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Strong dollar may be a good fit for this glove maker

Anticipation of an interest-rate rise in the U.S. for the first time in nearly a decade has injected renewed strength in the greenback this year. While some businesses fear that a rejuvenated dollar could limit corporate profitability, the world's biggest nitrile glove maker Hartalega told CNBC it isn't too worried.

"The strengthening of the U.S. dollar is positive for the glove industry and also for [Malaysia's] export business," Kuan Mun Leong, managing director of Kuala Lumpur-based Hartalega Holdings told CNBC's "Managing Asia."

Kuan is not alone; industry watchers also expect a stronger greenback to be a tailwind for Malaysia's massive rubber glove industry which meets more than 50 percent of global demand, according to the Malaysian Rubber Export Promotion Council.

In a note released in June, UOB KayHian's analyst Lester Chin said: "A firmer U.S. dollar remains a boon to the export-oriented glove manufacturing sector, since glove makers are expected to benefit from higher ringgit-denominated revenue given that the bulk of sales receipts are denominated in U.S. dollars. Furthermore, with most commodities traded in U.S. dollar, the stronger greenback could help prolong the current period of soft raw material costs."

Chin also expects industry earnings to rise around 3-5 percent for every 1 percent rise in the U.S. dollar against the ringgit.

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Year to date, the greenback has risen 6.8 percent on the back of speculation that the U.S. central bank could raise rates as soon as this month, while a persistent slump in oil prices and domestic political strife have exacerbated the slide in the ringgit.

While the favourable foreign exchange could translate into a decent fillip, Hartalega's Kuan remains cautious, noting that the benefits may be short-lived.

"We don't see a long-term benefit [because] the glove-making sector quotes monthly prices. We don't have a fixed price contract for our products," Kuan said. "With customers being so well informed, they would come after us for a bargain if they see the dollar strengthening."

Kuan Mun Leong, managing director of Hartalega Holdings.
CNBC
Kuan Mun Leong, managing director of Hartalega Holdings.

Malaysia's biggest glove maker in terms of market value is also stepping up on innovation amid intensifying price competition in the sector.

"Innovation is the guiding principle within the company and the Kuan family, but to innovate a product so simple and semi-commoditized is very challenging," said the 38-year-old, whose father, Kuan Kam Hon, founded Hartalega in 1981.

Despite the challenges, the company was the first in the industry to produce polymer-coated natural rubber gloves in 1994 and set a precedent again by inventing lightweight nitrile gloves in 2002. Now, the manufacturer is aiming to leapfrog its competitors by expanding its Next Generation Integrated Glove Manufacturing Complex (NGC) in Malaysia's Sepang town.

The expansion will be a huge boost for productivity and in turn, the company's margins, according to Kuan. "At NGC, we are able to produce 24 billion pieces of gloves per year, with a workforce of just 5,000. Compared to [our plants in] Bestari Jaya where we make about 11 billion pieces of gloves with 4,000 workers, we believe NGC is 60 percent higher in productivity. If everything [such as cost input and selling price] remains status quo, it should give us a few percent in margin improvement."

The 2.2 billion ringgit project which began in late-2013 is already in operation, with 14 production lines churning out 45,000 pieces of glove per hour, a report by Malaysian media outlet The Star on August 25 said. Hartalega is planning to build two more plants in the NGC by mid-2016, so as to increase its production capabilities to 42 billion pieces of glove a year by 2021.

"This is a very important part of our strategy, which is to reap the benefits of economies of scale," he told CNBC. "We need to work harder to maintain our leadership position [because] as a leader, we have no benchmark to follow. We have to find our own way."

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So far, analysts have given Hartalega's move to improve productivity a thumbs-up.

Malaysian-based Affin Hwang Capital expects the ramp up in production capacity to bring about "stronger sequential earnings momentum" after current operations at the NGC lifted earnings by 14 percent on-quarter in the first quarter of fiscal 2016.

The asset management company has a 'hold' call on the glove maker's stock with a target price of 9.00 ringgit, it said in a note last month following Hartalega's earnings release.

Kenanga Research echoes that sentiment and maintains an 'outperform' rating on the Kuala Lumpur-listed stock with a target price of 9.50 ringgit, said the research arm of Kenanga Investment Bank in August.

Shares of Hartalega finished 1.2 percent higher at 8.380 ringgit on Thursday, outpacing the broader FTSE Bursa Malaysia KLCI index which advanced 0.79 percent.

This interview with Kuan Mun Leong, managing director of Hartalega Holdings, is the second of a five-part special series called "Managing Asia: The Next Generation". CNBC's Christine Tan will be speaking to leaders from the second- to fourth generation in Asia, to find out what it takes to transform family businesses to new levels of growth.