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Saturday, 19 September 2020

(Tradeview 2020) - Long Term Value Pick 5 : Hartalega Holdings Berhad (5168) The King of Nitrile Gloves

       


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Hartalega came out very strong during the recent AGM. What I like about Hartalega's message is the confidence it gives to the shareholders and market including their statement when asked on analyst earnings forecast : 

KUALA LUMPUR (Sept 16): Hartalega Holdings Bhd, which expects an additional demand for 120 billion pieces of disposable gloves in the next three years, does not foresee any sharp earnings contraction after 2021 as some analysts anticipate.

"The analysts are correct [on the earnings forecasts]. But when it comes to the third year, after 2021, they start to give us [earnings] contraction... and [it's] a very sharp contraction.

"I mean this is an opinion, right? They can be right at the end of the day. I do not know. But by my guidance, what the analysts have said cannot be right,” Hartalega's executive chairman Kuan Kam Hon told the media after the group's annual general meeting yesterday when asked to comment on analysts' earnings forecasts.

"We are on the ground. We have been in the business for the last 30 years and analysts are not able to see what we are able to see," he added.

This has been a strong point of contention in the markets between two camps - those who believe in the glove story and those who don't. Particularly, this is especially poignant when this concern was highlighted by 3 research houses namely JF Apex, Ambank and Macquarie. The 3 of this relied on this fact to give justification for their bleak outlook of the sector. So which is which? Is Mr Kuan, the industry titan correct or the analysts?

Lets have a look at this 3 minutes long video below from the AGM which gives a very good flavour :





As mentioned before, for a stock to go up and share price to rally, the majority of market participants must believe in the story in order for the buying momentum to outweigh the selling momentum. I have written extensively on glove stock and the sector so I wont repeat what was shared earlier. 




I would like to take the opportunity to zoom in and focus on Hartalega following the AGM. The few key takeaways which convinced me to consider Hartalega to be my 5th Long Term Value Pick are as below :

1. The visibility of earnings for the next 2-3 years minimum. Please note I am not citing the lock in committed order of 18-20 months. But potentially 3 years - 36 months. The issue here is no longer about ASP and deposit paid for locked in order. It is the issue of structural change in demand due to hygiene practice resulting in continuous shortage of supply against demand. 

2. Management years of experience as pioneer and market leader carries more weight than analyst. Some owners of companies' are promotional and lack credibility. Not the Kuan family. They are known to be hardworking, humble and ethical in their conduct of business. This is the market reputation and street credentials. This is what I value most in a business. Strong management running a quality business.

3. The expansion and succession plan are all in place. By his side, Mr Kuan junior demonstrate eloquence, stability and knowledge. Furthermore, with NGC 2.0, by 2027, the group's total annual installed capacity shall increase to 95 billion pieces per annum. As shareholders what we like to see is both expansion for growth and succession for stability. This will allow us to decide the investment horizon to longer term.

4. Premium valuation. Don't get me wrong, I am not recommending to buy stocks at expensive valuation. What I meant is, the market will always accord premium valuation to companies which are fantastic. Paying a fair price for a wonderful business is more important than paying a cheap price for a good business. Currently, if we compare to others, Hartalega is no longer trading at a huge premium unlike before Covid-19. In fact, if you were to consider Hartalega now, you are investing in this good business at a fair price with strong outlook and growth prospects. Top Glove and Supermax are the earliest to hike their ASP significantly. Hartalega, Kossan and Riverstone hiked the ASP much later as they value long term business relationship and committed to earlier pre-Covid 19 ASP. Hartalega and Kossan both has recently indicated that for future quarters, they will be hiking ASP significantly in the range of 30-50%. This leaves room for imagination on their potential upside.






5. Prominent substantial shareholders including their major client Medline Industries Inc. As per the latest list of 30 largest shareholders in the 2020 annual report, we can spot big names like Great Eastern, AIA, GIC, EPF, Norges Bank, Vanguard Emerging Market Index Fund, Australia Employees Superannuation Trust, Prudential amongst others. Big names aside, what impressed me most, is the fact that Medline Industries Inc from US which is one of the biggest privately held manufacturer and distributor of medical supplies is the 7th largest shareholder of Hartalega. Just imagine, if your major client have so much faith in you that they want to take a stake in your company. That not only signifies confidence the company but also rightly guarantees continuous order flow. Your client essentially ties his interest with the company and believe in growing hand in hand for the long term.






