KUALA LUMPUR: ACE Market-listed rubber glove manufacturer Careplus Group Bhd plans to instal up to 20 production lines at its newly acquired industrial property in Seremban, a move which allows the company to widen its product portfolio as it makes further inroads into global markets.

Executive director and group CEO Lim Kwee Shyan said Careplus, whose portfolio comprises mainly natural rubber gloves, will set up the office block and warehouse before installing the production lines in the facility to be known as factory four (F4).

This is in addition to the 20 lines planned for another facility nearby, undertaken via Careplus’ strategic collaboration with Brazil-based Descarpack Descartaveis do Brasil Ltda.

“The outlook is certainly bright for us,” Lim wrote in an email reply to The Edge Financial Daily.

But he declined to specify the number and type of gloves Careplus will produce annually with the new facilities, only indicating that both entities are about the same size.

According to Careplus’ listing prospectus, the facility undertaken in collaboration with Descarpack will eventually house up to 20 production lines with an indicative annual output of 122.6 million gloves per line. This translates into a potential annual capacity of 2.5 billion pieces from the 20 lines.

Assuming that production lines at the newly acquired land have a similar capacity, the refurbished factory may also be able to churn out another 2.5 billlion pieces of gloves a year, translating into an additional output of five billion pieces a year.  

The potential output adds to Careplus’ production of 420 million gloves.

The company also indicated in its prospectus that its newly added capacity coincides with plans to venture into the production of synthetic rubber or nitrile gloves. Synthetic rubber is a by-product of crude oil.

To recap, Careplus last Tuesday said it plans to acquire a 37,888-sq m tract of leasehold land with industrial properties in Seremban from Kim Fashion Knitwear (M) Sdn Bhd for RM9.5 million cash. Careplus intends pay out another RM3 million to refurbish the property to expand its glove production capacity.

In June this year, Careplus formed a joint venture with Descarpack to establish Careglove Global Sdn Bhd in which the Malaysian entity has a controlling stake of 50% plus one share.

Careplus will spearhead the glove manufacturing operations while Descarpack will undertake sales, marketing and distribution. The tie-up will enable Careplus to leverage on Descarpack’s global distribution network, which includes South America, Europe, Asia, and Australia.

According to Lim, Careplus will earmark its existing financial resources primarily for capacity and geographical expansion for now, and the company has yet to decide on the quantum of dividends to reward shareholders.

“Earnings from F4 will not materialise so soon as the company intends to focus on its Careglove partnership with Descarpack.

“Careglove is at its initial stage. We are working hard to get all the import regulatory approval requirements (from Brazil ) now,” Lim said, adding that Careglove is due to commence operations in 4Q this year.

To finance its expansion, Careplus had in April announced a plan to undertake the private placement of new shares to raise up to RM25.2 million. The private placement is undertaken together with an issue of free warrants by the company on the basis of two warrants for every existing share in Careplus.

This follows the company’s IPO in December last year where the group had raised close to RM15 million.

Careplus’ growth initiatives come at a time when the rubber glove manufacturing fraternity is contending with headwinds in the form of a weaker US dollar and costlier raw material prices.

A weakening US dollar essentially translates into lower earnings for export-based companies when their dollar-denominated income is converted back into the ringgit.

Against the backdrop, analysts said the once aggressive expansion undertaken by local glove manufacturers had tapered due to less demand for gloves. This is because  customers being aware that glove manufacturers have additional capacity are less willing to pay higher prices for gloves.

They have instead chosen to reduce their inventory in anticipation that prices of gloves will come down when prices of natural rubber decline.

As such, does Careplus’ expansion make commercial sense against the challenging operating landscape?

An analyst said its capacity expansion could be pivotal to address demand from its customers.

“It also depends on the glove manufacturer’s utilisation rate,” the analyst said.

Lim said the glove producer needed to expand its output as its 420-million pieces in annual capacity prior to the group’s listing last year was “almost fully utlised”.

“We have to expand and go for listing,” he said.  

During Careplus’ announcement on its industrial land purchase last Tuesday, the company said its capacity expansion was justified despite the ongoing challenges in the rubber glove fraternity.

The challenges, according to Careplus, include persistently high natural rubber prices and the impact of a weakening US dollar.

The company also said the continuous rise in demand for nitrile gloves as an alternative to natural rubber gloves and overcapacity concerns among industry players presented a different dimension to the challenges.

“Despite these challenges, the Careplus group believes that the industry will remain buoyant and will continue to see an increase in demand as global standards of healthcare and hygiene continue to rise and with the opening of new foreign markets.

“Furthermore, the group has the technical know-how on the production of nitrile gloves, despite that it is currently a natural rubber latex glove manufacturer,” the company said.

In 1Q11 ended April 30, Careplus made a net profit of RM429,000 or 0.2 sen a share on revenue of RM10.56 million. As the group was listed in December last year, there are no comparative figures from a year earlier.

The group, however, said its results were affected by costlier raw materials and stronger ringgit versus the US dollar. Exports constituted 75% of revenue during the period.

As at April 30, Careplus had cash of RM3.79 million versus debt obligations of RM7.23 million, translating into a net debt of RM3.44 million. Its net assets per share stood at 15 sen.

Careplus shares fell 1.5 sen to close at 41.5 sen last Friday, valuing the company at RM87.15 million. The stock has gained 22% so far this year, outperforming the FBM KLCI’s 0.4 % advance.