Careplus Meets Headwinds Head On

29 Nov 2014

THE rubber glove industry is facing some headwinds as declining average selling prices crimp revenue and stiff competition compress margins, resulting in depressed earnings for some players in the industry.

On top of that, the recent hike in natural gas prices and increase in electricity tariffs have also driven operating expenses higher for most players.

The challenge is more prevalent for smallish glove manufacturers like Careplus Group Bhd.

The ACE Market-listed rubber glove manufacturer slipped into a net loss position in the third quarter ended Sept 30, 2014, on account of higher production costs, lower average selling prices and higher start-up costs from its two new production lines.

Careplus’ filing with Bursa Malaysia show that the company made a marginal net loss of RM21,000, or 0.01 sen per share, compared with a net profit of RM1.6mil, or 0.67 sen per share, in the preceding quarter. This is despite the company registering a 6.3% increase in revenue to RM37.5mil in the third quarter from RM35.2mil in the preceding quarter.

According to Careplus executive director and group CEO Lim Kwee Shyan, the business outlook for Careplus will remain challenging over the medium term. He points out that while there is no concern over the prospects of sales volume growth for the company, the intense competition in the industry means price undercutting will still be the order of the day for the time being.

“The demand for our products is certainly there, but price competition will be stiff,” Lim tells StarBizWeek in an email.

Analysts say they expect the ongoing price competition among glove manufacturers to hit the smaller players more, as they lack the economies of scale that their bigger counterparts have.

“Unlike the larger glove manufacturers, small players do not enjoy the economies of scale,” TA Research analyst Paul Yap explains.

“Larger players tend to be more efficient in their production and operation, and this enables them to weather the industry challenges better than the smallish players,” he adds.

Ongoing expansion

Taking the challenges in his stride, nevertheless, Lim says Careplus will just have to continue working with its existing customers, while looking at ways to enhance its cost efficiencies.

“The prices of gloves are certainly very competitive in the market now, so we have to look at other avenues such as improving our cost efficiencies and the quality of our products to stay in the competition,” Lim explains.

Lim: ‘The demand for our products is certainly there, but price competition will be stiff.’

Lim stresses that Careplus will stick to its expansion plan in order to remain attractive to the group’s investors. He notes there is ample room for the company to expand its operations in order to tap into the growing global demand for gloves.

“The small base that we have implies that our growth potential is huge,” he says.

Lim, who is currently also the president of Malaysian Rubber Glove Manufacturers Association, notes that the global demand for gloves is expected to continue growing at an annual rate of around 8% to 10% in 2015.

The view is in line with the sanguine expectations of most analysts who cover the industry.

Affin Hwang Capital Research, for one, tells StarBizWeek the steady growth in the global demand for gloves will be sufficient to absorb any new incoming supply of the products.

The brokerage points out that demand for gloves in general is inelastic, as they are an essential product in the healthcare industry.

It believes developed markets such as the United States and European Union will continue to support global demand for glove, while potential for further growth is arising from demand by emerging markets, such as China and India, where hygiene standards and health awareness are increasing.

Lim concedes that as Careplus is currently undergoing expansion of its business, incurring higher overhead expenses over the medium term is inevitable. Such investments, nevertheless, will be rewarding for the company in the long run.

Production diversity

While Careplus’ mainstay is in the latex segment, the company has in recent years gradually diversified its product range to include nitrile gloves. This is in line with the ongoing shift in demand from latex to nitrile gloves.

“The demand shift to nitrile gloves has slowed down; having said that, we continue to invest in production lines that produce both latex and nitrile gloves,” Lim says.

Careplus currently produces only 20 million of nitrile gloves per month, while its latex glove production stands at 150 million per month.

By the first quarter of next year, Careplus will have an additional capacity of 30 million gloves per month, Lim reveals.

By then, the company will have five production lines, with a total monthly capacity of 50 million, that can produce both nitrile and latex gloves.

“At present, we still have some latex glove commitment to meet,” Lim says, noting that of the 50 million “flexible” capacity, Careplus will probably run 20 million for latex gloves and 30 million for nitrile gloves per month.

“The final production mix will still ultimately depend on our customers’ preference,” he shares.

Despite the rising demand for nitrile gloves, Lim says he still sees potential in latex gloves, especially on the back of lower natural rubber prices.

He points out that the recent decline in natural rubber prices, in tandem with the decline in global commodity prices, has given some cost advantage to latex gloves.

According to Lim, raw material prices for the rubber glove industry would likely remain stable at current levels in 2015. And with the US dollar expected to remain strong, glove makers should be able to find support for their bottom lines, he says.

Nevertheless, he notes, the industry will continue to be challenged by rising labour costs and shortage of both skilled and unskilled workers.

Careplus’ shares closed unchanged yesterday at 47.5 sen, which represented a year-to-date gain of about 53%.