Lowering Position in Gloves

Sold all my holdings on Supermax, Kossan, and part of Hartalega recently.

Glove-companies are still one of my favorite investment. The main reason of selling is to further diversify my portfolio into other businesses. After this sale, the weight of glove-companies in my portfolio has drop from previously ~25% to about 14% now.

The Myth of Nitrile Glove's higher margin.

I was among those who think that nitrile glove always had a higher profit margin, hence it should be the better choice for a glove manufacturer...

only untill recently I realised that how wrong this concept is... 

Just like AirAsia making huge profit every year doesn't guarantee that other airlines could earn money in LCC business.... the fact that Hartalega had been maintaining better profit margin doesn't mean that anybody who venture into nitrile glove production will enjoy the same profitability...

Hartalega got its own advantages, e.g. strong R&D and highly automated factory... these factors bring down its cost, make the products competitive enough hence resulted in higher profit margin.... when other manufacturers like Topglov, Supermax or Kossan jump into nitrile glove production, it could be that they only earn ordinary profit (could even lower than NR gloves) if they don't have the high production efficiency as Harta.

following statement is extracted from Supermx 2013-Q1 reports:

"While we are increasing production output of Nitrile gloves, we have been maintaining our manufacturing margins of Nitrile Glove at between 11% - 13% to be in line with global market prices, especially Nitrile gloves from China & Thailand. This is in line with our objective to be globally competitive."

clearly, Supermx's manufacturing margin for Nitrile gloves is much lower that Hartalega, and seems not much superior (if any) compared to its own NR gloves manufacturing...

 x x x

Conclusion --

"higher margin of nitrile glove" is only a myth...

switching to nitrile glove alone doesn't guarantee higher profitability...
there are much more a company have to do for chasing a higher profit margin.

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Bought Supermax

New fund injected into portfolio, bought 7500 shares of Supermx at RM1.85. The new investment result in the glove-companies forming ~28% weight in my whole portfolio now.

a glance of Supermax's historical data:

		RM Million
	Revenue	PBT	PAT
2003	131.2	20.0	17.4
2004	218.4	34.3	30.2
2005	284.7	39.9	36.3
2006	400.3	47.3	39.8
2007	574.3	58.6	55.9
2008	811.8	52.0	47.0
2009	803.6	151.5	126.6
2010	977.3	183.8	159.0
2011	1,021.4	112.1	104.1
2012	1,048.4	140.2	121.5

Supermx is expanding its surgical glove capacity since 2012. According to the management's plan, the nitrile capacity of Supermx will soon be doubled when its new plants are commissioned by next year. This will cause nitrile-glove forming ~50% of the company's total output. 

This change in product portfolio will deliver a better profit margin, hence great potential of profit growth in near future. It's expansion of distribution business in US and Canada will also position the group to secure greater share in these markets.

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Rising latex price & the glove-manufacturers

In this post, we'll see how the rising latex price affect the profitability of the latex-glove companies. (Latex is the raw material for glove-manufacturing, accountable for about half of the operational costs)

Here's the historical price movement of bulk latex:

source: Malaysian Rubber Board, http://www2.lgm.gov.my/Mre/YearlyAvg.aspx

[updated 30-10-2008: pls click here for the updated-verion of the chart.]

From the chart, we can see the recent price of latex is about 150% higher than that in 2001 & 2002. This definitely will rise the operational cost of latex-glove companies. But will it have a significant impact on their profitability?

The following graph shows the EBITDA margins and PAT (profit after tax) margins for the three largest glove-companies in Malaysia:

While the latex price rise significantly from 2002 to 2006, the profit margin of these glove-manufacturers just show a small decline in the same period. This small decline in profit margins could be cause by other factors, e.g. rising financial cost for expansion of production lines.

So, I think we can say the rising price of latex has a minimal impact on the profitabilily of latex glove companies. They are always able to pass on the rising cost to their customers.

Again, I feel that Supermax is the best choice (for investment) among this 3 companies . From the charts, we can see that Supermax's EBITDA margin in 2006 is about 1% higher than that in 2002, while Topglove's EBITDA margin shows a decline of about 2%. This shows that Supermax's management is better in maintaining the company's profitability.

Supermax and other Latex Glove Companies.

the global demand on latex gloves has been growing exponentially in recent years. Since this growing trend of glove market is not likely to stop for the coming years (though it may slow down gradually) , the latex glove manufacturers will benefit a lots from it.

Malaysia's companies are the largest suppliers of latex gloves in the world. There are several latex glove companies listed on Bursa Malaysia. Here's a simple comparison based on their annual report FY2006:

Obviously, the three largest companies are:

1. Topglove
2. Kossan
3. Supermax

The huge production capacity of these companies ensure that they can produce gloves with lower cost than their competitors. Hence they can maintain their profit margin while keep the selling price competitive. When I decided to buy a glove company, I only considered this three biggest companies. After doing some study, I've chosen to invest in Supermax.

