AnalysisBursa

14 things to know about Top Glove before you invest (updated 2020)

Top Glove Corporation Berhad manufactures and sells natural rubber, nitrile, and vinyl gloves. It is the world’s largest glove manufacturer with 26% of market share globally and aims to grow its market share to 30% by 2020. Top Glove currently has an annual manufacturing capacity of 64 billion pieces of gloves.

Here are 14 things to know about Top Glove before you invest:

1. Top Glove derives most of its sales from its export business to 195 countries. It distributes 20% of its gloves of its own brand directly to end users and through an online platform. Original equipment manufacturing (OEM) gloves contributes to 80% of its product portfolio. Its clients come from various sectors ranging from medical to manufacturing and food processing.

2. Top Glove aims to be a Bursa Malaysia Top 20 company by 2020 and Fortune Global 500 company by 2040. Top Glove is currently a constituent of the FTSE Bursa Malaysia KLCI that features the 30 largest companies on Bursa Malaysia. However, Top Glove was accused of compulsory labour, excessive overtime, debt bondage, and passport confiscation by The Guardian, and subsequently denied the allegations. The global market is key to Top Glove’s continued growth and chairman Tan Sri Dr Lim Wee Chai believes it’s important to follow the rules when doing business with the U.S. and Europe.

3. Top Glove foresaw that demand for natural rubber gloves would remain stable when it listed in March 2001 as synthetic gloves could not mimic the high elasticity and tensile strength of natural rubber gloves. Despite this, the demand for nitrile gloves has grown considerably. Nitrile gloves overtook latex-powdered gloves as Top Glove’s best-selling glove in 2017.

Source: Top Glove annual reports

The changes are in line with the gradual shift in Malaysian glove exports from natural rubber to nitrile gloves. This is due to some people being allergic to the protein found in natural rubber gloves, which is not ideal for medical practitioners.

4. The glove industry is a largely resilient one. Gloves are a necessity and cannot be reused for hygiene reasons. Global rubber glove consumption grew at a compound annual growth rate (CAGR) of 8.0% from 2000 to 2018. Demand is expected to grow moving forward due to increasing healthcare standards, growing and aging populations, and increasing usage in the non-medical sectors.

Source: 2019 Hartalega AGM presentation slides

5. Some of the business risks Top Glove faces include fluctuations in raw material prices, foreign exchange rates, and utility costs. In the face of competition, it cannot fully pass on these cost increases to customers. It was estimated by an analyst that Top Glove could only pass on between 50% to 80% of cost increases.

6. Top Glove chairman, Tan Sri Dr Lim Wee Chai, his wife, Puan Sri Tong Siew Bee and his brother, Lim Hooi Sin are among the company’s board of directors. The chairman’s son is also part of the senior management. They collectively own a 35.8% stake in Top Glove as of October 2019. It is good to see the founder and management having some ‘skin in the game’ as this aligns them with shareholder interests.

7. Top Glove relies on a two-pronged approach to grow — organic and inorganic growth. In terms of organic growth, its annual manufacturing capacity rose massively from 3.2 billion pieces in 2001 to 64 billion pieces in 2019. For inorganic growth, Top Glove has looked at mergers and acquisitions as well as ventures into related industries ranging from rubber plantations to medical catheters, which the chairman thinks ‘is not rocket science’. The chairman views a company of Top Glove’s size needs to diversify in order to grow further.

8. Top Glove set aside RM30 million to invest in a new condom manufacturing factory to produce OEM and own brand condoms. The rationale for the investment is its attractive profit margins and valuations. In the chairman’s opinion, the condom industry also uses similar raw materials, production processes, and marketing strategies as the glove industry. Top Glove aims to grab a 5% share of the global condom market but will face hurdles as evidenced by Karex Berhad‘s — the world’s largest condom producer with 15% of global market share — recent challenges in condom supply overcapacity and government funding cuts.

9. In April 2018,  Top Glove acquired Aspion Sdn Bhd from Adventa Capital Pte Ltd for a total of RM1.4 billion. Of which, RM1.2 billion was settled via a combination of internally generated cash and loans, while the rest was satisfied via a rights issue. Three months later, Top Glove discovered irregularities in Aspion’s balance sheet and claimed that the inventory, plant, and machinery as well as acquisition price were overstated by RM74.4 million and RM640.5 million respectively. As a result, Top Glove sued Adventa Capital and its directors, Low Chin Guan and Wong Chin Toh, for RM714.9 million. Litigation is still ongoing as of December 2019. After the news, Top Glove lost RM3.8 billion or 24.6% of its market capitalisation in one day. An extraordinary general meeting was subsequently held to remove Low from the board of Top Glove. The chairman said Top Glove would be more careful with its future mergers and acquisitions but not be deterred from making additional acquisitions to fuel its growth agenda. In my opinion, Top Glove needs to improve its capital allocation and due diligence in order to preserve shareholder value.

10. Top Glove ended up 2019 in a net debt position of RM2.3 billion. It took on debt to acquire Aspion and fund its ongoing expansions. Its total-debt-to-equity ratio stood at 0.95 as at 31 December 2019. The chairman has stated that Top Glove can still continue to acquire other companies as long as the gearing is below 1.0. A ratio below 0.5 may be more ideal for more conservative investors.

11. Revenue has grown at a CAGR of 21.8% over the past 19 years. In 2019, revenue grew by 13.8% year-on-year because of robust sales growth of nitrile gloves. Revenue has increased every single year except for 2011, 2o13, and 2014. In 2011, the U.S. dollar weakened against the Malaysian ringgit, which impacted Top Glove’s revenue which is reported in U.S. dollars. Top Glove was affected by higher raw material costs the same year. In 2013-2014, the average selling price of gloves fell due to heightened competition which affected revenue.

Source: Top Glove annual reports

12. Net profit excluding one-off items is slightly choppy over the same period but increased at a CAGR of 18.2%. In 2019, net profit dropped 16.2% year-on-year because of higher rubber prices, competition, and losses in the vinyl segment. The drop in net profit in 2011, 2013, and 2014 was due to the same reasons mentioned above. Higher raw material prices also impacted Top Glove negatively in 2017. It has good quality earnings as its cash-flow-to-net-income ratio is at 1.2 over the past 19 years. Its ROE has averaged at 16.3%, which is above the benchmark of 15.0% we normally look for.

Source: Top Glove annual reports

13. Top Glove has the second highest EBITDA margin and the third highest EBIT margin among Malaysian glove manufacturers. The top four companies in the table below are sometimes collectively known as the Big Four by the media. (Malaysia is the largest glove exporter and producer with 63% market share in 2018.)

NameEBITDA MarginEBIT Margin
Hartalega22.9%19.4%
Top Glove13.5%9.5%
Kossan Rubber13.2%9.6%
Supermax11.4%8.5%
Comfort12.0%9.0%
Careplus8.4%2.2%
Rubberex15.2%9.4%

14. Overall, dividend per share has been on an upward trend, which is good news for income investors. Top Glove has a dividend policy of distributing not less than 50% of its net profit to shareholders each year.

Source: Top Glove annual reports

The fifth perspective

Being in the right growth industry, Top Glove is almost a 100-bagger if an investor invested in the stock from its listing in 2001, which is impressive. Along with Hartalega, Top Glove looks set to benefit from the rising global demand in gloves. However, investors need to watchful of its debt level and the quality of acquisitions moving forward.

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Shak Chee Hoi

Chee Hoi is an investor and research analyst at The Fifth Person. He was previously involved in wildlife conservation work with a non-governmental organisation as well as sustainability consultancy work. He personally believes in impacting society and the environment for the greater good.

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