Not-So-Top Glove

Business Times - The world's
biggest manufacturer
of rubber gloves,
Top Glove Corp Bhd,
has set aside RM100 million this year to buy a rival and
expand its factories. Currently, TG produces 29 billion
pieces of gloves a year, which is about 24 per cent share
of the global market. It aims to capture 35 per cent by
December 2010. The estimated annual demand by then is 160
billion gloves. Cheong Guan, who is also the finance
director, said that TG expects to boost its net profit by
22 per cent to RM125 million for the fiscal year to
August 31 2008. TG is also confident that a slowing US
economy will not affect its business because rubber gloves
are a necessity.

Caveats:
1) A slowdown is a slowdown, how not to be affected. 30
per cent of TG sales comes from the US, rubber gloves.
2) Patent suit pending - Even though the company is
optimistic of winning.The reality may indicate otherwise.
On May 30 last year, the US-based Tillotson Corp filed a
complaint against all nitrile glove manufacturers,
distributors or importers worldwide, claiming to be the
patent holder for nitrile gloves until 2010.
Eight glovemakers, through the Malaysian Rubber Glove
Manufacturers Association (Margma), are contesting
Tillotson's claim. TG is part of the group. However,
Supermax Corp Bhd, which is not part of the group, has
agreed to settle and pay royalty to Tillotson.
3) TG has been able to offset USD weakness by raising
prices: not going forward in a slowdown.
4) Latex prices still pushing higher putting pressure
on margins.
5) Net cash per share only 33 sen and will go to 24
sen next year.
6) Capacity being boosted by 25% p.a. in 2008 and
2009, more stock going into a down cycle.
7) Reduction of tax rebates for China exports will
hurt expansion business model.
8) Its gearing is low as its acquisition spree has
been funded by new shares, however that creates a
huge free float of about 60% with many substantial
shareholders of previously acquired companies.
They won't be sitting around waiting for the grand
master plan to pan out.
9) Net cash flow is about only RM10m in 2008 and is
projected to jump to RM50m in 2009. Still a
projection with many variables.
10) Receivable is about 15%, watch for danger signs if
it gets closer to 20%.
11) Looking for rubber plantations hints at margin
pressures. Looking to do share buybacks
hints of even bigger problems.