KOSSAN RUBBER INDUSTRIES BHD

8 Annual Report 2019

MANAGING DIRECTOR’S
MANAGEMENT DISCUSSION & ANALYSIS

Dear Valued Shareholders,

For the financial year ended 31
December 2019 (“FY2019”), I am
pleased to report that KOSSAN
Rubber Industries Bhd (“KOSSAN” or
“Group”) has delivered another year
of growth despite operating under
challenging market conditions. The
Group’s profit before tax (“PBT”) grew
by 10.9% to a record of RM276.4
million on revenue of RM2.22 billion
in FY2019. Shareholders’ Funds
increased to RM1.42 billion with a
Return on Shareholders’ Equity of
15.8% in FY2019.
TAN SRI DATO’ LIM KUANG SIA
MANAGING DIRECTOR AND
CHIEF EXECUTIVE OFFICER

The improved performance is a result of our commitment to long-term, sustainable growth where we continued
to invest for the future - accelerating the transformation within our organisation, empowering our people and
reengineering our processes. With this performance, the Group has for the 24th consecutive year made good on its
commitment to deliver enhanced shareholder value since its listing in 1996.

Operating Environment

Impacted by rising costs and heightened competition, Malaysia’s glove export value decreased to RM17.4 billion in
2019 (2018: RM17.7 billion), even as shipments increased to an estimated 170 billion pieces (2018: 168 billion pieces)
according to the Malaysian Rubber Glove Manufacturers Association (“MARGMA”).

Operational Highlights

Established in 1979, KOSSAN is today one of the largest manufacturers of natural rubber and nitrile gloves in the
world. The Group continued to deliver on its objectives for the 2019 year, the highlights of which are as follows: -

• Completion of Plant 18 in November 2019. Plant 18, which has an annual capacity of 2.5 billion pieces,
will focus on the production of nitrile gloves. This plant incorporates high-speed lines with a high-degree of
automation to reduce the dependence on manual labour.

• Implementation of a new and enhanced Enterprise Resource Planning (“ERP”) system with a planned roll
out on a Group basis that will integrate and centralise administrative functions and increase management
efficiency and control.
 KOSSAN RUBBER INDUSTRIES BHD
Annual Report 2019 9

Managing Director’s
Management Discussion & Analysis
(Cont’d)

Financial Performance Overview

RM’000 FY2019 FY2018 Change (%)

Revenue 2,217,170 2,140,571 76,599 3.58%
Operating Profit 287,690 264,351 23,339 8.83%
Profit Before Taxation 276,372 249,264 27,108 10.88%
Profit After Taxation 227,861 204,599 23,262 11.37%
Earnings Per Share (sen) 17.57 15.62 1.95 12.48%
PBT Margin 12.47% 11.64% 0.83% 7.13%
PAT Margin 10.28% 9.56% 0.72% 7.53%

For the financial year ended 31 December 2019, revenue increased to RM2.22 billion as compared with RM2.14
billion in 2018. Profit before tax increased to RM276.4 million as compared with RM249.3 million in the previous year
mainly attributable to the improved performance in the Gloves division. Despite operating under higher raw material,
energy and labour costs, PBT margins expanded to 12.5% from 11.6% as a result of efficiency gains and effective
cost controls.

RM’000 FY2019 FY2018 Change (%)

Cash and Bank
Balances 162,250 146,315 15,935 10.89%
Total Assets 2,377,245 2,148,227 229,018 10.66%
Total Liabilities 926,234 805,853 120,381 14.94%
Total Bank Borrowings 565,234 508,680 56,554 11.12%
Shareholders’ Fund 1,424,290 1,314,864 109,426 8.32%
Issued and Fully Paid Capital 323,885 323,885 - 0.00%
Return on Equity (%) 15.77 15.19 0.58 3.82%
Net Gearing Ratio (%) 28.29 27.56 0.73 2.65%
Net Asset per Share (sen) 111 103 8.00 7.77%

