17, 2012

Top Glove and Hartalega: Betting between latex vs nitrile gloves maker

As healthcare becomes more important and if you are an investor who is purely looking at the Malaysian market alone and not elsewhere, one industry which you will want to continue to monitor is the medical gloves industry. Why? Malaysia is the top producer of medical gloves globally and the quality of our gloves are competitive if not the best. Additionally, medical gloves is an industry which is growing much faster than the growth of any economies on average. As the industry matures, it is also much easier to identify the winners. The industry will consolidate and over time, there will definitely be lesser players as compared to during the growth stage.

For rubber gloves, one should concentrate on 2 companies - Top Glove and Hartalega. In fact, it used to be Top Glove only being the largest producer by quite a fair bit while the other players like Supermax, Kossan and Latexx Partners are smaller competitors. However, recently another player in fact became larger in the context of market capitalization and started to gain much followings - Hartalega.

Top Glove is the largest natural rubber gloves maker globally while Hartalega is the largest producer of nitrile gloves.

What are the major difference and significance between natural rubber gloves and nitrile gloves? (Obtained from wikipedia)

Medical gloves are disposable gloves used during medical examinations and procedures that help prevent contamination between caregivers and patients. Medical gloves are made of different polymers including latex, nitrile rubber, vinyl and neoprene; they come unpowdered, or powdered with cornstarch to lubricate the gloves, making them easier to put on the hands. Cornstarch replaced tissue-irritating Lycopodium powder and talc, but since even cornstarch can impede healing if it gets into tissues (as during surgery), unpowdered gloves are being used more often during surgery and other sensitive procedures. Special manufacturing processes are used to compensate for the lack of powder.

Latex allergy
Due to the increasing rate of latex allergy among health professionals, and in the general population, gloves made of non-latex materials such as vinyl, nitrile rubber or neoprene have become widely used. Chemical processes may be employed to reduce the amount of antigenic protein in Hevea latex, resulting in alternative natural-rubber-based materials such Vytex Natural Rubber Latex. However, non-latex gloves have not yet replaced latex gloves in surgical procedures, as gloves made of alternative materials generally do not fully match the fine control or greater sensitivity to touch available with latex surgical gloves. (High-grade Isoprene gloves are the only exception to this rule, as they have the same chemical structure as natural latex rubber. However, fully artificial polyisoprene—rather than 'hypoallergenic' cleaned natural latex rubber  is also the most expensive natural latex substitute available. Other high-grade non-latex gloves, such as nitrile gloves, can cost over twice the price of their latex counterparts, a fact that has often prevented switching to these alternative materials in cost-sensitive environments, such as many hospitals.

Another thing is that due to the substantial rise of the natural latex prices, cost of producing nitrile gloves became lower than natural latex gloves - this significance happened since 2010. As a result of that, many players have started to partially switch from natural rubber to nitrile rubber - Top Glove included.

Will this switch cause Hartalega's margin to be affected? For sure but by how much, it is difficult to foresee. However, since Hartalega continues to lead in the R&D and also being the largest nitrile gloves maker, it is still continuing to enjoy the switch in demand to nitrile gloves from the medical fraternity. These however may not last long as the other players are surely chasing and allowing their production lines to be able to cater for nitrile gloves production especially the newer ones. How much will the effect is still unknown though. One thing for sure is that Hartalega is already in the lead while the other players (Top Glove inclusive) are doing the chasing.

One should look at the below comparison between Top Glove and Hartalega to understand the competitive side of the medical gloves business. As you can see, Top Glove's margin are much smaller despite its revenue being more than 2 times Hartalega. Balance Sheet - Both Top Glove and Hartalega are almost equally strong with minimal debt. Top Glove's capacity on the other hand is probably more than 2 times Hartalega.

Comparison between Top Glove and Hartalega
Over the period (of probably less than 20 years) where many of the gloves maker became very big and successful due to the increased global demand, we have witnessed Top Glove stands out to become the leader in terms of growth in production capacity, revenue and maybe even profit. Its balance sheet is also the healthiest. One should note that it is not as easy as we think to grow to a size as big as Top Glove (even for Hartalega and Supermax) as there must be ready market as well as operational ability to manage these expansion.

