Industrial Products: Top Glove Corporation Bhd

Introduction
Malaysia is the world leader (Boleh la!!) in rubber gloves, with a market share of ~60%, followed by Thailand (~25%), Indonesia (~10%), China and Sri Lanka. Following consolidation of the many players in 1980s & 1990s, they are now just a few of them and enjoying an oligopolistic (very dominant) position, this will make it harder for new entrants to achieve economies of scale (make more & sell them cheaper through bulk selling).

Here comes Top Glove Group which was established in 1991, an ambitious and nimble company that has grown to become the world's largest glove manufacturer under founder Tan Sri Dato Sri Lim, Wee-Chai and is still the Chairman. It has 19 factories across Malaysia, Thailand & China (as of August 2009) with 355 production lines making 33 billion pieces per annum. Top Glove alone supplies 23% of the global market, exporting to more than 180 countries especially to USA, Europe and Far East (Japan, HK and Taiwan).

The demand for rubber gloves is expected to grow around 10% pa, owing to better health awareness and standards. Demand for growth is quite recession-proof because a large % of them are being used in healthcare sector. With the increase in fast food consumption (good correlation with health problems), growing aging population, health threats like SARS/H1N1 & emerging developing countries like BIRC (Brazil, India, Russia and China), I find that the 10% pa figure by economists to be optimistic. Good news for Top Glove and other rubber glove companies in Malaysia (which are competitors):

• Supermax Corp Bhd (14 bil pieces per annum)
• Kossan Rubber Industries Bhd (11 bil pieces per annum)
• Hartalega Holdings Bhd (6 bil pieces per annum)
• Latexx Partners Bhd (6 bil pieces per annum). A good friend of mine made this research already here at The Fool Investor

Fundamental

1. Does the company have an identifiable durable competitive advantage?

Being the largest rubber glove company in the world, it can produce high quality gloves with efficient low cost. Economies of scale & its dominant position are Top Glove's competitive advantages.

2. Do you understand how the product/service works?

Rubber gloves are not only used in healthcare but also in the food and services industries for hygiene purposes. As such, it is anticipated that the demand to stay resilient (stable) even with the global economy being sluggish.

3. What is the chance that it will become obsolete (KO) in the next twenty years?

Definitely NO. Ask yourself, is there any substitute for rubber? Is like asking what other material apart from rubber can be used to make condoms :)

4. Does the company allocate capital exclusively in the realm of its expertise?

Yes, they are moving forward in a two-prong growth strategy. Vertical strategy on the downstream via overseas marketing offices, upstream via take overs of smaller companies involved in the rubber sector. Horizontal strategy by increasing sales in new flavours via R&D and value added products.

5. What is the company's financial history and status?

• Net Profit Margin is in the 10-15% range. Nothing special as the other competitors have these kind of figures as well, though Top Glove enjoys better average margins most probably due to its economies of scale.
• Return of Equity which means how much shareholders get in return of investment is in the 20-30% range over the last 10 years.
• Revenue Growth Rate saw a tumble since 2007. This is due to the drastic increase in the cost of raw materials of latex and fuel. Also affected slightly by the strengthening of the ringgit vs the greenback (USD). Soon after that, the world was hit with the 2009 financial crisis and further weaken the growth rate.

• Earnings Per Share & Dividend Per Share is on the rising trend over the past 10 years. If one compares this with the stock price, you can clearly see that the stock price is affected by human emotions (panic & greed) even though the company is growing steadily well. Once again I would like to stress that you should value a company from it's financial ratio/numbers, not just purely from stock price.

6. Is the company conservatively financed?
Yes, with RM185mil in cash and bank balances enabling the company to deal with rising commodity prices like latex and to fund potential expansion plans. They did have do have the occasional short term borrowings but has been paying back effortlessly thanks to a good balance sheet. D/E ratio is at 0.02 (which is negligible) while in the last 5 years has never exceeded my trigger limit of 0.5.

7. Is the company actively buying back its shares?
Amount of treasure shares (buy backs) stands at 6.6 million units. There has also been a 1:2 share split in Year 2005 and also many bonuses. All of these add value to shareholders in terms of equity.

• Year 2002: 3/10 Bonus
• Year 2003: 2/5 Bonus
• Year 2007: 2/5 Bonus

8. Is the company free to raise prices with inflation?
According to Dynaquest, they did pass on the cost increase to its customers in the year 2009. With the increasing thrust & volatility of latex and oil prices, passing cost to the customers is inevitable not just Top Glove but to the rest as well.