6. Hartalega is steadfast to remain the world leader along with other Malaysian glove makers. Be it China or the new entrants recently announced in the news, in my view, will not be a substantial threat to the Big 6 players. This is because of their ability to deliver, capacity, R&D & technology innovation. 

Let me cite this example, Hartalega came up with the Anti-microbial gloves which is the first in the world. It is now pending approval with the FDA and in our view, it is a game changer that cements their leadership position in Nitrile Gloves. We must remember, to be a leader, capacity is not the only metric. Technology and innovation are key to ensuring you maintain your pole position. From a 2018 news report, Hartalega spent US$10 million in R&D on this gloves with Chemical Intelligence UK. This is before the pandemic. With heightened awareness, this product of Hartalega will differentiate them from other industry players.


Comparing to my past writing on Long Term Value Picks, this time it is slightly different. The reason is because I have covered extensively on glove stocks and sectors which you can read from my earlier posts. For me, when all is said and done, when choosing a long term stock to be in your portfolio for many years, it must meet my 5 metrics :

1. Strong, honest and capable management team / owner
2. Consistent Growth, Earnings & Dividend payout
3. Strong balance sheet & cash position / cash flow
4.Can hold across decades / generations without risk of delisting or bankruptcy
5. Undervalued & lack of appreciation from investors

At this juncture, Hartalega meets all the metrics even at RM14.16 

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Food for thought: 





Monday, 14 September 2020

(Tradeview Commentaries) - Buy Malaysia. I am.

      


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Congrats all on the strong rebound of the Glove sector. For those who held  through the selloff last week, you deserve the pat on the back.

This week is a very important week for the Glove sector. Whatever the outcome, I think it’s important to know everything in life there is always going to be different voices & opinions. We cannot expect everyone to think like us and that’s why humans are all unique and different. 

I think how the investment community views the Glove sector is diverse. But for the stock to go up and share price to rally, the majority must believe in it for the buying momentum to outweigh the selling momentum. 

I do not know what will happen in future but my view is strongly in favour of gloves for many reasons including but not limited to :

1. Strong earnings visibility for the next 12 months (min) with / without vaccine 

2. Shortage is acute especially for nitrile Gloves 

3. ASP price increased has been and will remain elevated for some time

4. Structural change in demand and hygiene habits  

5. Monopolistic position of Malaysia supply to the Global markets 

6. Valuation is still lagging actual earnings growth and it will be reflected in coming quarters 

7. Huge cash inflow for Glove players. Cash is king especially during weak economic environment. 

8. No other better sector / industry / stocks for alternative investment opportunities in the near term.

9. Some local funds / local investors may not believe in the Glove sector. But I believe in it strongly. My belief is objective based on data, facts and numbers. Not emotions. There is deep value in Glove sector especially those with strong quality management like Hartalega, Riverstone, Kossan, Top Glove. 

10. Lastly, the Glove sector is very relatable to retail investors who can touch, feel or understand the nature of the business due to usage in daily life. 

I remembered in 2008, during the Global Financial Crisis, before Lehman Brothers collapsed, they went to Warren Buffet for help to save them from bankruptcy. Warren Buffet didn’t save Lehman Brothers after assessing their books which contained too many toxic assets. But he did go in big to others like Bank of America, Citigroup, Goldman Sachs etc. He advocated “Buy America”. He believe in US’s resiliency and ability for the US financial markets to remain world leader despite the mess they caused.

I am going by the same playbook. I advocate “Buy Malaysia”. The Glove sector is one of the few things as a Malaysian we should be proud of. I believe this sector has shown its ability to defy adversity, rise against odds to become a global leader. This is one of the few sectors that Malaysia will remain a global leader post Covid-19 and for many years to come.

