ENVIRO-HUB Holdings Enviro-Hub: L23 +4.41% announced on Thursday (Dec 9) that its indirect wholly-owned subsidiary has incorporated a company in Malaysia through a joint venture with its controlling shareholder Law Siau Woei.

 

The indirect wholly-owned subsidiary, Pastel Glove, has a 40 per cent stake in the joint venture company known as Pastel Care Sdn Bhd, while Law has a 60 per cent stake.

 

Pastel Care' s initial issued and paid-up share capital is RM10 (S$3.24) comprising 10 ordinary shares. Its key business activities will be the retail sale of pharmaceuticals, medical and orthopaedic goods.

 

Its incorporation, funded through internal resources, is not expected to have any material impact on net tangible assets (NTA) per share and consolidated earnings per share of the group for the financial year ending Dec 31.

 

The proposed joint venture between Pastel Glove and Law is subject to negotiations and there is no certainty that they will proceed with the pharmacy business, or if a definitive joint venture agreement will be entered, said Enviro-Hub in the bourse filing.

 

Law, as a controlling shareholder owning 18.5 per cent of Enviro-Hub' s shares, is regarded as an " interested person" based on the mainboard rules of the Singapore Exchange. Meanwhile, Pastel Glove, being a subsidiary of Enviro-Hub, is regarded as an " entity at risk" .

 

Therefore, the incorporation of the joint venture company is regarded as an interested person transaction.

 

However, as the value of the transaction is less than 3 per cent of the group' s latest NTA value and is less than S$100,000, Enviro-Hub is not required to make an announcement or obtain shareholder' s approval under mainboard rules.

 

The company' s audit and risk committee has reviewed the incorporation of Pastel Care and is of the view that it is not prejudicial to the interests of the company and its minority shareholders, Enviro-Hub said.

 

Between Aug 23 and 24, Enviro-Hub Holdings Enviro-Hub: L23 0% executive chairman Raymond Ng acquired 400,000 shares of the environmental management solutions group for a consideration of S$29,800 at 7.5 cents per share.

 

This took his total stake in the stock from 34.70 per cent to 34.73 per cent.

 

Mr Ng is responsible for the group' s overall management, business development, investment decisions as well as strategic direction and planning.

ENVIRO Healthcare, a wholly-owned unit of Enviro-Hub Holdings, has entered a sale-and-purchase agreement for its planned acquisition of the remaining 75 per cent stake in an associate, Pastel Glove, for S$46.8 million.

 

The mainboard-listed company previously disclosed on May 21 that it would pay S$23.4 million in cash for Pastel Glove, and issue 292,500,000 new shares at S$0.08 apiece. There will be a one-year moratorium for the shares.

 

In a Thursday bourse filing, Enviro-Hub said that it will finance the consideration and other fees with internal funds and revenue. As at end-2020, it had a cash balance of S$17.3 million. The company said that the proposed deal would not adversely affect operations.

 

Enviro-Hub had called for a trading halt on Tuesday this week, and asked for the halt to be lifted on Thursday night.

An employee works at a medical glove factory in Luannan county, North China' s Hebei Province. The county, with an annual output of over 4 billion yuan ($619.13 million) worth of medical gloves, has in recent years aimed to build itself into a manufacturing base for this product. Photo: cnsphoto

Chinese glove makers are meeting rising demand from the US and Europe, with new order inquiries jumping by 10-20 percent in weeks, amid production disruption caused by a flare-up of epidemic in Malaysia, the world' s largest rubber-glove supplier. 

In the face of the new orders, major industry players have been working at their full swing to expand production capacity, the Global Times learned.

A person with Blue Sail Group, a leading glove maker based in East China' s Shandong Province, told the Global Times on Thursday that it had received rising orders these days, after production was suspended at factories in Malaysia. More than 90 percent of the orders come from developed countries, including the US and some European countries.

The orders are in line with the company' s expansion plan, with a new production line with capacity of 20 billion gloves annually to go into operation this month. 

Another production line with a capacity of 10 billion gloves is under construction in Weifang, Shandong Province.

Another industry player, INTCO Medical, is part of the trend, with " conspicuous" growth in global orders from many of its clients starting in July, media reports said.

Malaysia recently imposed stricter restrictions on movement, businesses and factories in its capital Kuala Lumpur, as well as neighboring Selangor state, until Friday to fight a spike in new COVID-19 infections, Reuters reported on July 8.

" Malaysian glove manufacturers contribute up to 67 percent of the global supply or 320 billion pieces a year out of 480 billion pieces," The Malaysian Reserve, a business news provider, said in a report earlier in July.

China contributes about 10 percent while Vietnam accounts for 3 percent of the global glove supply, the report said, citing Supramaniam Shanmugam, president of the Malaysian Rubber Gloves Manufacturers Association.

Chinese glove production capacity used to be inadequate, but there have emerged more rubber glove plants since the epidemic outbreak, industry insiders said.

