Top Glove (SGX: BVA) is the largest rubber glove maker in the world and holds a 25% market share. But the company isn’t stopping there – it plans to be the largest nitrile glove maker as well.
What should investors know about this?
The expansion plan
According to business publication The Edge Markets, Top Glove is planning to build three new factories in Klang, Malaysia, that will increase the company’s nitrile glove production capacity by 10.8 billion pieces per year.
The factories will be completed in phases, with the first factory done by April 2017, the second by August 2017, and the third by May 2018.
Together with other expansion plans, Top Glove expects to grow its total annual glove production capacity to 58.8 billion gloves by 2018. Currently, Top Glove’s capacity is at 46.6 billion gloves.
Top Glove’s targeted production capacity is 26% higher than the current level. For shareholders of the company, that could mean possible bottom-line growth, though a lot would also depend on (1) the company’s pricing of its products, (2) the company’s control of its costs, and (3) whether the company can fully utilise the additional capacity.
Meanwhile, it’s worth noting that Top Glove is not the only rubber glove maker around. There are many listed rubber glove producers in Singapore and Malaysia’s stock market. Some examples includes Hartalega Holdings Berhad (KLSE: 5168.KL), Kossan Rubber Industries Berhad (KLSE: 7153.KL), and Riverstone Holdings Limited (SGX: AP4).
Top Glove’s plans would increase the supply on the market. Unless demand for rubber gloves is expanding at a similar pace or supply is inadequate, big jumps in the supply of nitrile gloves may have an impact on prices the industry can command.
Hartalega focuses primarily on nitrile gloves. Kossan, on the other hand, has a more diversified product portfolio. As for Riverstone, it too hawks nitrile gloves for most of its business. But, the company generates the majority of its gross profit from producing cleanroom gloves, which is considered a niche area.
A final check
Top Glove’s investors may want to monitor the company’s execution of its expansion plans and the impact of said plans on the company’s revenue and profit. Put simply, the question to be asked is: Would the expansion translate into value-creation for shareholders?
As for investors of the other gloves makers, they may want to monitor whether Top-Glove’s expansion has an impact on the pricing and margins of the companies.
Lastly, investors may also want to monitor the overall supply and demand situation of the rubber gloves industry over the next few years – Top Glove is not alone in building capacity. In fact, the other three glove makers – Hartalega, Kossan, and Riverstone – all have plans to significantly increase their output over the next few years.
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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.