Top Glove Corporation Berhad is the world’s largest manufacturer of gloves. It exports gloves to 195 countries and takes up 26% of the global glove market share. Its product portfolio consists of nitrile, natural rubber, and vinyl gloves. The rubber glove industry has experienced tremendous growth throughout the years. If one had invested in Top Glove since they were first listed in 2001 till the 2020 AGM, their total returns including dividends would have been 7,823%!
However, the past two years have been a bit bumpy for the entire rubber glove industry and Top Glove has not been spared from the oversupply issues in the industry which have reduced the average selling price of rubber gloves.
This industry-wide trouble was apparent in the kind of breakfast provided to shareholders before the AGM. In the previous year, Starbucks coffee was served; but this year, coffee from their canteen was served.
Here are 11 things I learned from the 2020 Top Glove AGM:
1. Revenue grew 13.8% year-on-year to RM4.8 billion in 2019 because of strong sales volume growth, particularly in the nitrile glove segment. The management has also targeted to earn at least RM5.0 billion in revenue in 2020. Top Glove also recently launched its BiogreenTM Biodegradable Nitrile Gloves in June 2019 but its sales volume was low in 2019. The gloves biodegrade 10 times faster than conventional ones but have a similar shelf life. (Biodegradation of the gloves will only happen in landfills with the help of microbes but not under normal storage conditions.)
2. Sales volume increased 9.2% y-o-y to 53.3 billion pieces of gloves in 2019. Nitrile gloves sales have been increasing consistently year after year (see chart below). However, Top Glove incurred losses in the vinyl gloves segment in China as its sales volume decreased by 29% between 2018 and 2019 due to the oversupply of vinyl gloves. This loss was also caused in part by the fall in the average selling price of vinyl gloves from RM14 per carton to RM10 per carton. Executive director Lim Cheong Guan considers vinyl gloves as more cyclical in nature compared to nitrile and latex gloves. As for surgical gloves, though it only contributed to 3% of Top Glove’s sales volume in 2019, it made up 12% of Top Glove’s 2019 revenue as it fetched a higher average selling price than the other glove segments. Overall, Top Glove registered increased sales volume mainly in developed regions whereas sales volume recorded mostly flattish growth or minor contractions in developing regions.
Source: Top Glove 2019 annual report
3. Net profit excluding extraordinary items decreased 16.2% to RM315.5 million in 2019. The decrease was due to the increased cost of the raw material (i.e. natural rubber) used to manufacture Top Glove’s gloves. Top Glove could not quite pass on the increased cost of natural rubber to its customers, especially in the second half of 2019. The management’s bonuses were also cut as Top Glove didn’t perform as well in 2019 compared to 2018. In 2020, the effective tax rate will hover around 15% given that Top Glove has about RM100 million worth of unutilised tax allowances.
4. The number of workers required to produce a million pieces of gloves for Top Glove has decreased by 69.0% from an average of 8.4 since they listed in 2001 to an average of 2.6 workers in 2019. The chairman reckoned that in order for Top Glove to do well amidst the challenging environment, it has to invest in technology, automation, and young talent. Top Glove strives to continue reducing its dependence on manual labour.
5. Top Glove has an annual manufacturing capacity of 70.5 billion pieces of gloves. An additional 11.4 billion and 9.5 billion gloves worth of manufacturing capacity will be added by 2020 and 2021 respectively, across Malaysia, Thailand, and Vietnam. The utilisation rate of the nitrile glove manufacturing plant stood at 97%. On a separate note, Top Glove aims to expand its existing distribution network, that currently covers home improvement retailer MR.DIY, to include 99 Speedmart and mini-markets as well.
6. The condom segment posted a revenue of RM34,000 and loss after tax of RM1.8 million in 2019 as a result of start-up costs and a low utilisation rate. The registration processes of condoms across countries take time as they are categorised as a higher-risk classification product. Top Glove has filed for and will receive registration of its condom products within the next two years from various bodies and countries. It has received trial orders so far and has started exporting to Asia, Africa, Middle East, and Europe. The revenue contribution from condom sales is expected to be negligible given the existing robust glove sales as well as future expansions in glove production capacities. On a side note, the maximum revenue contribution from condoms is 20% in order to remain shariah-compliant.
7. Aspion Sdn. Bhd. contributed 10.2% of Top Glove’s revenue in 2019. Aspion’s net profit margin was low initially due to some impact on its business operations. This was caused by the removal of Aspion’s former director after Top Glove took legal action against vendors for fraudulent misrepresentation and a low utilisation rate. Some shareholders voiced their concerns that Aspion’s net profit of RM10.2 million is markedly distant from its profit guarantee of RM108.3 million in 2019. The management is of the view that no impairment is required after assessing the recoverable amount of Aspion. Management also urged shareholders to take a long-term view in terms of its synergistic relationship with Top Glove. A shareholder joked that he was waiting for the impairment to be made so that he could buy the shares at a depressed price.
8. Value Add Sdn. Bhd. is in the business of property letting and recorded a loss of RM9.9 million in 2019 compared to a profit of RM22.8 million in 2018. Dr Lim attributed the sharp decline to unrealised forex impact as the property was funded through U.S. dollar borrowings. The dollar strengthened against the ringgit by 2.8% in 2019 compared to 2018.
9. Minority Shareholder Watch Group pointed out that Azrina Arshad was appointed as a non-executive director on the day her father, Tan Sri Arshad Ayub — who had been on the board of Top Glove, retired. The directors explained that Azrina Arshad’s working experiences in the architecture field and rapport with various authorities would guide Top Glove in terms of its factory expansion plan. She was hired based on merit and her keen interests in environmental, social, and governance matters are useful to the company’s path to sustainability.
10. The chairman expects the entire rubber glove industry to grow at an annualised rate of 10%. According to the chairman, the rubber glove industry has been consolidating for the past 30 years. Only about 20% of the 250 rubber glove companies in the past survived the intense competition.
11. A shareholder asked for the reasons for buybacks and the resale of treasury shares. Lim answered that the treasury shares were acquired back in 2014 and 2015. Part of the treasury shares were resold to generate internal cash flows. The remaining treasury shares were used as part of the share grant plan for employees to create a form of ownership and loyalty to the company.
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