As a result of the Group’s further investments to pursue its capacity expansion, total assets increased by 10.7% to
RM2.38 billion from RM2.15 billion in 2018. Despite these capital expenditures, balance sheet remained robust and
net gearing remaining manageable at 28.3%, with cash and bank balances of RM162.3 million as at 31 December
2019. Return on equity, which measures the ability to generate profits on shareholders’ funds, increased to 15.8%
from 15.2% in 2018, underscoring the Group’s ability to further improve and maximise returns on its equity capital.
 KOSSAN RUBBER INDUSTRIES BHD
10 Annual Report 2019

Managing Director’s
Management Discussion & Analysis
(Cont’d)

Review of Segmental Performance

KOSSAN’s business segments are divided into Technical Rubber Products (“TRPs”), Gloves and Cleanroom
Products. We have a total of twenty-two (22) plants: seventeen (17) for the production of gloves, four (4) for TRPs
and one (1) for cleanroom products. With the exception of the plant for cleanroom products which is located in
Dongguan, China, all our plants are located in Malaysia.

Segmental Contribution %
RM’000 FY2019 FY2018 Change (%) FY2019 FY2018
REVENUE 2,217,170 2,140,571 3.58%
- TRP 180,740 184,386 -1.98% 8.15% 8.61%
- Gloves 1,962,389 1,874,919 4.67% 88.51% 87.59%
- Cleanroom 74,041 80,975 -8.56% 3.34% 3.78%
- Others - 291 -100.00% 0.00% 0.01%

OPERATING
PROFIT 287,690 264,351 8.83%
- TRP 27,372 27,896 -1.88% 9.51% 10.55%
- Gloves 266,078 240,551 10.61% 92.49% 91.00%
- Cleanroom 2,634 3,628 -27.40% 0.92% 1.37%
- Others -8,394 -7,724 8.67% -2.92% -2.92%

Gloves Division

The Gloves division is the largest contributor to revenue and profitability. The revenue derived from the Gloves
division for FY2019 was up 4.7% to RM1.96 billion from RM1.87 billion in 2018. Operating profit also grew to
RM266.1 million, up 10.6% from RM240.6 million recorded in the previous year. The improved performance was
mainly attributable to the growth in demand for the Group’s glove products, with higher volume sold of 7.8%
as compared with FY2018, as well as increased manufacturing efficiency and effective cost controls. The full
year performance was achieved despite the decrease in average selling price of 5.4% as a result of heightened
competition across the industry, the increase in average natural gas tariff rates of 3.3%, natural rubber prices of
5.1% and increase in wages compared to the previous year. In the period under review, nitrile prices declined by
10.5% while the US dollar appreciated by 2.7% against the Malaysian ringgit.

Our glove products are mainly exported to the developed markets of the US, Eurozone, and Asia Pacific. With the
completion of the Group’s latest Plant 18 in November 2019, KOSSAN’s current installed capacity stands at 29
billion pieces per annum. The nitrile to natural rubber (NBR:NR) volume split is 79:21 for FY2019.

Technical Rubber Products (“TRPs”) Division

The TRPs division is involved in the manufacturing and distribution of high technical-input rubber products, which
are used in a wide array of industries, including infrastructure, automotive and industrial applications. The majority
of the division’s products are exported to the US, Eurozone and ASEAN countries.

The TRPs division is the second largest contributor to revenue and profitability. The revenue derived from the
TRPs division for FY2019 decreased marginally by 2.0% to RM180.7 million from RM184.4 million in FY2018. Its
operating profit was RM27.4 million, a marginal decrease of 1.9% from RM27.9 million recorded in the previous
year.
 KOSSAN RUBBER INDUSTRIES BHD
Annual Report 2019 11

Managing Director’s
Management Discussion & Analysis
(Cont’d)

Cleanroom Products Division

The Cleanroom division is involved in the production of gloves, face-masks and wipes that are mainly used in
the electrical and electronic industries. The Dongguan plant in China is not involved in glove manufacturing but
undertakes secondary and value-added processes on the gloves produced in Malaysia by our Gloves Division.

