(Tradeview 2021) - Long Term Value Stock 1 : Oriental Food Industries Holdings Berhad (7107) Gong Xi Fa Chai!

        

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Source : OFI website

In a blink of an eye, 2020 have passed and now we are on to the second month of 2021. Many seniors I know in their golden years have lamented to me how the Covid-19 pandemic have stolen the time of their life for enjoyment, simply joys and peace of mind. In fact, majority worried about contracting the virus (elderlies have higher propensity to contract the virus) that they even reduced to staying at home fully, not even going for morning walks or evening strolls anymore. The young ones on the other hand would live through 2020 deprived of their proper education, socialising with school mates and examination. 

When it comes to the economy, the number of companies especially SME which have shuttered have reached levels unseen since the 1997 Asian Financial Crisis. During times of uncertainty, volatility and distress, the Government and agencies plays an important role to assist the people to get through the darkest hours. We have to admit, like Covid-19 patients, beating the virus is only the first stage. What comes after, long term effects are what patients will need to battle with in the years to come. Hence, if anything, investing in the midst of a pandemic driven economic crisis has taught me the importance of investing in quality business which can sustained over a long duration of time. There are many companies listed in Bursa but not many companies are like that. To be a good investor, we must do the necessary work to scour through the stock exchange to find these hidden gems. It is not easy but when you do find it, it is all worth it. 

As we are approaching the end of Chinese New Year 2021, I would like to share a  company which fits the frame of my expectation, namely Oriental Food Industries Holdings Berhad (OFI). Please do not confuse this company with Oriental Holdings Berhad which was a conglomerate I have written about in 2020. OFI is a consumer FMCG company with many years of track record and own brands under its stable. I like the stock for a variety of reasons based on a set metrics. To give a little background, OFI is the manufacturer of these familiar food products :

Pic Source :  OFI website

1. This is a confectionary products manufacturer and exporter. I like the company because it is rebounding from multi-year lows and returning back to steady consistent profitability. This provides some level of earnings visibility. The products I have tried myself, it is really quite good. Well, the best way to know if a company is worth investing is if you try the product yourself. Additionally, despite MCO and lockdown, they have done very well for themselves in 2020 with the latest quarterly results with strong growth on Revenue and Profit YoY. The first 3 quarterly results profit alone have exceeded last full year results FY2020. Based on the trajectory of the recent quarterly results, it would appear that OFI will likely deliver all time high revenue and much improved earnings since 2018 despite the onslaught of the pandemic. It shows the resilience in earnings for the FMCG sector despite the weak economic climate. In comparison, its peers apart from Kawan have all been somewhat affected by the pandemic including Hupseng, Poweroot to name a few. Kawan remains to be growing and OFI is making new highs in terms of revenue and profits.

 

2. Management to me is very important when considering investing in companies. OFI was founded by Dato Son and with decades of experience under his belt, he has built OFI to be a household names with brands like Jackers, Rota, Super Ring, Zess. Each of this brands are up against Fortune 500 MNC products which caters a value alternative to local and mass market consumers. Until today, Dato Son at 74 years old still personally lead and take charge of the R&D of the business. This is what I value most in a business. Strong management running a quality business.

3. The expansion plan are in place. The loans used previously were for expansion of facility and new production line for further increased which will kick in soon. As of March 2020, they were finishing the balance production line pending delivery of the equipment and machineries. With the new expansion and facility in place, it would raise their revenue and provide the growth trajectory which this conservatively managed company requires. There is no point buying a company purely because it is undervalued without any growth potential. This will serve as a catalyst to the upward revision of the stock price in line with growth rate.

4. Importantly, it is net cash company with good balance to of local and export markets. It is currently RM 18 million net cash and cash position stands at 12.5% of total market cap. For many years, the company have always maintain healthy cash position and this allows consistent dividend payout ratio policy of 35% for shareholders. Also, indication of stronger earnings is from their increased in dividend payouts which also is consistent every quarter. Based on the past year dividend trend, the conservative estimate this year at current price of 86 sens would be a yield of 2.3% assuming they continue the payout of 0.5 sens per quarter (full year 2 sens). The only downside is the low liquidity. 