There are 5,384 disposable glove-related companies in China at the moment, after 2,779 companies registered last year and 235 others registered from January to Thursday, data from market information online platform Qichacha showed.

In addition to the newcomers, like the mask industry, some companies produced and stockpiled gloves during the outbreak and they are still in the process of releasing the stockpiles, meaning capacity is sufficient for now, Chen Hongyan, secretary-general of the Medical Appliances Branch of the China Medical Pharmaceutical Material Association, told the Global Times on Thursday.

While the supply chain disruption in Malaysia is driving more orders to China, industry insiders said that the supply chain transformation is increasingly tilting toward China, with or without the outbreak.

" Malaysia is mainly producing natural latex gloves, but the clinical and ordinary gloves used in all walks of life are not latex gloves, but nitrile and other synthetic gloves," Chen said.

The sources of natural rubber are mostly located in Southeast Asian countries including Malaysia, making China heavily reliant on imports for natural rubber, which saw a jump in prices lately. 

In order to reduce reliance on natural rubber, Chinese companies have focused their development and production efforts on gloves made of nitrile. 

This chemical compound is not only less likely to cause allergic reactions and more likely to offer better tensile properties and protection.

" The epidemic caused an increase of raw material prices, so we began to develop raw materials independently, and the production line and ingredients of nitrile gloves were independently developed. The yield is adequate," the person with Blue Sail Group said.

 

Singapore-listed Enviro-Hub Holdings &mdash known for its forays in the recycling and property investments &mdash has diversified into a new business: Glove making. The company, led by executive chairman Raymond Ng, is in the midst of acquiring Ipoh-based glove maker Pastel Glove. The target was set up last September by Law Siau Woei and Choo Kuan Ping &mdash who hold stakes of 97% and 3% respectively &mdash to meet the surge in demand for rubber gloves during the Covid-19 pandemic.

 

On Jan 12, Enviro-Hub announced it is investing US$125,000 ($168,970) for a 25% stake in Pastel Glove, on top of a loan of US$4.87 million. On May 21, Enviro-Hub announced it is acquiring the remaining 75% for $46.8 million, which will be paid using $23.4 million in cash.

The remainder will be settled by issuing 292.5 million new Enviro-Hub shares at 8 cents each. This will make Law the second largest Enviro-Hub shareholder, with a stake of around 19%.

 

Ng, who will remain the largest shareholder, says that investing in the healthcare sector was a long time in the making, and not because of the pandemic. &ldquo We felt a change was needed far away before Covid-19,&rdquo says Ng in an interview with The Edge Singapore.

 

The company, which started off as a provider of heavy construction equipment, moved into recycling and refining of e-waste and metals in 2005. It then pivoted into the property sector when the commodities market took a hit in 2013.

 

Now with its recycling arm suffering from a lower volume of collections and a scantier pick in the number of suitable property projects, Ng has once again been scouring for opportunities elsewhere.

 

An entry into the healthcare sector was an obvious choice. Before the pandemic, Enviro-Hub had already made &ldquo a bit of profit&rdquo trading face masks. The growth potential of this sector encouraged him to seek other related opportunities, says Ng.

The opportunity with Pastel Glove was brought by Adrian Toh, a former portfolio manager with RHB Asset Management and Azure Capital. He joined Enviro-Hub as its chief investment officer (CIO) earlier this year.

 

Toh believes glove-making is a good fit as a healthcare arm could eventually complement the company&rsquo s e-waste business. For instance, a manufacturer or life sciences company purchasing gloves from Enviro-Hub can choose to also send its e-waste over for processing, and adding that Toh says is already fielding such enquiries.

 

Sealing the deal

 

Ng says the decision to invest in Pastel Glove was made in less than a day. &ldquo I always feel that when something good is brought to you, you need to think of the risks involved,&rdquo he adds. In this instance, Ng believes the returns will outweigh the risks.

Despite not being able to visit the facilities at Pastel Glove due to the movement control restrictions, Ng took a leap of faith, making what he calls a &ldquo hard statement&rdquo to Toh.

 

He adds: &ldquo If you walk out of this room, please don&rsquo t come back. If you want, let&rsquo s seal the deal and move forward&rdquo . But his confidence in the deal was motivated by two factors &mdash Toh&rsquo s sincerity and Law&rsquo s standing as an &ldquo iconic guy who can convince the market&rdquo .

Law pioneered the black-coloured disposable latex examination glove in 2010. Such gloves have since been patented under the Black Drag- on name and are used in the tattoo, medical and law enforcement industries. He was also a vice-president with a subsidiary of Latexx Partners, the sixth largest glove manufacturer in the world prior to its takeover in 2013. The other Pastel Glove shareholder Choo was a consultation manager with K & L Total Solutions, whose clients are glove makers.

