12 things you need to know about Top Glove Corporation before you invest

The rubber glove is an indispensable item in today’s healthcare industry and global demand has risen steadily. In 2005, we consumed 110 billion pieces of rubber gloves. By 2016, the amount increased to 190 billion pieces. This is due to the rising demand for better healthcare and hygiene standards as a result of a growing aging population, the emergence of new health threats, and stringent health reforms and regulations,.

Today, 63% of the world’s rubber gloves is supplied by Malaysia. This is unsurprising as Malaysia has plenty of rubber trees. Currently, the nation is the third largest producer of rubber in the world. The abundance in rubber has greatly contributed to the growth of the country’s rubber glove industry.

Top Glove Corporation Berhad (Bursa: 7113; SGX: BVA) is the largest rubber glove manufacturer in the world. It single-handedly supplies 25% of the global demand for rubber gloves today.

Here are the 12 things you need to know about Top Glove Corporation Berhad.

Track record

1. Top Glove has invested for continuous growth. In 2007, Top Glove ran 18 factories with 322 production lines with an annual production capacity of 28 billion rubber gloves. By 2016, it has expanded to 26 factories with 500 production lines which are capable of producing up to 48 billion gloves a year.

Source: Top Glove Corporation quarterly reports

2. Top Glove has achieved an 861% growth in sales volume of nitrile (synthetic rubber) gloves from 2010 to 2016. It is an initiative of Top Glove to have a wider range of products to reduce its dependency on sales of latex (natural rubber) gloves. This enables Top Glove to mitigate the impact of rising raw material prices as nitrile is cheaper than latex. In 2011, 55% and 11% of Top Glove’s sales volume were latex gloves and nitrile gloves respectively. By 2016, the gap had narrowed to 39% and 32% of sales respectively.

Source: Top Glove Corporation annual reports

3. Top Glove has grown its customer base from 850 clients in 2007 to over 2,000 clients in 2016. The manufacturer exports its products to over 195 countries worldwide and achieved sales growth in markets like Asia and North America. Presently, not one single customer contributes more than 4% of Top Glove’s revenue. This adds stability to the company as it is not reliant on a few major customers for revenue.

4. Top Glove has achieved a CAGR of 11.27% in revenue for the past 10 years. Revenue has increased from RM992.6 million in 2006 to RM2.89 billion in 2016. The growth was directly contributed by Top Glove’s continuous expansion in manufacturing activities elaborated in the first three points mentioned above.

Source: Top Glove Corporation annual reports

5. Top Glove has improved its profit margins over the last three years. This was despite a hike in the minimum monthly wage and two rounds of upward revisions in natural gas tariffs. The management has undertaken multiple initiatives to enhance operational efficiency and performance. They include the implementation of the SCADA system, vision camera system, immersion burners, glove mold holders, and the auto-insertion of gloves into boxes. This has reduced Top Glove’s reliance on manpower. In 2013, Top Glove took 4.46 employees to produce 1 million gloves. By 2016, the number of employees needed dropped to 3.07 per 1 million gloves.

Source: Top Glove Corporation Bhd June 2017 Investor Presentation

6. Top Glove has achieved a CAGR of 16.49% in shareholders’ earnings for the past 10 years. It has increased from RM78.4 million in 2006 to RM360.7 million in 2016. This was due to the continuous sales growth and higher profit margins achieved as a result of the multiple initiatives mentioned in Point 5.

Source: Top Glove Corporation annual reports

7. Top Glove has a 10-year return on equity (ROE) average of 16.75%. This means, it has made, on average, RM16.75 in annual earnings from every RM100 in shareholders’ equity over the past 10 years. Here’s why we like companies with consistently high ROE.

8. Top Glove has generated RM2.50 billion in cash flow from operations over the last 10 years. It has also raised another RM521.8 million in net equities and net long-term debt. Out of which Top Glove has allocated:

  • RM1.50 billion in capital expenditures
  • RM302.2 million in net purchases of investment securities
  • RM829.4 million in dividends payments to shareholders

This means that Top Glove is in itself a cash-producing business and doesn’t need to continually raise equity or debt to expand its business or reward its shareholders with dividends.

9. Top Glove has consistently increased its dividend payouts to shareholders over the last 10 years. In 2006, Top Glove paid out RM14.1 million in dividends. By 2016, the amount of dividends paid out grew nearly 12 times to RM168.9 million. It is also the highest amount of annual dividends paid in the 10-year period.

As at 27 June 2017, Top Glove is trading at RM5.66 a share on Bursa Malaysia. For the financial year ended 31 August 2016, Top Glove declared and paid RM0.145 in dividends per share (DPS). If Top Glove is able to maintain its DPS at RM0.145, its expected dividend yield is 2.56%.

