I will start the post bluntly – I never found the glove-making business a sustainable industry with a wide moat. Even though most Malaysians would know them and their ticker symbol by heart – Hartalega Holdings Berhad (KLSE: HARTA), Top Glove Corporation Bhd (KLSE: TOPGLOV), Kossan Rubber Industries Bhd (KLSE: KOSSAN).
In fact, I was one of the few voices that was bearish when glove counters were in euphoria 5 years ago during the onset of the pandemic.
As the one-off bumper earnings taper into a distant memory, most glove companies have more or less distributed their windfall earnings through special dividends, while also embarking on value destruction moves by firstly doing share splits, and later buying back shares when market went into a free fall.
Yes, share prices have rebounded from the trough post their euphoria lows, but unless you are waiting for the next pandemic, the fundamentals that once propelled Top Glove, Hartalega, Korean and Supermax are long broken. And we are witnessing a sudden selloff yet again.
Now that I got the long-term glove bulls all riled up, let’s table out the facts on the rise and fall of the these glove making companies.
The broken growth momentum
Growth is non-negotiable in the capitalistic world we live in. Share prices going up can and will only be justified by increasing profit. And increasing profit is ultimately achieved by getting more revenue.
When glove companies were reporting better sales and margins, holding the world hostage with historical high average selling prices (ASP), they were experiencing their own “NVIDIA moment with AI”.
While everyone was clamouring on the limit-up happening on glove stocks, I was scratching my head profusely. This is just one-off right? What happens when things normalises?
Post 5 years today, things have definitely normalised. Wearing gloves and face masks is a thing of the past. And chances are, you’ve already uninstalled the MySejahtera and TraceTogether apps.
Meanwhile, TOPGLOV, HARTA and KOSSAN are still experiencing revenue contraction, unable to return to the steady growth trend they’ve shown before the COVID era.
Whipsawed margins
Looking at the gross margin trends, the disparity over the last 10 years is too jarring.
During the COVID era, if a pair of gloves cost $1, at the peak of their gross margins, these glove companies are pocketing $0.60 after factoring in manufacturing and material costs.
Today, even if the selling price remains the same, these glove companies are only taking $0.08- $0.11 for every $1 in revenue. And we haven’t factor in marketing and administrative costs, on top of the management salary.
A decreasing revenue trend and cratered gross margins – its easy to nail down the inference: the business is broken, as of now.
Beating China in the game of economic scale and cost?
Not to forget, China was also at the mercy of the COVID onslaught. And post-COVID, glove companies mushroomed across China.
How significant was this shift? Imagine having a global market share of 70% chopped all the way down to just 40-50%.
I have an investing tenet that I hold closely to my heart: when it comes to economies of scale and cost, just like in badminton, most likely you’ll end up losing to China.
People might doubt the Chinese market and lean into the pessimism. But when it comes to scale and cost efficiency, no one beats them. We are seeing the exact same scenario unfolding in the EV industry.
This is an insurmountable threat, and the harsh reality is, Malaysia glove companies are heading towards the same fate as our national badminton legend, Dato Lee Chong Wei – playing second fiddle.
The Trump’s tariff-laden regime
Mr Tariff is back, and the “apertariff” is served.
Trump has just started the tariff war on China, with China made gloves easily on one of the crosshair.
While Trump has been known to use tariffs as a threat to bring the opposing party to the negotiating table, the one that he laid out for China, won’t be for negotiation purposes. With the tariffs kicking in effectively the moment the fireworks went out on 1st of January 2025, that meant that importers had already been scrambling to stockpile China-made items before the New Year.
Malaysia might escape the tariff target. But other glove makers in the likes of Sri Trang Gloves (Thailand) Ord Shs F (SGX: STG) and Riverstone Holdings Ltd (SGX: AP4) are also aiming to benefit from the tariffs laid on Chinese glove makers.
The contrarian in me sees another risk – with China affected by the US tariffs, the factories will be more than willing to supply to the rest of the world. This is not a sanction, so China is more than free to sell their gloves to the world ex-US.
Why Supermax Group, Riverstone & Sri Trang is less/not affected by the selloff?
While Supermax Corporation Bhd (KLSE: SUPERMX) saw a lower magnitude selloff compared to its peers, I can only attribute this to the more diversified business the company has.
Over the years, Supermax has diversified into the contact lens business as well. While it is still predominantly a glove company, the diversification would allow the company to see lesser selloffs if the China dumping were to happen.
As of Riverstone and Sri Trang, in terms of sheer size, they are still dwarfed out by Harta and Topglove. Thus, the pessimism in how market has loaded up on China gloves hit the big boys harder, as the price had rallied last year in anticipating for an easier roadway to growth with China glove companies not competing for the US market demand.
Verdict
Contrary to what the experts and analysts think, I think investing should focus less on the numbers. If revenue and profit rises, the prospect for growth is there, there really isn’t much need to go deeper into ASPs, rubber prices, or market share analysis.
I don’t really keep track of YouTube’s total viewership. I just know that from a glance, more hours are spent on YouTube, and YouTube is pulling in more advertising revenue.
The moment there is a need to go deeper in the numbers, is often when the fundamentals start showing cracks.
While the Malaysian glove makers are not lousy businesses, I find the need to constantly track ASPs and rubber prices too much of a hassle to justify their over or undervaluation.
Even if this turns out to be a bumper year for Malaysia glove companies, do take note, the Trump term only lasts for 4 years.
That is definitely too short of a timeframe to convince me that the Malaysian glove making business is for long-term investing.
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