The revenue derived from the Cleanroom division for FY2019 decreased to RM74.0 million from RM81.0 miilion last
year, while operating profit decreased to RM2.6 million from RM3.6 million in FY2018.

Rewarding Shareholders

KOSSAN is dedicated to delivering value to our shareholders through consistent dividend distributions. In line with
our earnings performance, the Group has paid an interim dividend of 3.0 sen to date. The Board has declared
second interim dividend of 3.0 sen for FY2019. This will bring total dividend per share to 6.0 sen which amounts
to a total payout of RM76.7 million, representing a payout ratio of 34.2% for FY2019.

MOVING FORWARD

Operating Environment

The global economy, already showing signs of slowing as a result of the ongoing trade protectionism and
geopolitical risks, has been further compounded by the devastating outbreak of the coronavirus disease 2019
(“COVID-19”) that has brought the world to a standstill. The International Monetary Fund (“IMF”) now forecasts a
global recession in 2020, one that could be worse than the 2008-2009 global financial crisis, with a recovery only
expected in 2021. The COVID-19 pandemic which is expected to have a significant impact on the world economy
including markets where the Group operates, will have to be actively monitored and managed to minimise any
potential impact to our operations.

Under such circumstances, however, the demand for protective gloves is expected to remain robust, with the
Malaysian Rubber Glove Manufacturers Association (“MARGMA”) projecting global glove demand to grow to 345
billion pieces in 2020 of which 65% is expected to come from Malaysia, with Thailand and China at 18% and 9%
respectively. Malaysia is expected to export 225 billion pieces of gloves valued at RM 20 billion in 2020 compared
with 170 billion pieces worth RM17.4 billion in the previous year.

Given the rising demand for personal protective equipment such as gloves as a result of improved healthcare
services, production of rubber gloves has been on a steady rise over the years. Rubber gloves, whether made from
natural rubber or nitrile, have become an indispensable part of the healthcare industry as the contamination and
infection control device of choice. Increased healthcare standards in emerging economies, growing government
expenditure on healthcare reform, increasing awareness of health-related issues and an aging population in the
developed and emerging economies of Asia, Middle East, Africa and Russia will continue to drive the industry’s
expansion.

Rubber gloves’ functional barrier properties and low absolute unit price has lent itself to a broad range of
applications across industries and end-uses. Unsurprisingly, demand from the non-medical sector, such as for
food and beverage, industrial applications, beauty as well as the household sector has also contributed to the rise
in global glove consumption in recent years. Given KOSSAN’s expansion plans and geographic reach, the Group
is well prepared to capitalise from this sector’s growing potential.

For the Technical Rubber Products division, the Group views this division as stable despite the cyclicality of
infrastructure projects as well as the challenging environment for the automotive segment.
 KOSSAN RUBBER INDUSTRIES BHD
12 Annual Report 2019

Managing Director’s
Management Discussion & Analysis
(Cont’d)

Growth Pillars

a) Expansion Programme

As part of the Group’s expansion programme, Plant 18 which has an installed capacity of 2.5 billion pieces
was fully commissioned in November 2019. With the completion of the plant, the Group’s production capacity
stands at 29 billion pieces of gloves per annum.

To meet the continued growth in demand for our glove products, the Group has embarked on the construction
for Plant 19 which will have an installed capacity of 3 billion pieces. With the progressive commissioning of
Plant 19 and expected full completion by the 1st half of 2020, the Group’s total installed capacity will then rise
to 32 billion pieces of gloves per annum.

