This article first appeared in The Edge Malaysia Weekly on June 8, 2020 - June 14, 2020
THE ample liquidity in the global financial system has distorted investors’ risk tolerance, leading to stock valuations reaching nosebleed territory, given the still-weak fundamentals. Many commentators have now labelled the rise in stock prices as the FOMO (fear of missing out) rally.
Malaysian stocks have now caught up with the euphoria seen in the US where key market barometers — the Dow Jones Industrial Average and Standard & Poor’s 500 — returned to bull market territory in April. The FBM KLCI only did this in late May.
And the stocks that did the heavy lifting, pushing the index higher, were none other than the glove makers, which are seeing demand outstrip their ability to produce gloves in the wake of the Covid-19 pandemic.
Last Monday, the rally in glove stocks pushed Hartalega Holdings Bhd and Top Glove Corp Bhd to sixth and eighth place respectively among Malaysia’s largest listed companies by market capitalisation.
“It’s mind-boggling and getting ridiculous. It doesn’t make sense,” a private investor told The Edge in a text message that day.
When asked who could be buying glove makers at such levels, he pointed to punters. “No fund manager can justify buying at 35 times next year’s earnings when you know 2022 earnings would likely be half,” he explained.
Later in the evening, it emerged that certain brokerages were imposing margin financing caps on the shares of Hartalega, Top Glove, Kossan Rubber Industries Bhd, Supermax Corp Bhd, Rubberex Corp Bhd and Comfort Gloves Bhd.
theedgemarkets.com reported the following day that Maybank Investment Bank Bhd had capped the valuation for Hartalega at RM8.97, Top Glove at RM9.41, Kossan at RM7.87, Supermax at RM3.38 and Comfort Gloves at RM2.29, compared with their much-higher closing prices.
RHB Investment Bank Bhd, meanwhile, capped the financing limit to a 35% discount on the latest market closing price of Hartalega (or RM8.15, whichever is lower), Top Glove (or RM8.64, whichever is lower), Kossan (or RM5.65), Supermax (or RM5), Rubberex (or RM2.31), and Comfort Gloves (or RM2.35).
Needless to say, the shares of glove makers fell on Tuesday.
Hartalega fell by 4.55% or 60 sen in late morning trading and closed 3.34% lower at RM12.74. Meanwhile, Top Glove fell 82 sen or 5.28% at noon before closing 4.76% lower at RM14.80.
Kossan dropped 33 sen or 3.61% to settle at RM8.80 while Supermax declined 34 sen or 4.28% to RM7.61. The lower liners dropped by a bigger margin. Rubberex sank 16.3% or 74 sen to RM3.80 while Comfort Gloves fell 10.7% or 45 sen to close at RM3.75.
Is it time to pick up glove stocks after the correction? An institutional fund manager remains adamant on staying away from the sector for now. But on Wednesday, Credit Suisse upgraded its target price on Top Glove to RM20.30 from RM11.30 on the back of a 122% growth in earnings, driven by a “structural shift in demand for gloves”.
Confused? Let’s take a look at the factors driving the trade in glove makers and the downside risks that could burst the bubble again.
Is the world running out of rubber gloves?
Malaysian Rubber Glove Manufacturers Association (Margma) president Denis Low expects global glove consumption to grow 11.5% to 330 billion pieces this year from 296 billion pieces last year.
Malaysia exported 187 billion pieces last year and the projection this year is 220 billion pieces. In the first quarter, 53 billion pieces were exported. With Malaysia contributing 63% of the world’s glove supply, total supply is seen at close to 350 billion this year.
The present market requirement for nitrile gloves is about 65%, and for natural latex gloves, 35%.
Low says with demand being much greater than supply, glove makers have orders that will last them until year-end and beyond. While it is normal to be 45 to 60 days oversold, now, the sell-through and use-through are so acute that order books are filled up until next year.
“It must be noted that the concentration of supply goes towards the healthcare sector at the moment, thus denying the other users of their usual supply. Hence, it is envisaged that once the lockdown subsides, there will be a big rush for gloves by other users such as food handlers, dentists and dermatologists,” he tells The Edge.
“The replenishment of stock by all sectors will mean another prolonged delivery period, thus there is not going to be an oversupply situation in the foreseeable years,” Low says when asked about fears of over-expansion further down the road.
“We must never discount the fact that capacity expansion has been affected by the Movement Control Order (MCO) for months already. As such, we foresee the shortage to spill over into 2021, not forgetting the fact that the industry has always been in an oversold position since years ago,” he adds.
The world’s largest glove maker, Top Glove, says an oversupply — if any — caused by the capacity expansion will only be temporary. “The global glove demand is approximately 280 billion pieces per annum and after Covid-19, this is expected to grow by about 12% per annum, higher than the pre-Covid-19 growth rate of around 10%,” its executive chairman Tan Sri Lim Wee Chai tells The Edge.