9. Are large capital expenditures required to update plant and equipment?

Because it is a manufacturing company, capex are always required to boost production capacity via upgrades or expansion. Top Glove is no different and is investing about RM100mil to increase production of its five plants in Malaysia. This will up the capacity to 41.25 billion from 33 billion by 2011 (looks like company is anticipating at most a 10% growth in demand).

Discounted Cash Flow Analysis

DCF treats a company as a business rather than just a ticker symbol and a stock price which most blind people think that price only matters. It requires you to think through all the factors that will affect the company's performance and gives you an appreciation for what drives stock values. Go to Investopedia.com and learn.

I have estimated that TOPGLOV's revenue growth rate is at 10% averagely following demand %, with 85% operating cost margin, 25% corporate tax, 2% re-investment (~RM30mil a year) but a growing working capital in tandem with revenue growth at 10% for the next 5 years. Having computed all these in my opinion it is fair to buy..

TOPGLOV at RM6.90 to RM8.40 for ~15-13% discount rate.

From its listing in 2001 to 2010 the stock would have appreciated by 1200% not accounting dividend reinvestment which would give you more. Is the stock overvalued? I would say Yes based on FCF (free cash flow) & some technical indicators, a value of ~RM12.00 is only appropriate if I did assume the revenue growth rate at 15% but as an optimist and the company's expansion plan, 10% is more sensible. Having bought them during the start of the bull run and sold at ~RM11 this is merely short term profit riding for me on bad times > good times. One would only do this sort of profiting if I find that the underlying fundamentals of the company is good and NOT solely because of stock price as have been explained earlier.

What Do I Think? 

The time to buy is too late, over the last three months has seen the price hovering at RM12.00 level (saturated). Also with this industry being quite competitive and at most times volatile (revenue margins dependent on latex and oil prices), there is a lot of risks at stake and it is in my honesty to say that it only makes it harder to value such company. I do like the fact that Top Glove has consistently being rewarding their shareholders with dividends & bonuses.

TOPGLOV is a good stock if one follows the trend in commodity prices & also to follow the demand of rubber gloves of different categories such as powder-free latex gloves & the increasing demand of nitrile gloves. Plus be on the lookout for the next global pandemic (if you watched Discovery Channel like me) you will know that viruses keep mutating so it is not a matter of will it but when.


Because the rubber glove and plantation sector in Malaysia is one of world-class, their stocks tends to be on the limelight thanks to hot news & bullish analysts. The result? Simply panic & greed. The prices of these stocks will fall hard during bad times and go up high when it is in Disneyland especially the blue chips. 

My strategy is simple, if I need short term funding, buy during bad times and sell at good times. If I look forward for long term then I will need to monitor closely perhaps by quarterly. This stock is not as easy as buy, hold, sleep and wait as they are just too many uncertainties for me to relax.

**I would one day like to compile a grandmother story with a side-by-side comparison of all the major rubber gloves companies as well as plantation companies for they are world-class Malaysian companies. It is wise to know in depth how these companies compare to each other and why they are important to Malaysia. There are many other financial ratios I look at as well but to put them into my usual blog writing will make most people blur blur & zzzz...until I get that long writeup done I feel that a short sharing will interest some people to pick up investing as a life skill & dump the gambling mindset that most people have away as a start.

Day 2: Still Suzhou

Woke up the next day by a morning call at 7am & not by sunshine :( Still in the vicinity of Suzhou (city with a population of 6 million) and heading to the famous Suzhou No.1 Silk Factory Co. Ltd. The tour guide apparently said that Suzhou has the prettiest girls in all of China but I have only seen old women and just OK girls...was Tertipu! Maybe her plan to wake us up.

Anyway no pictures were allowed to be taken inside the factory & production area. Sadly I had to use other pictures (not taken by us) but looks almost identical, just imagine/visualize lor.

• Step 1: To sort and treat the killed cocoons with boiling water to separate the filaments bound together and to easily locate the end of the thread. One cocoon can generate a thread of about 1km!
• Step 2: Combine the threads as one is too thin so workers locate the end of 8 threads and unite them before putting them into the spinning machine.
• Step 3 & 4: These are then weaved before being stretched to be stocked as a pile. The pile can be used to make high quality silk items like beddings, quilts & women underwear. Did I say underwear?