On the other hand, Hartalega due to its vision and focus in the nitrile gloves market has become the margin leader. They are enjoying the fruit of the better foresight now. Hence, who are we to bet on if we are asked to pick one only?

This is going to be a hard decision, as from the perspective of Top Glove, although they are moving into nitrile gloves producing, they are also definitely not letting go of latex gloves. Its move of buying land to produce rubber proves that. Hence, in this, we can see that Top Glove is betting that latex gloves will have its own consistent demand. They also feel that the price of rubber is overly speculated at this moment - hence over time, the price of producing latex gloves may still be cheaper than nitrile gloves. Note that Top Glove's rationale for moving upstream by owning its own rubber plantation is that it is the best long term hedge against fluctuations of the global raw latex price.

Hartalega, on the other hand is spending on efficiency and continuous R&D to produce better quality nitrile gloves.

We can know that most of the players do not know which of the type of gloves they will be concentrating on as Top Glove, Supermax, Kossan are now using production lines that are switchable. We configure that if they know, these players would not be relying on switchable lines.

Whatever the results, let's not take our eyes off the players and industry as its significance is going to be important, although I am a little bit bent towards Top Glove due to its capability to expand faster. I still think that due to the players inability to brand - size and efficiency matters more.

Serious Investing!

5 comments:

Ethan Chia said...

Hi,

I like value investing like you as well.

a) How do you view the Supermax in the longer term compared to Harta/Top Glove. As I heard Supermax has good distribution and branding.

b) However, how do you rate three companies (Top Glove, Supermax and Harta) in terms of overall performance?(profit margin, production capacity, R&D, distribution networking, leadership quality, balance sheet, product quality and etc).
I can see that Supermax and Top Glove are trying to balance their markets between latex and nitrile gloves. Harta seems like still enjoying the same market. Thinking nitrile glove could not be a difficult barrier for market penetration and Harta's lead position will be affected and will it affect the profit margin as well? However, at this moment. the advantage I can see from Harta is the more automated production capability wins the situation if Supermax and Top Glove starts to compete in nitrile market.

Thanks for the patient as I invested some in glove industry and betting who will be provide more value.

felicity said...

Hi Ethan, You probably have it all there in terms of what you want to check out as comparison. Top Glove and Supermax, I would say are quite similar although the former is around 1 time larger in terms of capacity to Supermax. Balance Sheet wise, Top Glove is definitely stronger although this does not mean Supermax has weak BS. You probably have it right in terms of Hartalega's commitment to production automation as probably in terms of R&D, nitrile gloves would need better quality focus as compared to latex gloves. This is also why, Hartalega has a good headstart against the traditional strong latex gloves maker.
Somehow or rather, looking at the trend and since I believe gloves making is not rocket science, any one which has a stronger Balance Sheet, quality, ability to expand and distribution channel will probably have an advantage.
As not any one of them has a strong branding strength, this business will depend largely on some of the production and distribution qualities of each respective players.
It is however hard to predict how the commodity prices of latex or even nitrile i.e. byproduct of petroleum will work out in future. I do like both Harta and Top Glove better though.

山下聖人 said...

Actually you cannot see gloves industry this way.
This industry is an easy entry industry, Harta streght now is in Nitrile, but not forgetting, Topglove and Supermax and Kossan can anytime adjust their production towards nitrile also as and when now.

So in future, market share for Harta might reduce as I see it

felicity said...

Appreciate your comment. However I do not see it the way you see it. Yes, probably in terms of market share Hartalega's nitrile market may drop. Yes, its true that Top Glove and the rest of the big players will have their production line to switch. That switch however is because of the demand for nitrile rubber gloves are expanding. Hartalega is a little bit different from the other players where they concentrate on nitrile gloves while the rest are trying to pick up their momentum on the production of the gloves.
The only reason for the rest to switch is due to higher demand for nitrile based products.
Personally, I like Top Glove better for its size and ability to scale however, we have to respect Hartalega for its vision and choosing the right fight.

Sunny said...

While people are being exited to give their opinions on Top Glove, Hartalega, or Supermax, one word just flash over my mind. It actually had quite a long time ago.

"Levi's"

Whisper to me if anyone can guess what I mean.