The first reason is Supermax has a better earning power. I've create a table to make a comparison between 3 companies:

(I don't have the EBITDA data of Kossan, but the comparisons of EBITDA should be similar to PBT and PAT)

Clearly, Supermax has a highest profit margin among them. This is a result from the continuous effort of its managment in controlling the cost. The 2% difference in profit margin can make a very big difference, especially when the market become gradually saturated and tough competitions occur. So, I think Supermax will become the last winner, though its growth rate in recent years is a little slower than Topglov and Kossan.

At the end of Sep-2007, when the privatisation of Seal Polymer is completed, Supermax is going to beat Kossan and become the 2nd largest glove company. If Supermax privatise APLI in the future, it will become almost same size as Topglove.

Another reason I choose Supermax, is because the price of Topglove and Kossan are already too high. Look at some figures relating the share prices of these companies:

		Topglov	Supermax	Kossan
	PAT '2006 (RM million)	78.4	39.7	39.5
	No. of share (million)	300	227	160
	Earning per share (sen)	26.2	17.5	24.7
	Share price (RM)	6.2	2.4	4.5
	Equity per share(RM)	2.0	1.2	1.3
	Price/Earning ratio	24	14	18
	Price/Equity ratio	3.1	2.0	3.4

* the no. of share & equity per share are based on the latest quarterly report.

Due to my investment prinples, I'll never buy a company that has a PE higher than 15, no matter how good is the company. So, I'll never consider to buy Topglove though it's the biggest latex glove company, unless its share price fall below RM4.50. Besides, Supermax's Price/Earning ratio and Price/Equity ratio is significantly lower than the other two, This make Supermax a better choice for a secure investment.

Reasons of buying Supermax

Let's have a quick look on Supermax. With its current share price of about RM2.40,

• the P.E. ratio based on the profit for FY-2006 is about 13.
• the net asset per share is about RM1.20, about half of its share price.
• the liability to equity ratio is about 1.0

As we can see, the figures are not very attractive. Its share price is not at a bargain level, nor is it very expensive. I may consider its current price is quite 'fair' due to its latest financial condition. I invested in Supermax not because of its cheap price. I invest in it because it is a continuous growing company with a bright future.

As Warren Buffette said, "it's much better to own a wonderful company with a fair price, than buying a fair company with wonderful price".

This is what i feel when I invested in companies like AirAsia and Supermax.

Supermax has some criteria that make it a wonderful company that worth to buy:

1. Simple business model - manufacturing of rubber gloves
2. Growing market for its products
3. Good management
4. Profitability - Consistent profit margin

Let's go through these one by one:

1. Simple Business Model Supermax has only one core business – Manufacturing and selling rubber gloves. It has a wide range of rubber gloves, made of natural latex or synthetic rubber. Its products are mainly for dental and medical use. Most of the products are exported, mainly to U.S. and Europe.

The merge between Supermax and Seal Polymer is going to be completed by the end of Sep-2007. Seal Polymer is involved in the similar business as Supermax. I like a company that grow while concentrate on its core business.

2. growing industry. The demand of rubber gloves has been growing in recent years, due to the growing health conscious and hygiene awareness, especially in the advanced countries like U.S. and Europe's. And the most important point is, the demand on medical gloves will only keep growing, independent of economical cycle. Hence, Supermax has a consistent growing market. From 2002 until now, Supermax’s revenue and profit had recorded an average growing rate of about 40% per year. I’m confident that its growth rate will be maintained above 20% per annum for few more years.

After merging with Seal Polymer, Supermax now has become one of the biggest manufacturers of rubber gloves in the world.

3. Management Team Tthe financial condition of Supermax is better than other glove companies in Malaysia, due to the continuing effort of its management, under the leadership of its CEO, Mr Thai Kim Sim.

Two years ago, Supermax had acquired shares of Seal Polymer and APLI, and became largest shareholder of these companies. Mr Thai had then become new CEO of these companies. At that time, APLI was suffering loss; and Mr Thai had turn APLI into profitable in early 2007. This is an evidence showing his ability of managing a company, especially in reducing operational cost.

about two months ago, most glove manufacturers in Malaysia faced an allegation by Tillotson Corporation (a U.S. company), of patent infringement of nitrile gloves. Supermax then announced that they will pay the loyalty fee to Tillotson Corporation, for all its nitrile gloves selling in U.S. This immediate response shows that Supermax's management is paying respect to intellectual property of other party.

4. Consistent Profitability About 50% of its cost is the raw material – latex. In recent years, the price of bulk latex rose from RM2 per kg (year 2002) to about RM5 per kg now. But the EBITDA margin of Supermax is maintain at about 15%. So I never worried about the rising price of latex, because Supermax is always able to pass the rising cost onto its customers.

Besides its consistency, Supermax's profit margin is also better than average value of other glove companies. So, it will always be profitable while selling its product with a competitive price.

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[updated 10/10/2008]: I sold Supermx at the end of September-2008. Please read this post for the reason.

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