The Top Performance on SGX in 2020: UG Healthcare Corporation Limited

UG Healthcare Corporation Limited (“UG Healthcare”) together with its subsidiaries is a disposable gloves manufacturer with its own established global downstream distribution that markets and sells disposable glove products under its proprietary “Unigloves” brand. 

Since the start of the year, the group’s share price has risen at a tear, increasing over 1,700% in value. In this article, we will take a closer look at the business, management and financial aspects of the group, to assess whether it is worth an investment. 

Background of the group

Established in 1989 and listed on the Singapore Stock Exchange (SGX) in 2014, UG Healthcare is a disposable-glove manufacturer with two factories in Seremban, Malaysia. The factories are located in Senawang Industrial Estate. Its current annual production capacity is 2.9 billion gloves. The group also distributes ancillary products including surgical, vinyl and cleanroom gloves, face masks and other medical disposables.

UG Healthcare makes and distributes gloves under its proprietary “Unigloves” brand to more than 2,000 customers in 50 countries, including the UK, Germany, US, China, Brazil and Nigeria. The group’s “Unigloves” brand of disposable gloves offers an extensive product range that includes both specialized products, amongst others, a variety of coating, scents, colours, thickness, anti-microbial properties for more specialized users, as well as generic products. 

Around 55% of its gloves are latex and the balance nitrile. These products are used across a diverse range of industries requiring cross-infection protection and hygiene standards, catering to different applications and preferences. 

UG’s Business Model 

Major glove manufacturers such as Top Glove Corporation Berhad (KLSE:TOPGLOV) (SGX:BVA) and Hartalega Holdings Berhad (KLSE:HARTA) are largely Original Equipment Manufacturers (OEM). OEMs primarily manufacture gloves under the brand of their customers such as large medical distributors (e.g. Medline, OneMed, Cardinal Health, Ansell, Kimberly Clark), government agencies and non-profit organisations. 

OEMs are not keen to build their distribution network. First, this is to avoid any conflict of interest with their customers. Secondly, managing warehouses and logistics in the destination markets is not their core expertise compared to the scale and efficiency of production. Another challenge in distribution is the huge variety of products to be stocked and sold, not just a single product – gloves. 

UG Healthcare differentiates itself by building a distribution network for its own branded gloves. It started in Germany and its network has now grown to include major emerging countries such as Brazil, Nigeria and China. 

The typical logistics or sales cycle is as follows: UG Healthcare manufacturers the gloves from its factory and ships to its warehouses in UK, China, Brazil and Germany, etc. UG Healthcare services many end customers that may just order several cartons every week. UG Healthcare needs to have sufficient stock to meet such consistent orders for next day delivery. For effective sales, UG Healthcare maintains a local sales team to promote the brand, speak to customers, engage in marketing activities and provide after-sales support. 

(Source: 2019 annual report)

Surge in demand due to Covid-19

Covid-19 has resulted in a sharp spike in demand, precipitating severe industry shortages. Industry order lead times have multiplied from one month before Covid-19 to 12 months. 

Glove manufacturers are seeing three levers of demand: a) quantum jump in the number of hospital patients, frequency of use and typically low inventories, have led to a scramble for gloves; b) hospitals, government agencies and non-profit organisations have started to build buffers or strategic stocks to prepare for future spikes in demand; and c) the new normal of hygiene practices has necessitated the use of gloves by consumers and non-healthcare industries such as airlines, restaurants, beauty salons, etc. 

Similarly, UG Healthcare has reported receiving a surge of orders for latex and nitrile gloves due to the Covid-19 outbreak. The group informed that the surge in demand has delayed its plan to modify certain production lines, but it is on track to achieve optimal utilization with the existing capacity of 2.9 billion gloves p.a. in 2020 before embarking to construct new production lines. The additional 300 million gloves annual capacity is planned to come on stream in the next financial year (FY) ending 30 June 2021.   

(Source: 2019 annual report)

Major shareholders  

Mr. Lee Keck Keong and family are the largest shareholders of UG Healthcare with a direct and indirect equity stake of 62.7%. Mr. Lee, his wife (Ms. Sim Ai Cheng) and children (Mr. Lee Jun Yih and Mr. Lee Jun Linn) are deemed owners through their investment vehicles Zen UG Pte Ltd and Raydion Direct Global Inc. 

(Source: 2019 annual report)

Mr. Lee Keck Keong is the Executive Director and Chief Executive Officer (CEO) of the group. He co-founded the group in the late 1980s and has been instrumental in leading the group to become an established glove manufacturer. His children, Mr. Lee Jun Yih and Mr. Lee Jun Linn are both Executive Directors of the group. 

Mr. Lee Jun Yih is primarily responsible for oversight and management of the group’s business and corporate development and works together with the CEO to formulate the overall business corporate policies and strategies for the group. He is also responsible for the oversight and control of the group’s overall accounting and finance function, including monitoring and coordinating the group’s financial accounts, consolidation and financial reporting. 

Separately, Mr. Lee Jun Linn is responsible for directing the group’s sales, marketing and distribution platforms, and focuses on developing the group’s marketing strategies and expanding its distribution network. 

Financials  

Measure 1: Growth in revenue and profits

While UG Healthcare has recorded respectable compounded annual growth in revenue of 13.4% from 2014 to 2019, this has not translated to the group’s bottom line. Its profit after tax has declined from RM4.9 million in 2014 to RM2.5 million in 2019 as the group has had to invest aggressively in marketing, logistics, warehouses and end-customer networks to sell its own brand of gloves. 

Measure 2: Profitability

Except for 2017 and 2018, UG Healthcare’s gross profit margins are relatively stable at circa 20.0%. However, its net profit margins and return on equity ratios have both seen significant declines. Net profit margins have fallen from 10.0% in 2014 to 2.7% in 2019; while return on equity ratios have tumbled from 16.3% to 5.8% over the same period. This is disconcerting as shareholders may question management’s ability in managing and allocating capital. 

Measure 3: Liquidity

We have concerns on the liquidity of UG Healthcare’s due to its low current and cash ratios of 1.3x and 0.1x respectively, especially when compared to its high gearing ratio of 0.8x recorded in 2019.  Further, the group has a cash conversion cycle of approximately 200 days, meaning it is only able to convert its investment in inventory into cash flow from sales in 7 months.  

Another red flag is that the group has recorded negative cash flow from operations during the past 4 years from 2016 – 2019. Investors should scrutinise the group’s cash flow closely. 

Year	2014	2015	2016	2017	2018	2019
Cash flow from operations (RM’m)	1.9	2.0	(1.4)	(7.1)	(0.4)	(6.4)

Round 4: Dividends payout

UG Healthcare does not have a dividend policy and has only paid dividends three times in the past 6 years as it has been re-investing its profits back into the business. 

Conclusion

With a closing share price of SGD2.70 as at 30 July 2020, UG Healthcare is trading at a price to earnings (PE) ratio of 260, with a market capitalisation of SGD530 million. 

Upon inspection, its business model is susceptible as it is pitting itself against established medical distributors. One wonders if the group can compete effectively with these big players in terms of resources, brand recognition and distribution network, especially at such a smaller scale. While UG Healthcare’s stock price has rocketed due to favourable market sentiment, we are not confident that the growth expectations warrant such elevated valuations.

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