Currently, the group has a capacity of 78.7 billion pieces per annum and will increase it to 106.6 billion pieces by 2022. “Our post-Covid-19 monthly order book has increased 168% compared with the pre-Covid period and the lead time is currently one year,” says Lim.
An analyst with Inter-Pacific Securities Sdn Bhd is positive on glove makers’ production capacity expansion. “Every company would want to have some spare capacity, no matter whether there will be another virus or not. When they build the factory, they do it line by line and not in one shot.”
LeInves PLT chief investment officer William Ng believes the oversupply issue will only surface two years down the road. “Whether we are entering the new normal or [go] back to the old normal, I believe demand will continue to grow. Just like the face mask industry, the glove industry will find its equilibrium. But before that, supply and demand will continue to shoot up … so will prices.”
Singapore-listed Riverstone Holdings Ltd’s orders have been filled until the first quarter next year, says executive chairman and CEO Wong Teek Son. It has an annual capacity of 9.6 billion pieces, which will increase to 10.5 billion by year-end. A new factory, being built at an investment of RM80 million, will be completed next year and will contribute 1.4 billion pieces annually.
Wong reveals that the company has been increasing selling prices gradually, by 10% for existing customers and 20% for smaller buyers.
Takeaway: Demand remains strong, at least until early 2022, indicating good results from glove makers in the next few quarters. Overcapacity is not a concern.
Will discovery of a vaccine derail glove demand?
Countries around the globe are racing to develop a vaccine against Covid-19. Bloomberg reported that more than 100 vaccines for the virus are being developed globally but only a handful have made it to the crucial and final human clinical trial stage, with Chinese scientists leading the way. In total, five vaccines developed by Chinese companies are being tested on humans, the most in any country.
In the US, reports say five companies have been chosen as the most likely candidates to produce a vaccine against the virus.
Meanwhile, GSK, the world’s largest vaccine maker, plans to produce one billion doses of vaccine efficacy boosters for Covid-19 shots next year.
Top Glove’s Lim admits that panic buying of gloves will be reduced if a vaccine is found and demand may soften. “However, pre-Covid-19, global glove demand was already growing at 10% and will continue to grow steadily, driven by strong market fundamentals.”
He expects glove usage to increase after the pandemic, especially in the medical sectors of developing countries. “Moreover, even with the finding of a vaccine, gloves will still be needed for testing and administering the vaccine.”
Margma’s Low says the discovery of a vaccine is still a long way off and even if it were found, the pandemic has created greater awareness of personal hygiene and the need for personal protective equipment, so demand will still be there.
AmInvestment Bank Research foresees a structural change in the way gloves are used, where glove usage per capita will increase as hygiene measures become stricter. “This is expected to apply not only to the healthcare sector but also across different industries like F&B. Glove consumption per capita in emerging markets such as India and China was low at around two to six gloves as opposed to 100 to 280 gloves in developed countries.”
Takeaway: Glove demand expected to remain intact even with the discovery of a vaccine against the coronavirus.
What are potential risks that could affect the industry?
A weak ringgit is usually a tailwind for export-oriented sectors like glove makers. But now, the industry also benefits from a strong local currency.
AmInvestment Bank Research points out that the strengthening of the ringgit will help expand net margins for glove companies because unlike pre-Covid-19 times, cost savings are not being passed through to customers due to supply constraints.
Its projection for the US dollar/ringgit exchange rate is an average of 4.29 in 2020 and 4.25 in 2021.
Careplus Group Bhd CEO Lim Kwee Shyan does not expect any major risks in terms of raw material prices or other external factors. “It is very normal to see raw material fluctuations, even before Covid-19. There are no additional risks.”
However, Credit Suisse cautions that average selling prices, which have gone up three to four times from the pre-Covid-19 period, could revert quickly once spot orders are no longer necessary.
Despite rising automation over the years, glove makers’ dependence on foreign workers could pose a risk.
Takeaway: No visible near-term external risks.
Is the valuation justified?
An analyst with a local securities firm who declined to be named says the valuation of glove stocks should be viewed differently given the severity of the pandemic. “The price-earnings ratio had not gone up so much before. Compared with H1N1 and SARS, this is a global pandemic and affects everybody. There were no lockdowns during SARS, so it’s different right now.
“That’s why the current valuations are justified as glove makers’ profit could easily double on a quarter-on-quarter basis, especially for 3Q.”
However, as the share prices of glove makers are currently at high levels, he advises investors not to buy the stocks. “If I were a fund manager, of course, I would take profit as prices have gone up so much,” he adds.
LeInves PLT’s Ng concurs, saying that investors should avoid the sector. “It is too late to buy glove stocks now. For those who own some shares in the glove companies, they should take some profit. At the very least, take back your capital first. The rest of the shares, just hold on to them and see how it goes.”
