THE EDGE MALAYSIA , SEPTEMBER 26, 2005
By Ng Kar Yean 06:06PM (27-09-2005)

Two local rubber glove companies have been grabbing the local dailies' head-lines with their plans to outdo each other to be the world's largest producer. Top Glove Corp Bhd and Supermax Bhd have been touting their plans to up their production capacity aggressively to the investment community. Top Glove chose the route of organic growth, while Supermax has been busy acquiring other rubber glove companies. Conspicuously absent from the rivalry is Kossan Rubber Industries Bhd. According to its managing director Lim Kuang Sia, Kossan deliberately distanced itself. "We don't want to get involved in the fight, we want to focus on the business," he tells The Edge. Kossan has also kept a low profile among investors and analysts.

However, Lim has realised that being silent has its downside, too. This is because the high-profile players have set the benchmark for investors to judge a rubber glove company. Lim is keen to dispel the belief that the better rubber glove company is the one with the larger production capacity. One should also not judge based on future production capacity. "What's more important is how many gloves you are producing now," he says.

Currently, Kossan's 49 production lines could produce up to 3.9 billion gloves per annum. Lim says Kossan is expected to produce 3.7 billion gloves this year. He says if a rubber glove company is only running at about 70% of its production capacity, it is not the right time to expand aggressively. Yet, this is what some players are pursuing to be the world's largest glove manufacturer, he adds. As a rule of thumb, Lim says a glove manufacturing plant that runs below 70% of its capacity is not running at the optimum level as the idle 30% capacity will be a drag to profit. "We will not expand if our existing production lines are running at 70% of its capacity. Our production line is running at more than 93% at all times due to strong demand," he says. Investors could also get a feel on how well a company is utilising its asset by looking at the sales to net fixed asset ratio. For the year ended Aug 31, 2004, Top Glove chalked up sales of RM418.1 million from its RM178.2 million net fixed asset. This means that its sales was 2.34 times its net fixed asset. For Kossan, its sales last year was 2.14 times its net fixed asset, while Supermax's ratio in 2004 was at 1.55 times. This does not mean that Kossan has no plans to increase its production capacity. The company will add another 19 production lines next year, bringing its production capacity to six million pieces per annum. By 2008, another 33 lines will be built, and its capacity will reach 9.5 million pieces.

The expansion plans in 2005 and 2006 will cost about RM43 million, which will be financed by internal funds and bank borrowings. Kossan is also considering reducing its interest cost by restructuring its debt via issuance of private debt securities worth up to RM80 million. Some of the proceeds will be used to finance its expansion. Lim expects the exercise to take place early next year. As at June 30, 2005, the company short- and long-term borrowings stood at RM55.80 million and RM11.60 million, respectively. For the first six months of 2005, its finance cost was RM1.88 million. Kossan is further distancing itself from its peers by moving away from the low-end powdered gloves, which are used for examination purposes. The powdered gloves segment is where the price war is intense. Because such gloves are easy to make and the quality requirement is low, the buyers place more importance on the price. As such, Kossan is working on transforming its client base from the price-sensitive ones to those who place more emphasis on quality. Hence, instead of targeting buyers of powdered gloves from the developing countries, Kossan will try to secure more buyers from the developed countries that prefer powdered-free gloves, which minimises protein allergy.

Last year, of the 2.78 million gloves it produced, 43.8% were powdered gloves, 43.9% powder-free gloves and 12.3% nitrile gloves. By 2008, Kossan intends to reduce powdered gloves to only 25% of its total production, and up the powder-free production to 57%. Powder-free and nitrile gloves for medical and non-medical use also command a higher selling price than powdered gloves. The prices of powder-free gloves range from US$21 to US$23.5 per thousand pieces. The prices of nitrile gloves are even higher at between US$26.5 and US$32 per thousand pieces, while the price tag for powdered gloves is from US$15 to US$17.50.

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