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Friday, September 23, 2016

Top Glove eyes Thai expansion on Malaysia risk

Friday, 23 September 2016 | MYT 11:56 AM
Top Glove eyes Thai expansion on Malaysia risk

“We could have expanded much more” in Malaysia if there hadn’t been any disruptions, Lim said

KUALA LUMPUR: Top Glove Corp. is focusing on Thailand to boost its production capacity as shortages of workers and water at home disrupts its expansion spree.

The company, which doubled its factory capacity in Thailand’s Phuket this month, will increase its output size by 100 percent at another plant in Songkhla that borders Malaysia, Chairman Tan Sri Lim Wee Chai said in an interview Thursday. Favorable tax breaks in Thailand and the ease of hiring workers prompted the company’s decision, he said.

The stock gained 0.4 percent at 9:54 a.m. in Kuala Lumpur, set for the highest close in three months.

”We expanded a lot in Malaysia, but now we need to diversify because the risk is high,” Lim, 58, said at the company’s headquarters in Setia Alam, a town outside of Kuala Lumpur. “The Thai government is very supportive, they have an eight-year tax-free incentive; they don’t have foreign workers problem.”

Top Glove, which commands a quarter of the world’s glove market, has suffered from rising costs in Malaysia with the doubling of foreign worker levies this year and employment policy flip-flops that have disrupted production. Manufacturers had earlier this year warned the government that sudden changes in policies as the nation tries to cut reliance on overseas labor are threatening businesses and jobs. The Southeast Asian country is the world’s fifth-largest natural rubber producer with gloves forming the bulk of rubber product exports.

Malaysia suspended the recruitment of overseas workers in February, only to lift the freeze partially on new foreign labor hires to four sectors including manufacturing in May. Still, the country can’t continue to increase its intake of foreign labor, according to Mah Siew Keong, the plantation industries and commodities minister on Tuesday. The ministry, which oversees the rubber sector, is instead seeking incentives for more mechanization to cut reliance on foreign labor.

Top Glove has 22 glove factories in Malaysia, two in Thailand and one in China, with a combined production capacity of more than 46 billion pieces per annum.

“We could have expanded much more” in Malaysia if there hadn’t been any disruptions, Lim said. “Thailand has a good future for the glove industry. Business issues in Malaysia are not critical but it makes Thailand very attractive.”

Slumping Shares

Shares of Malaysia’s largest glove makers including Supermax Corp. and KossanRubber Industries Bhd. have slumped at least 29 percent this year, making them among the worst performers on a gauge of the nation’s top 100 companies. They were among the biggest winners in 2015 as the ringgit’s drop to a 17-year low bolstered their dollar earnings.

“There are still high downside risks to Top Glove’s earnings from the unfavorable operating environment and intensified pricing pressure from sector capacity influx,” Walter Aw, analyst at CIMB Bank Bhd. wrote in an Aug. 31 report. “The group’s earnings are the most susceptible.”

Shares of Top Glove surged 200 percent last year. The stock is down 30 percent this year.

“The ringgit has stabilized and last year’s extraordinary gains from dollar sales might not be repeated for this financial year,” Lim said. “We will still grow, but it would be back to normal growth.”

Top Glove’s third-quarter profit tumbled 40 percent from the preceding quarter, highlighting the change of fortune for exporters as dollar sales gain were no longer being boosted by a weaker ringgit.

“The third quarter was the beginning of the new normal. The delivery times for our products are getting longer, which indicates that the oversupply situation is easing,” said Lim. The company is slated to announce its fourth quarter results next month and is aiming for 10 percent growth in revenue in the next financial year, he said.

The company is still searching for acquisitions. “We are still talking to other glove makers for potential M&A. We would only buy if it is value for money,” said Lim, who expects valuations to come down further with the foreign-exchange gains easing.

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