Yes, we did made some grand purchases here but not going to disclose more because it is PnC haha. Lunch was awesome at a place called Zhou Xin where we had some 'very the keat' Ramen with fortified pork belly (see for yourself). Again the ramen is drenched in oily soup, a culture of standard Chinese food in China.

With no time to waste we forged ahead to Ruiguang Pagoda which has the longest history considering it was built during the Three Kingdoms period. At 43.2 meters tall, it is a structure of seven storeys built using bricks and wooden beams. There's also the Tiger Hill; gardens with waterfall near the auspicious Light Pagoda.

The famous historical landmark Pan Gate Scenic Area estimated to be around 2,500 years old. It is part of an ancient city wall that surrounded and protected Suzhou from invaders during the Warring States period.

Outside the water gates, we went for a boat ride on Jing-Hang Yunhe (Beijing-Hangzhou Canal) which is a series of waterways in eastern and northern China that links Hangzhou to Beijing. It is the longest man-made waterway (1,747km) to supply grain to capital cities and large standing armies in the north and was built using raw man swt, no machines! Truly a magnificant second wonder only second to the Great Wall.

The last stop for the day was a shopping district of Guan Qian street, center of Suzhou commerce. Books sold in China were darn cheap, the Chinese seem to have more purchasing power than a standard Malaysian when it comes to reading hence the books are 50% cheaper than ours. This explains why Msia pirated DVD is insanely cheap. Because we like to watch TV more than read le.

Back to the hotel after a boleh boleh dinner, at least it was not Ho Au one.

Trading/Services: Genting Malaysia Berhad

Introduction 
Genting Resort was the brainchild of the late Tan Sri Dato Seri (Dr.) Lim Goh Tong, spent all he had in his life without earning an income to develop and expand Genting Highlands without any help from the government until it was completed and opened on 8 May 1971. Now, it is one of the most successful Casino resorts in the world and a primary tourist attraction for Malaysia.

Genting is now a group and has diversified into many other industries such as plantations, property, paper, power generation, oil and gas exploration and cruise boat industries. Distinctive names namely Asiatic, Genting Sanyen and Star Cruises are part of Genting Group. Now Genting is being managed by his son, Tan Sri Lim Kok Thay.

Genting Resorts acquired the entire gaming, hotel and resort-related operations from Genting Malaysia in a restructuring exercise in 1989.  Known as Resorts World Genting now, the resort offers six hotel with 10k rooms, over 50 fun rides, 170 dining and shopping outlets, mega shows, business convention facilities and endless entertainment - all under one roof. Resorts also owns and operates two beautiful seaside properties named Awana Kijal Golf, Beach & Spa Resort in Terengganu and Awana Porto Malai in Langkawi.Is Asia's leading leisure & hospitality company with a market capitalisation of RM17 billion.

Fundamental

1. Does the company have an identifiable durable competitive advantage?

It operates using a traditional business model where game is emphasized and little attention is paid to the environment, this means cramped and smoky casinos. The model has suited regular patrons all these years (72% of the visitors are day-trippers, 28% are hotel guests from AR 2009). This suggest that the resort is catering to gamblers. The younger crowd now have different taste & demands such as fine dining & Western culture. This is something to think about.

2. Do you understand how the product/service works?

Gamblers will emerge whenever there are dice and playing cards. Greed is part of human and will be part of our lives. Casino (Cash In Now) serves usually three distinct markets which are premium a.k.a high rollers, mid market and general gaming. For the super-rich, not-so-rich folks and for folks who just want to have fun (theme parks, entertainment, shopping and MICE). MICE stands for Meetings, Incentives, Conventions, Exhibitions & Events. To name a few, companies like Prudential and MAA have been using Resorts.

3. What is the chance that it will become obsolete (KO) in the next twenty years?
Zero for obsolete. More competitive would be more suited for the next twenty years which is certain. I was also quite shocked to know that there are 60 casinos of different sizes just 3.5 hours away from Kuala Lumpur & 17 more alone in South Korea. This number is still growing as we all know that Asia is a sweet spot for economic growth for emerging economies like Vietnam, China, India and recently Indonesia is coming back. The last three countries has sizable population to take note.

4. Does the company allocate capital exclusively in the realm of its expertise?

Yes, Genting Resorts only spends its capex on leisure and hospitality business but has diversified beyond the borders of Genting Highlands, for example Star Cruises Limited and the Awani Resorts in Terengganu and Langkawi.