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Food for thought: 






Friday, 11 September 2020

(Tradeview Commentaries) - A Message to Local Funds Especially Macquarie Bank - Don't Be A Joke

     



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When the Glove Sector was killed off by certain Local Funds since the start of last week, coupled with some incompetent reports from select "professionals", you might be asking, since the funds have left Gloves. Where would they go next? What is the next thematic / rotation play? 

I can with great certainty share with you, regardless of which sector they move to, it wont move up and these Local Funds wont be able to make money from that sector. The Glove Sector is the one supporting the KLCI index, it is also the one that is supporting the other ancillary sector (be it healthcare or indirectly linked such as Bursa due to high volume). Gosh, even the water, electricity, natural gas consumption by these Glove Manufacturers are supporting the utilities sector for the government when other industries have slowed down as a result of the pandemic. I like this message by Principal Asset: 

Her views were echoed by Principal Asset chief investment officer Patrick Chang, who said that the FBM KLCI has largely been driven by the healthcare sector, which has seen medical glove manufacturers, in particular, raking in bumper profits amid the Covid-19 pandemic.

Compared with its regional peers, he said the KLCI has been the biggest outperformer in ASEAN year-to-date, having only been down by about 6% compared with Thailand (down 22%), Singapore (down 22%) and Indonesia (down 25%).

These countries, he noted, do not have a massive glove sector like Malaysia does.

"Glove makers are making historic amount of profits as we speak — this tells you at the end of the day that it is backed by fundamentals. 


Hence when select Local Funds  try to kill the KLCI market's only bright spot, you effectively kill other sectors. Simply because, if a company with strong fundamental earnings are ignored and dismissed with such impunity, what does it make of other sectors which are loss making or delivering only a fraction of the Glove's sectors earnings? 

- Tech ? Down 
- Banking ? Down
- Plantation ? Down
- Wood? Down
- Consumer? Down
- Utilities ? Down
- Telco ? Down

The list goes on. Banks don't even give Local Funds the yield anymore. So where are the Funds going to park your funds in search of yields? Your best bet is for the Glove players to be generous with their dividend this year and fill in the gap left by other Blue Chip stocks. Hence, if Funds continue selling down and creating nonsense justifications to play down the sector, trust me, even the Glove Sector cant save the Fund's performance this year. Why? Glove Players would probably need to use their cash holdings to support their share price.  

So, now where else do you turn to? Sure, one can artificially prop up some of these sectors last minute to try to beautify your Index. However, the market will not respond to your nonsense. In fact, the market always punishes greed, pride & laziness. You may want to rotate out and switch to other sectors, but no one is following you. So you are just playing with yourself. And if you are playing with yourself, the share price will not go up. This is because all market participants need to be on the same page for a company share price to rise. Its as simple as that. 

This is my message to Macquarie's unbelievably incompetent and questionable Research Report Downgrade of Top Glove yesterday. This has caused such a reputation dent to your Bank that if I am senior management or the CEO of the Bank, I would summon the head of research to reprimand how his action brought disgrace to the organisation. Why am I saying this? Just look at what Macquarie send to my mailbox this morning. 

My message to Macquarie - After adding salt to injury in the market yesterday, you have the nerves to reiterate outperformance on Bursa stock to promote your call warrants on Bursa. How dare you email me with his garbage? Bursa's share price and volume has been reaching record high because of Gloves sector. If you want to say Gloves sector's supernormal profit in 2021 will never repeat itself and its a one off, hence justifying pegged to 2022/2023 normalised ASP earnings, do the same for Bursa. Downgrade to underperform as well and pegged it to 2022/2023 normalised Average Daily Volume. Be Consistent in your message - Macquarie. Dont be joke.


Ps: McQ, just bring back the previous Glove Analyst - Denise Soon

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Food for thought: 


80 Best Quotes On Stock Market Investment And Financial Management

Thursday, 10 September 2020

(Tradeview 2020) - The Argument For & Against Glove Sector. Pick Your Side. But Choose Wisely.

    





Dear fellow readers, 

Once again, these writings are just my humble highlights (not recommendation), feel free to have some intellectual discourse on this. You can reach me at :

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