 

Law and Choo&rsquo s strong industry knowledge has already proved beneficial: Pastel Glove speedily secured the 510(k) regulatory clearance from the US Food & Drug Administration (FDA) for its medical grade examination gloves, which command an average selling price (ASP) of between 10% and 15% higher than normal gloves. Toh estimates that only 20% of glove mak- ers in the market have obtained this 510(k) FDA certification.

 

Creating a niche

 

Personal protective gear has become one of the hottest commodities on the market since the pandemic struck. Nguyen Thi Kim Cuc, a senior economist at the Asean+3 Macroeconomic Research Office (Amro), estimates the demand for rubber gloves globally will jump by 15% to 20% per annum in the next few years, from a growth rate of less than 10% in the last decade.

 

With its base in growing natural rubber, Malaysia has close to 70% global market share, hav- ing produced 240 billion pieces last year. With active expansion plans in place, Nguyen predicts that Malaysia is poised to sell more gloves in the years ahead.

Meanwhile, the industry is going through an unprecedented boom. For example, for the nine months ended May 31, Top Glove reported earnings of RM7.26 billion ($2.3 billion), more than four times the whole of the previous full year ended August last year.

With such gains, new players &mdash including the likes of Enviro-Hub and Aspen Holdings &mdash have entered the fray. But the latter was embroiled in a controversy in April: Aspen had on April 13 announced that it had clinched a US$210 million gloves supply order from Honeywell. However, it retracted the announcement on April 24 because of a &ldquo communication oversight between the parties&rdquo .

Enviro-Hub was also in the spotlight when it drew a query from the Singapore Exchange after announcing its FDA 510(k) approval nearly a month after receiving it on May 13. To this the company said it was because it took time for the database showing these approvals to be updated. This also served to &ldquo risk announcing misleading information inadvertently&rdquo , Toh adds.

Besting the competition

 

From its two operating lines in Ipoh, Pastel Glove produces around 500 million glove pieces per annum. Of this, around 80% are latex gloves while 20% are nitrile gloves. It is looking to add six lines by the end of the year, so that it can produce 1.4 billion pieces of gloves per annum, where 70% of the output will be so-called specialty gloves, while 20% will be nitrile and the remaining 10% will be latex.

 

Toh and Ng believe their product mix will help set them apart from the competition. The average selling prices of so-called commodity gloves have been down by around 30% to 40% from the levels at the height of the pandemic. There has also been an increase in the payback period to more than three months.

 

In contrast, specialty gloves have been seeing an ASP decline of just 5% to 10% from their peak 2020 levels. Specifically, these gloves weigh around 10g a piece and are &ldquo not really easy to do&rdquo as compared to a typical commodity nitrile glove weighing just 3.5g. Specialty gloves have more exacting requirements, so its production speed tends to be 20% lower than that for commodity products.

But what it does not command in volume, it will make from higher margins. Toh says the gross profit margin of specialty gloves averages at around 65%, higher than the 45% expected for commodity gloves.

 

As such, he and Ng expect this specialisation to rake in stronger profits in the longer term. Despite the better margins, the big players are not likely to muscle into this market segment too because of the relatively low volumes, they add.

 

Toh and Ng are also optimistic of a pick-up in its recycling business in the next year. Enviro-Hub&rsquo s processing capacity stands at 3,600 tonnes per annum, between its two facilities spanning 350,000 sq ft. This gives it a net margin of around 5% to 10%, depending on the mix of metals sold. The company is in the midst of expanding its processing capacity to 5,100 tonnes per annum.

Higher profits

 

Prior to its foray into the healthcare sector, Enviro-Hub logged losses of $990,000 for the year ended Dec 30 last year, from earnings of $298,000 in the preceding FY2019. Total revenue for FY2020 was $30.8 million, down 10% y-o-y.

 

But if things go the way the parties intend to, Enviro-Hub can look forward to a different set of numbers down the road. Under terms of the acquisition of Pastel Glove with Law and Choo, the sellers have put in a profit guarantee of US$18 million over the next three years.

 

Over the past few months, trading interest in Enviro-Hub has picked up significantly. Last January, when Ng put up his bungalow for sale, the asking price of $63 million was 2.5 times that of the company&rsquo s market value of around $25 million, based on its then share price of two cents.

 

Enviro-Hub&rsquo s share price started surging morethan a month before its initial Pastel Glove investment was made. From three cents in the middle of last November, the share price hit 10 cents in less than two months. 

 

Year to date, Enviro-Hub&rsquo s shares closed up 22.53% to 8.7 cents on July 7, valuing the company at $107.92 million.

 

To signal his optimism, Ng on June 11 bought 10 million shares at 9.9 cents, lifting his total stake to nearly 430 million shares, or 34.65%. CGS-CIMB remisier Ernest Lim views the recent shares buyback as indication of the management&rsquo s commitment to the company. Agreeing, UOB KayHian analyst Clement Ho adds that Enviro-Hub could see stronger ROEs (return on equities) going forward thanks to a stronger balance sheet.