Established in 1991, Top Glove Corporation manufactures and exports gloves to more than 195 countries worldwide. It is the world’s largest glove manufacturer that owns 26% of the world’s glove market share. Its factories are located across Malaysia, Thailand, Vietnam, and China. Besides gloves, the company produces healthcare and household products such as face masks, bacterial handwash, condoms, and dishwashing liquid.
Top Glove has performed incredibly well in the past two years, owing to ballooning glove demand and prices during the pandemic. As the demand softens, the company’s share price followed suit. Here are 10 things I learned from the 2022 Top Glove AGM.
1. Revenue rose 126.1% year-on-year to an all-time high at RM16.4 billion in 2021 because of robust glove demand and higher average selling prices of gloves amid COVID-19. Likewise, net profit soared more than fourfold to RM7.7 billion over the same period. In fact, the net profit recorded in 2021 alone exceeded the combined net profit posted over the past 20 years.
2. After a stellar year, the glove business is returning to normalcy. The average selling prices of gloves are slowly reverting to pre-pandemic levels amid the successful roll-out of vaccines. In general, customers now adopt a wait-and-see approach and delay restocking gloves as glove prices fall. As a result, Top Glove’s revenue and net profit in Q1 2022 fell 66.7% and 92.1% year-on-year to RM1.6 billion and RM185.7 million respectively.
On the plus side, raw material costs that make up of about half of the costs of goods sold are also expected to trend down. Top Glove’s manufacturing utilisation rate stood at 65% in December 2021 and is forecast to reach 75% in 2022 as customers start buying back more gloves.
3. Dividend per share was up 452% year-on-year to 65.1 sen in 2021. Dividend payout ratio stood at 68% in 2021 in line with its dividend policy of paying not less than 50% of PATAMI as dividend to shareholders. Dividend payment will revert to twice yearly as it was in the past, compared to quarterly dividends during the pandemic.
4. Executive director Lim Cheong Guan understands that good times don’t last forever. In fact, some of the company’s expansion plans has been deferred in light of the glove supply and demand situation. Top Glove aims to double its annual manufacturing capacity from 100 billion pieces of gloves in 2021 to 201 billion in 2025. Lim expects pricing pressure on gloves as new glove players across China, Thailand and Vietnam enter the industry. He believes industrial consolidation may happen in the near term, and may present potential merger and acquisition opportunities to the company. Top Glove has been in the industry for 30 years and the management is confident to ride through this competitive business cycle.
5. Lim believes that annual global glove demand will increase between 10% and 15% post-pandemic across medical and non-medical sectors compared to the previous growth rate of between 8% to 10% per annum. Glove usage in developing countries remains low compared to the developed world, and the strong demand for natural rubber gloves in developing countries presents a growth opportunity for the company.
6. North America accounted for only 15% of Top Glove’s sales volume in 2021 compared to 22% in 2020. The sales volume dropped because the U.S. Customs and Border Protection temporarily banned the import of Top Glove’s gloves into the country due to evidence of forced labour practices. The ban was lifted in September 2021 and sales to the U.S. gradually resumed to previous levels.
7. Top Glove has since improved its labour practices. It returned more than RM150 million to its 13,000-strong migrant workers who had paid recruitment fees to agents to join the company. Migrant workers made up of 55% of its employee headcount in 2021. About RM220 million was spent to build better accommodation for the workers.
The company will continue to wean off its dependence on manual labour by investing in automation and digitalisation, thereby improving its competitiveness and product quality compared to overseas players. Workers per million pieces of gloves decreased from 4.0 to 1.6. Top Glove aims to be net zero emissions by 2050 and will disclose the targets accordingly once the management irons out the details.
8. Minority Shareholder Watch Group highlighted that general expenses increased from RM551.0 million in 2020 to RM958.0 million in 2021. Lim explained that the increase was due to:
- RM191 million donation to the Malaysian COVID-19 fund and communities
- Increased headcount, staff costs, and performance incentives to deal with the surge in glove demand
- Higher allowance for inventory write-downs and write-offs in relation to the U.S. Custom and Border Protection’s import ban
9. Top Glove’s factories were not spared from the recent flood that ravaged parts of Peninsular Malaysia in December 2021. Six of its factories located in Meru, Selangor was impacted for five days. Damages caused its machinery were covered by insurance according to Lim. He mentioned that the company will improve its drainage system around the area by building a retention pond to collect excess rainwater and reduce the incidences of flood. He added that the company’s factories are scattered across different parts of Peninsular Malaysia to minimise production disruption risk.
10. Lim is not too worried about the impact of the prosperity tax on Top Glove as the tax is applied on the company or entity level, not at the group level. About half of its eight to nine subsidiaries that achieve net profit of above RM100 million will be affected by this tax. The management will conduct its tax planning to mitigate the exposure to this tax. On a separate note, its dual primary Hong Kong listing was approved by shareholders previously and is now pending review and approval by the authority.
The fifth perspective
Top Glove has grown by leaps and bounds since it was listed in 2001. Its revenue and net profit have grown at a compound annual growth rate of 27% and 36% respectively over the past 20 years.
The company remains ambitious and has a target to become a Fortune Global 500 company. Lim explains that the company cannot stay stagnant or else it will risk going backwards. It will continue to expand, look into acquiring new businesses in order to record more profit and distribute more dividend to shareholders.
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