All Is Not Well In The Glove Industry?

Hartalega Holdings Berhad (KLSE:5168.KL), one of the key producer of nitrile gloves global saw a 23% increase in its net profit and 29% increase in its revenue in FY2016. Yet, it seems the market seemed to be unhappy with the glove industry progress. Shares of Hartalega Holdings has dropped more than 30% year to date. In Singapore, shares of Riverstone Holdings Limited (SGX: AP4), one of Hartalega Holdings’ competitor, has also dropped close to 20% year to date. What is happening to the glove industry? Should investors be avoiding them now?

According to brokerage houses, the average selling price (ASPs) for Hartalega Holdings’ nitrile glove has fallen 25% year on year. This has resulted in weaker operating margins for the company. Given Hartalega Holdings’ leading position in the nitrile glove sector, the weakening margins might be an indication of more intense competition and oversupply of gloves in the market.

It should also be noted that 2017 would again mark another year of record growth in the glove production capacity, with Maybank Investment Bank estimating an 8% growth. With more growth in capacity and declining margins for glove producers, is it the beginning of the end for these glove producers.

Company Total Return (5 Years)
Riverstone Holdings 430.5%
Top Glove 118.2%
Hartalega Holdings 227.0%

Source: S&P Global Market Intelligence

As seen from the table above, all these three major glove producers have seen respectable total return for its shareholders over the past five years. Many of them have enjoyed a growing market, boosted by a rapid expansion of their production capacities. Now, has the supply growth finally caught up with the growth in demand?

Foolish Summary

If this is the turning point for the glove industry, does it mean we would expect much slower growth and diminishing margins for these producers? Given that most of them produce relatively similar products, it is certainly a sign of worry for these companies.

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