5. What is the company's financial history and status?

• Why a big dip in 2000 (1999 finances)? Due to goodwill written off from subscription of Star Cruises shares of RM1bil. Goodwill means buying a stake of another company at more than fair value or book value.
• Net Profit Margin is averagely in the 30% figure. Another good factor of Genting is that they have consistent high occupancy rates of 77% to 90% from 2003 to 2009 which means they are truly maximizing their assets for profit!
• Return of Equity which means how much shareholders get in return of investment is in the 20% range over the last 10 years.
• Revenue Growth Rate has been bumpy. Attributable to Visit Malaysia in 2007, disposal & impairment losses of Star Cruises and etc. Nevermind that, to simplify I'm looking at growth rate over 10 years of 6.88% and over the last 5 years is 12.28% which shows improving performance. This kind of growth rate value is also known as CAGR - compounded annual growth rate.

• Earnings Per Share & Dividend Per Share is on the rising trend over the past 10 years. GENM's dividend payout policy has been in between 20% to 30% per share earnings. Talk about being conservative, where else do they use their money then? Read on.

6. Is the company conservatively financed?
Balance sheet is VERY IMPRESSIVE. No debts and coffers filled with ~RM5bil of which RM3bil in bank balances and RM2bil in money markets (2009).

7. Is the company actively buying back its shares?
Yes, initiated since July 2007 and to date total treasury shares (shares bought back) stands at 208 million units. Resorts has been paying RM710mil for buy backs for the last three years even at times of financial crisis because they have tremendously strong cash balance in hand.

8. Is the company free to raise prices with inflation?
I did not find any info. Thus I took the liberty of using visitor growth rate vs revenue growth rate over the last 5 years. CAGR of visitors at 5% where else CAGR of revenue is ~13% tells us that revenue actually grows faster than the number of visitors. RWG serves the Malaysian market which is 85% of their total visitors & people are willing to spend more every year so cost (with per year our national inflation) does not seem to pose any problem with spending.

9. Are large capital expenditures required to update plant and equipment?

No, Resorts is modeled on a traditional business and does not spend a lot of capex to build nicer hotels and facilities. There is no new room capacity envisaged following their most recent sharing in Investors Forum in September 2009.

Discounted Cash Flow Analysis

DCF treats a company as a business rather than just a ticker symbol and a stock price which most blind people think that price only matters. It requires you to think through all the factors that will affect the company's performance and gives you an appreciation for what drives stock values. Go to Investopedia.com and learn.

I have estimated that GENM's revenue growth rate is at 8% averagely, with 65% operating cost margin, 25% corporate tax, 2% re-investment but a growing working capital in tandem with revenue growth at 8% for the next 5 years. Having computed all these in my opinion it is fair to buy..

GENM at RM2.20 to RM2.65 for ~15-13% discount rate.

You would probably ask why the start of the drop in 1999 and the rise and fall in 2007-2008. Asian Financial Crisis in 1999 and the peak of the bull run at the end of 2007 before some profit taking takes place by smart investors and then the great collapse as we all know it. This is exactly why an intelligent investor must seek buying opportunities during a collapse (bear run) OR to buy at a discount rate from the fair value to ensure you don't overpay for it.

At RM1.30 in between 2001 to 2002 (because nobody would know what's the lowest price you can buy), the stock would have appreciated to RM2.80 in 2010 which equates to 9% returns per annum, not accounting dividend reinvestment which would give you more than a 10% figure. This assumes that you hold the stock through the 2009 financial crisis. Why would you sell anyway? Do you think a stable and rich cash company like Genting will ever see its share price drop to less than RM1 (because Genting Groups has a 50% stake in Resorts)?

What Do I Think? 

The Pros
Damn rich company. Share buy back programme (helps in increasing share price). The only licensed casino operator in Malaysia. RWS won't bite Genting Malaysia as it serves a different market. Still looking for opportunities abroad to diversify income stream because too rich ma.

The Cons
Competition is stiffing up. Gaming landscape is changing so the question is, will younger people still be interested in traditional casinos?


Last say, I would be standing on the sidelines for now seeing that GENM is quite an active stock during trading, a great buying opportunity will come when the market is actually down. The price it is at right now is fairly valued (anything above RM3.20 is overvalued) but it is still better to buy at a certain discount rate at least in the 10% range as risk compensation.

GENM is a good stock but not exactly a great one. Why? My portfolio aims for at least 15% returns per annum and GENM is not really suiting me lately. I could one day diversify and put some allocation into this stable & entrenched gaming company. I'm still young ma so find more risk lor if there is any, what I call an educated risk.