Source: Top Glove Corporation annual reports

Moving forward…

Global demand for gloves is expected to rise at 6-8% a year. Top Glove plans to expand its manufacturing capabilities to meet the expected increase in demand including:

10. Top Glove expanded its R&D team in 2016. In 2015, it had 50 researchers. In a single year, Top Glove recruited another 50 researchers, doubling its number of researchers in 2016. Top Glove’s R&D activities are focused on enhancing its newly launched range of products. They include Polyisoprene Surgical Gloves and Grip Gloves. As a result, Top Glove filed 11 patents for its range of new products in 2016 alone.

11. On 28 June 2016, Top Glove completed its secondary listing on the Singapore Exchange. The secondary listing is expected to benefit Top Glove as:

  • It enhances brand awareness of Top Glove among international investors, analysts, and the media as Singapore is recognized as a global financial hub in Asia.
  • It enhances the trading liquidity of Top Glove shares and diversifies its base of investors.
  • It allows Top Glove to tap into a new market for fund raising activities in the future. This is important as Top Glove remains a growing company that plans to expand its manufacturing capacity in the future.

12. Top Glove also continues to expand its production capacity of nitrile gloves. As at 16 June 2017, Top Glove has 26 factories with 500 production lines which are capable of producing 48 billion gloves (both latex and nitrile) annually.

The construction of Factory 30 is reported to be almost completed. It is capable of producing 2.8 billion nitrile gloves per annum. Production is expected to commence in July 2017.

The construction of Factory 31 and Factory 32 will commence operations by January and December 2018 respectively. They have a production capacity of 3.0 billion and 4.8 billion nitrile gloves per annum respectively.

Besides nitrile production, F33 and F34 will commence natural rubber glove operations by August 2017 and will add 22 production lines and increase capacity by 1.1 billion latex gloves combined.

As a result, by December 2018, Top Glove is projected to have 31 factories and 628 production lines which are capable to producing 59.7 billion gloves a year — an increase of 24% from 48 billion pieces currently.

The fifth perspective

Based on its latest press release, Top Glove has revealed that it remains optimistic as the rubber glove industry is resilient in nature and the company has maintained a healthy balance sheet to finance its growth. As at 31 May 2017, Top Glove has RM212.9 million in cash reserves and a debt-to-equity ratio of only 0.18.

In conclusion, Top Glove has achieved growth in sales, profits, asset size and cash reserves over the last 10 years. Still, it remains focused in its pursuit for future growth as Top Glove has revealed its agenda to further cement its position as the world’s largest rubber glove manufacturer by raising its global market share from 25% presently to 30% by 2020.

Ian Tai is the founder of Bursa King, a data platform that empowers retail investors to build wealth through ownership of fundamentally solid stocks. It is an essential tool that helps investors unearth consistently profitable stocks from a database of over 900+ stocks listed in Malaysia. As a Malaysian with close family ties in Singapore, Ian publishes a series of newsletters on how anyone can invest profitability in both countries.

4 Comments

  1. CK

    June 28, 2017 at 6:09 pm

    Thank you for your analysis of TOP Glove.
    I was invested in its competitor, Riverstone which didn’t perform as great as TOP Glove.
    Do keep me in your mailing list.
    Thanks
    CK

  2. Lian Teo

    June 29, 2017 at 12:41 am

    Thank you for your detailed analysis of Top Glove. Can you advise on whether it is better to invest in the Spore listed shares or on the Bursa listed shares.
    Thanks

    • Ian Tai

      June 30, 2017 at 12:03 pm

      For a start, I like to find good stocks (financially solid) and to buy them cheap (price is low). Thus, if a stock, regardless of its location, fits the two criteria mentioned above, it would be in my watch list. Personally, it’s an advantage to have actual stock data and information from Malaysia and Singapore as both countries have their own unique attributes. To name a few,

      1. Malaysia has quite a number of mid-cap stocks worth around RM 500 Million. Often, these companies are owned and managed by local entrepreneurs. If they continue to be well-managed, they have the potential to grow its worth to over billions of ringgit. Of course, Top Glove is just one of the many successful examples. There are many more to choose from. Personally, I find the pool of stocks in Singapore to be a bit polarized in terms of size. There are either really huge (top 30 in the STI) or really small.

      2. Malaysia brings in some diversity in terms of types of industry. They include oil & gas, plantations, rubber gloves, and multiple manufacturing sectors which are cheaper to be operated in Malaysia.

      3. In terms of REITs, Singapore is still more advanced than Malaysia.

      4. Of course, we have the Ringgit. It’s not as stable as SGD. Fundamentally, it’s due to having prolong budget deficits and growing national debt. This trend is expected to persist in the immediate future.

      5. To offset it, Malaysia is still a developing country and has rooms for growth. Growth in GDP is faster and higher as compared to Singapore. There are many stocks which are positioned to grow in in tandem with the level of affluence among local Malaysians.

      Regards
      Ian

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