MENU

This Glove Maker Has a Unique Economic Moat That You Might Not Know Exists

Do you know that Malaysia is one of the largest rubber products exporter in the world and is actually the global leader in producing natural rubber and nitrile rubber gloves? In fact, 50% of global demand for medical gloves is fulfilled by Malaysian producers.

Just last year, Malaysia exported RM10.5 billion worth of medical-related gloves (including surgical gloves). With such statistics, it is no surprise to find that Malaysia has some of the largest gloves manufacturers in the world. More importantly for Singaporean investors, one of them is actually listed here.

Folks, meet Riverstone Holdings (SGX: AP4), a mid-sized glove producer that started operations in 1989 and now has manufacturing plants in Malaysia, China, and Thailand.

Although Riverstone does not quite enjoy the scale that industry leaders such as Top Glove Corp and Hartalega Holdings have, it does have a unique economic moat: Riverstone is actually one of the leading suppliers of high-tech cleanroom gloves for the technology industry.

This is an important point to consider because cleanroom gloves are actually much more technologically advanced than a typical medical glove. For instance, cleanroom gloves require a three-stage manufacturing process as compared to a one-stage process for a medical glove.

In addition, manufacturers of technological products are very particular about the quality of the gloves they use. So, they tend not to switch manufacturers once they have found a reliable supplier. This bodes well for Riverstone in terms of having a ‘sticky’ customer base.

Furthermore, despite cleanroom gloves costing about two-and-a-half times more than normal medical gloves, the cost of cleanroom gloves would still tend to be a relatively small expense for technological products manufacturers. This thus gives Riverstone some form of pricing power given that the cost of its products to its customers is small.

A combination of the two factors above – a ‘sticky’ customer base, and its products accounting for only a tiny portion of its customers’ spending – have helped Riverstone enjoy a much higher gross margin with cleanroom gloves as compared to manufacturing medical gloves. If we look at a breakdown of Riverstone’s income statement, this is what can be found: 40% of its gloves (in terms of volume) are manufactured for the cleanroom sector and yet 70% of its gross profit comes from that.

This also shows that Riverstone is not just a run-of-the-mill glove producer – it’s actually a strong player within its own niche market.

Foolish Summary

It’s easy to see the increasing adoption and demand for mobile devices such as tablets and smartphones and the manufacturers of such products provide yet another potential growth market for the company for its gloves. If Riverstone can capture that market, its future might be a lot brighter.

At this juncture, it’s good to point out that none of all of the above is to say that Riverstone’s actually a good investment. For starters, there are still the risks to consider. The glove-making industry in Malaysia is currently experiencing a huge growth in supply with manufacturers of all stripes planning to add on capacity in the near future. Will Riverstone’s business face a downturn due to the potential issue of oversupply? That’s just some of the risks investors might need to consider before any clearer investing-related decision can be made.

Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.  

The Motley Fool's purpose is to help the world invest, better. Like us on Facebook  to keep up-to-date with our latest news and articles.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.