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Tuesday, December 4, 2018

Kossan Rubber Industries Berhad - A Tour To The Automated Plant

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We visited Kossan’s model plant (Plant 16) recently and came back feeling positive on the progress of automation and digitalisation of the Group’s glove manufacturing process. Plant 16, which has an annual production capacity of up to 3bn pcs p.a. or c.11% of total capacity, was fully commissioned in August 2018. The model plant was equipped with automated and computerised systems which help to reduce reliance on workers, improve efficiencies and productivity, and ensure stable production as well as quality consistency. While this would result in cost savings and hence improve the Group’s margin, we reckon it would take some time for the Group to fully implement the new systems at its existing plants. Hence we maintain our earnings estimates and Neutral view on the stock with an unchanged TP of RM4.34. Moving forward, the Group’s performance is expected to be supported by Plant 18 (2.5bn pcs pa), Plant 19 (3.0bn pcs pa) and the expansion in Bidor (45.0bn pcs pa).
  • Plant 16 has an annual production capacity of up to 3bn pcs of gloves p.a. with 8 production lines, which accounts for c.11% of the Group’s total capacity, mainly for the production of the patented Low Derma nitrile glove. The plant was fully commissioned in August 2018. There are a total number of 535 workers in Plant 16, of which around 72% are foreign workers.
  • Computerised control room. Plant 16 has a centralised control room equipped with computerised systems which enable digital monitoring of all the production lines. The system, which replaced the previous handwriting method, aid to reduce human error and dependency on foreign labour. Going forward, the Group plans to duplicate this system at its existing plants. In addition, the Group also has a control room to automate latex mixing process, which further reduces its manpower from previous 12-15 staffs to only 5 staffs currently.
  • Automated layering machines. Kossan has developed its own in-house patented “capture type” of layering machines, which is more advanced than the older version of “roller type” of stripping machines as the former is capable of counting exactly the number of pieces of gloves it strips off from the glove formers. Apart from that, the Group is in the midst of developing its in-house packaging machine, which is currently a manual process, with the aim to remove two third of the number of workers required for packaging. Note that packaging is the most labour intensive area in the entire gloves production process for all the glove players.
    As a result of the digitalisation and automation, the model plant has managed to reduce reliance on workers to 2.5 workers per million pcs of gloves as compared to 3 workers per million pcs of gloves in other existing plants (including all staffs). The Group aims to further reduce the number to 1.2 workers per million pcs of gloves for the model plant once it automated its packaging process by next year. Also, we understand the Group also started to optimise its manufacturing process to reduce the energy and chemical consumptions, which should see further cost savings.
  • The only US FDA certified nitrile glove against powerful and illicit drug, Fentanyl. In addition to its halal-certified gloves, Kossan’s Low Derma nitrile gloves (which currently accounts for c.15-20% of the Group’s total production) has recently granted by US FDA with protection against Fentanyl, a powerful synthetic drug that is said to be 25-50 times stronger than heroin and 80-100 times more potent than morphine. While there are several gloves claimed to be fentanyl-resistant, the Group believes that it is currently the first and only nitrile glove in the market to be officially certified by the US FDA with protection against Fentanyl. The Group aims to cater to the law enforcement market which it sees huge opportunities given the severity of fentanyl death which is threatening law enforcement officers, first responders and healthcare workers. In the US, the numbers of deaths linked to opioids like fentanyl have led the government to declare a national public health emergency, and began tapping a USD1bn grant program to help fight the problem in 2017. The recent G20 summit has achieved a breakthrough with Chinese President Xi agreeing to label fentanyl a controlled substance, after years of pressure from US as its people were illegally buying this drug from producers in China.
Source: PublicInvest Research - 4 Dec 2018

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