With the historical PER of certain rubber glove stocks rising to over 100 times earlier, he says the sector is certainly “overheated”.
“At first, many investors see it as a safe haven and they expect good returns from glove stocks, which may still be the case if you bought the shares earlier. But in any case, a PER of 100 times is just too high. It is not sustainable, and it will be corrected.
“If they could double their earnings, perhaps their forward PER will come down to say, 50 times, which is still high, but more reasonable than 100 times,” he says.
Credit Suisse in a June 3 report notes that the recent move by brokerages to tighten margin financing could dampen sentiment although it sees this as a positive move to curb volatility.
Following upward revisions to its EPS forecast for Top Glove, Credit Suisse says the stock now trades at 17 times FY21 earnings — way below its historical average PER of 23 times. The securities firm pegged a target price of RM23.30 on the counter, based on a PER of 27 times, which it says is the mid-point between its average PER and one standard deviation above.
Chris Eng, chief strategy officer at Etiqa Takaful Bhd, says retail investors sloshed in liquidity are looking for places to put their money. “Also, based on the recent flurry of conference calls arranged by brokers and glove companies, there seems to be interest to extend the rally. So, they may not rally as hard and as fast but there may still be upside.”
Analyst recommendations on glove stocks are still overwhelmingly positive, with “buy” calls outnumbering “hold” and “sell” calls (see table).
Takeaway: Not for the faint-hearted, but risk takers would likely still try to eke out gains from the gloves story.
Crazy rich glove makers
Datuk Seri Stanley Thai
Supermax Corp Bhd
Total shareholdings: 37.218%
Market capitalisation (rm bil): June 5, 2020 — 11.468
Net worth (rm bil)
Dec 31, 2019 — 0.672
June 5, 2020 — 4.27
^534.6%
Tan Sri Lim Wee Chai
Top Glove Corp Bhd
Total shareholdings: 35.437%
Market capitalisation (rm bil): June 5, 2020 — 43.127
Net worth (rm bil):
Dec 31, 2019 — 4.263
June 5, 2020 — 15.28
^258.7%
Tan Sri Lim Kuang Sia
Kossan Rubber Industries Bhd
Total shareholdings: 49.877%
Market capitalisation (rm bil): June 5, 2020 — 11.485
Net worth (rm bil):
Dec 31, 2019 — 2.653
June 5, 2020 — 5.73
^116.2%
Kwan Kam Hon
Hartalega Holdings Bhd
Total shareholdings: 49.466%
Market capitalisation (rm bil): June 5, 2020 — 41.299
Net worth (rm bil):
Dec 31, 2019 — 9.143
June 5, 2020 — 20.43
^123.5%
The Covid-19 pandemic has been bad for the economy but glove makers have seen a bonanza. The share prices of the big four glove makers listed on Bursa Malaysia have surged between 116% and 539% in the first five months of the year, lifting their stock valuations to all-time highs.
Likewise, the wealth of the founders has also skyrocketed, with the combined net worth of the four tycoons standing at over RM42.5 billion.
The largest gain in terms of percentage was recorded by Supermax Corp Bhd’s founder Datuk Seri Stanley Thai, who is now a billionaire. With a 37.2% stake in the company, his net worth has jumped over five times, or RM3 billion, to RM3.7 billion from RM672.59 million at the end of last year.
Thai, 59, does not hold any position in Supermax following his conviction for an insider trading offence in 2017.
Supermax shares shot up over 500% during the period in review and its market capitalisation hit the RM1 billion mark.
Top Glove Corp Bhd founder and executive chairman Tan Sri Lim Wee Chai, 62, has seen his fortune grow almost threefold to RM12.29 billion as a result of a jump of about 250% in the company’s share price. He holds a 35.4% stake in the world’s largest glove manufacturer.
As the largest shareholder with a 49.9% stake in Kossan Rubber Industries Bhd, Tan Sri Lim Kuang Sia, 67, who is also its group managing director and CEO, is now RM2.9 billion richer. His wealth has more than doubled to RM5.5 billion from RM2.7 billion five months ago.
Of the four men, the king of the hill is Kwan Kam Hon, the founder, executive chairman and managing director of Hartalega Holdings Bhd. Kwan, 73, owns a 49.5% stake in the largest nitrile glove maker in the world and has seen his net worth breach the RM20 billion level to hit a high of RM21 billion — a 130% jump from RM9.14 billion at the end of last year. The company’s share price has risen 122.6% year to date.
In the Forbes Malaysia Rich List 2020 released in March, Kwan took the ninth spot with a net worth of US$2.8 billion (RM12 billion). This was despite a fall in the wealth of the country’s 50 richest people for the second consecutive year amid a weaker ringgit and decline in the stock market.
Filings with the stock exchange show that Kwan, through Budi Tenggara Sdn Bhd, disposed of five million shares or a 0.15% stake on May 22, for RM46.5 million or RM9.30 per share.
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