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Understanding The Cost Structure Of Gloves Companies

The gloves industry in South East Asia is the biggest in the world. It accounts for the majority of gloves production globally.

The main listed companies in this industry are:

  • TOP GLOVE CORPORATION BHD (KLSE: TOPGLOV) or Top Global Limited (SGX: BHO)
  • Kossan Rubber Industries Berhad (KLSE: KOSSAN)
  • Hartalega Holdings Berhad (KLSE: HARTA)
  • SUPERMAX CORPORATION BHD (KLSE: SUPERMX)
  • Riverstone Holdings Limited (SGX: AP4).

These “boring” companies have been some of the best performers in the stock market in the past five years, with stock price appreciation in excess of 100%.

For investors who want to better understand these companies, it could be good idea to look at the cost structure.

After all, gloves (with a few exceptions such as clean-room gloves) are commodities. In other words, most companies’ products aren’t differentiated. As such, the ones with the best cost leadership will most probably prevail in the long run.

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Source: Top Glove Investor’s Presentation

First of all, raw materials (latex, chemical and packaging) account for more than 60% of the total cost. This is variable in nature. In other words, there is less operational efficiency to be gain from economy of scale.

Secondly, labour and fuel cost accounts for 15-20% of the total cost. This cost is subjected to inflation, but could potentially be reduced through gains in efficiency in production – through automation and economy of scale.

Thirdly, the above cost structure of Top Glove does not necessarily apply to other gloves manufacturers.

Given that Top Glove is the biggest manufacturer in the world by volume, it should possess one of the biggest economy of scale.

As such, smaller companies such as Kossan or Riverstone should have a bigger percentage of fixed cost in relation to their total cost. Thus, we might expect that Kossan or Riverstone to have a bigger proportion of staff cost or overhead cost in its overall cost structure.

Conclusion:

Understanding the cost structure of glove companies can help investors make better judgements on the future profitability of these companies.

For example, commodities prices such as latex are currently trading at historically-low levels. Thus, it is highly likely that commodity prices be higher in future. This could lead to an increase in raw material costs and, therefore, a reduction in profit.

Nevertheless, as different companies have different cost structures, it is useful that investors look at each company separately to get a better understanding of their businesses.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Riverstone Holdings. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.