It would be an understatement to say that the last 12 months have been a trying time for Top Glove Corporation Berhad (SGX: BVA).
The largest glove manufacturer in the world was beset by a litany of problems.
At the top of the list was a ban by the US Customs and Border Protection (CBP) on glove imports in the country.
Back in July last year, the US CBP imposed a detention order on the group, citing instances of forced labour.
To make matters worse, Malaysia’s largest COVID-19 cluster broke out in one of its dormitories in December last year.
The Malaysian government then threatened to take legal action against Top Glove for poor worker accommodation standards. Fortunately, the group has escaped relatively unscathed.
With all the bad news, it’s refreshing to see good news, for a change.
Just last week, the group announced that the US CBP had lifted all restrictions and that all disposable gloves made by Top Glove will be allowed into US ports beginning 10 September.
Investors cheered this good news by sending the group’s shares soaring by as much as 9.8% to S$1.23 during the day.
Shares eventually settled at S$1.13 but the big question here is – can the momentum continue hereon due to the lifting of this ban?
An important market
Top Glove exports its products to around 195 countries around the world and has over 1,600 customers and seven distribution hubs.
North America took up 18% of its total volume for the first nine months of fiscal 2021 (9M2021).
The US is also one of the group’s seven distribution hubs, making it an important export location.
In addition, the US also had one of the highest per capita glove consumption in developed countries in 2020 at 300 pieces per person, according to independent research firm Frost and Sullivan.
In contrast, consumption in China, India and Indonesia amounts to less than nine pieces per person.
From these statistics, it appears that the group should benefit significantly from the lifting of the ban by US CBP.
A culture of continuous improvement
The US CBP saga and Malaysian government fiasco have also highlighted some positive aspects of Top Glove.
First off, its directors have not shied away from admitting responsibility for the poor worker accommodation conditions.
They acknowledged the weaknesses highlighted by the government and US CBP and strived to improve conditions.
By April this year, the group announced that it had resolved all 11 of the US CBP’s indicators of forced labour, paving the way for the lifting of the ban.
Secondly, during its recent fiscal 2021 third-quarter briefing (3Q2021), Top Glove also committed to investing RM 200 million to construct worker hostels for 14,200 people.
The group has also adopted admirable ESG practices by installing solar power systems at two of its factories, partnering with an energy developer to reduce its carbon emission intensity, and building facilities to harvest rainwater to save on water resources.
What the above examples illustrate is a culture of admitting to errors made and making the necessary improvements, all while maintaining a positive spirit of being candid with its shortcomings.
The management’s consistent efforts to engage the investment community to keep them abreast of what the group is doing to resolve these issues is yet another positive.
Tailwinds and headwinds
Despite the good news, the group is not totally in the clear just yet.
Executive director Lim Cheong Guan has flagged out the problem of declining average selling prices for its nitrile gloves.
This is a problem that other glove manufacturers are also facing and is an industry-wide issue.
However, the good news is that demand remains robust for rubber gloves even though vaccination rates are rising for most of the developed world.
There are also strong catalysts in place that should benefit the group over the medium term.
Production capacity is set to increase every year from the current 100 billion gloves per annum to 138 billion by the end of the calendar year 2022.
Top Glove has even planned out its capacity expansion till the end of 2024, seeking to double its current capacity by then.
Its proposal to list on the Hong Kong stock exchange recently lapsed on 26 August, but the group intends to renew the listing application and will continue to pursue the proposed dual listing.
Get Smart: Full-year results out soon
Although there are near-term headwinds, the longer-term prognosis looks healthy for the glove manufacturer.
Investors should stay tuned for the group’s latest financial update when it releases its fiscal fourth quarter and full-year results ended 31 August 2021 on 17 September.
Aspects to watch out for include the progress on the worker dormitories, nitrile glove ASP and the level of worldwide demand for gloves.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.