Thereafter, the next phase of the Group’s expansion programme will be focused in Bidor, Perak. The Group
expects the expansion, which is currently in the planning stage, to commence in 2020 and to take eight to ten
years to complete. The expansion in Bidor is intended to accommodate the Group’s expansion in a centralised
location (i.e. an integrated glove manufacturing facility) over the medium and longer term.

b) R&D and Innovation

At KOSSAN, we have long recognised the importance of R&D and innovation to the Group’s growth and
evolution over the years. Along the way, the Group has achieved many world-firsts, including anti-Fentanyl
permeation gloves (U.S. FDA 510 (k) approved), halal-certified Confidenz™ gloves and Low Derma™
Technology gloves (U.S. FDA low dermatitis potential claim), in-line with the Group’s expanding investments
into our innovation and R&D activities to bring cutting-edge, innovative features to our stakeholders. These
innovations join a growing list of intellectual properties already held by KOSSAN to protect its products in the
marketplace, reinforce brand presence and maintain market position.

c) Automation and Optimisation

Technology is a key enabler to our business growth in the long run. To remain relevant in the ever-evolving
glove industry, KOSSAN is focused on embracing cutting-edge technology such as robotics, Industry 4.0 and
the Internet of Things. Implementation of automation and robotics in our plants will allow us to improve quality
consistency and productivity.

d) Market Expansion

Geographical reach and market expansion are critical to our growth strategy. As a leading manufacturer of
disposable gloves, KOSSAN is the valued supplier to many of the pharmaceutical and healthcare multinationals
in the developed countries in North America, Europe and Asia Pacific. In addition to the uncompromising quality
of our products, the Group is focused on building strong customer relationships, reinforced by an excellent
track record, competitive pricing, timely delivery and flexibility to meet our customers’ specific requirements.
The Group constantly explores new areas of application for our products, widening our product range and
opening new markets. The ability to come up with innovative products as needed by the market has further
strengthened our brand.

In Asia, China and ASEAN countries provide opportunities where the per capita consumption of gloves is still
low compared to the US and Eurozone. Through government-mandated reforms and healthcare awareness,
KOSSAN is well positioned to develop its competitive edge in these select markets.
 KOSSAN RUBBER INDUSTRIES BHD
Annual Report 2019 13

Managing Director’s
Management Discussion & Analysis
(Cont’d)

e) Human Capital Development

KOSSAN recognises the importance of human capital. As a progressive employer, our people’s performance,
commitment and loyalty to the job are critical in achieving the company’s goals and objectives. Our focus
is on cultivating an engaged and dedicated workforce by providing them with the right training and skills
development, coupled with the right incentives, working environment and career advancement prospects. We
have a dedicated Training Centre and continue to invest in employee training, developing in-house training and
e-learning programmes to help keep our staff abreast of the latest industry trends and acquire the necessary
skills to perform effectively. By building a strong human capital foundation, the Group believes that not only will
it be able to attract the right talent, but more importantly to retain and develop its people for future success.

Awards & Recognition

During the year, we have been recognised by many industry awards and accolades. These awards help set us apart
from the competition and are a testament to our strengths and capabilities. The awards we received in 2019 are as
follows: -

Date Awards

15 August 2019 Asia’s Best Employer Brand Awards 2019: Best Employer Brand

2019 Frost & Sullivan Asia Pacific Best Practices Awards: Global Halal Glove
14 November 2019
Company of the Year

Acknowledgements

To the directors, management team and staff – thank you for your continued commitment that has led to the Group’s
record performance. With your dedication and contributions over the years, we have grown from a four-man operation
in 1979, into a world-class manufacturer of disposable gloves and technical rubber products.

To our customers, associates, suppliers, bankers and shareholders, my appreciation for your unwavering support
and trust, many of whom have been journeying with us since our founding.

As we look forward to a new financial year, we know that we have our work cut out for us. Nevertheless, with the
support of all our stakeholders, I am confident KOSSAN will continue to deliver sustainable growth now, and far into
the future.

Tan Sri Dato’ Lim Kuang Sia

Managing Director and Chief Executive Officer