5. Prominent substantial shareholders including EPF, KWAP and Fidelity. As per the latest list of 30 largest shareholders in the 2020 annual report, we can spot notable names which to me is rather surprising considering the company is a small cap stock with low liquidity. So this would give confidence to investors that the company while not a major cap stock, it still have the ability to draw institutional investors.

6.  The most significant reason I like OFI is because they have their own brand and market standing in the country (or overseas). Having your own brand with a dominant position in the market can lead to valuation premium just as what Munchy's happened back in 2018 where the company was bought by CVC Capital, a renown Private Equity fund at RM 1.1 Billion. According to Nielsen, Munchy's had a 21.5% share of Peninsular Malaysia's RM1.044 billion biscuit market in 2017. Based on this estimation, Munchy's revenue would be about RM 200 million. OFI currently for the past 5 years have a revenue ranging from RM 226-288 million. I believe OFI with their wide range of products should have comparable market value being offered as Munchy's as OFI have a wider range of snacks and confectionary products. To put things into perspective, OFI current market cap is only RM 211 million less than 5x valuation offered for Munchy's. This reminds me the arbitrage value difference example when I highlighted QL few years ago when they started their venture into Family Mart. Back then, I highlighted that QL will likely have a possible valuation rerating due to Jaya Grocer's valuation paid by the acquisition of PE fund then as new benchmark. For those who missed that article in 2018, feel free to read here :

https://www.tradeview.my/2018/01/tradeview-2018-value-pick-no-1-ql.html

Munchy's news :

https://www.cvc.com/media/press-releases/2018/cvc-asia-fund-iv-acquires-munchy-food-industries

https://www.thestar.com.my/business/business-news/2018/04/18/cvc-capital-close-to-buying-munchy-group-for-rm1pt1b/

7. Regardless, I believe this is a mid to long term stock that has strong share price growth potential. My calculation shows the long term Fair Value of OFI would be around RM 1.25 at a 20x PER of latest QR compared to peers which are more expensive like Hupseng, Power Root and Kawan. Once the new production goes full force, there is a further potential for rerating and to me, there is a solid grounds for the stock to be a multibagger. Lastly, the Price to sales ratio (P/S ratio) is 0.79x, less than 1 which is rather attractive. But using P/S ratio must be considered sparingly and in tandem with other metrics, like net cash position. This brings to the conclusion that OFI is attractive.

Of course, there is the argument that FMCG companies having specific client base due to the price point of their products will limit its potential reach. What I like about OFI products is the wide range it caters to, not only the lower middle class but even the elites. Our former Prime Minister is a big endorser of their product. Assuming you can't recall, let me refresh your memory :

Whenever I write about Long Term Value Stocks, the most frequent questions I receive from readers are, how Long is "Long" ? I can understand the frustration of waiting and sitting compared to active trading. Investing in fundamental stocks require very different set of skillset but most importantly, the difference is in the mindset. Active trading gives you a faux sense that you are doing something, working on making money. Investing in long term stocks feels boring. However, if your goal is to invest large sum of money and build wealth, then there is only one real way to do it, investing long term. Hence, long term can be anything more than years to decades so long as structurally and fundamentally, nothing has changed. 

Again, when choosing long term stocks 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, OFI is beginning to meet the metrics. 

To those who are celebrating Chinese New Year, Happy Chap Goh Meh. May the new year usher in prosperity, good healthy and plenty of joy. For those who aren't celebrating, happy holidays. Let us looking forward to a better year ahead for all.

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Food for thought: 

(Tradeview 2021) - Are We In A Bubble?

 

About 2 weeks ago, Elon Musk's Tesla revealed they have taken a huge position in Bitcoin and he believe in this cryptocurrency so much so he think it is worth more than cash (I am assuming he is only talking about currencies which are subjected to negative rates). Then, this week he said he feels Bitcoin is a bit on the high side. Few weeks ago, he promoted Dogecoin. Then he said it is best to sell. In 2020, the most watched or followed twitter account was Donald Trump. After Trump was banned, Elon Musk pretty much became the new king of twitter. One was a mad president. Another is a mad richest man in the world. Both are extremely powerful people with great influence.  

I grew up with the belief the the Presidential office of the United States is one of prestige, decorum and greatness. I too believed to become the richest man in the world, it would require someone of great brilliance and humility like Bill Gates, Warren Buffet and the likes. I never knew being eccentric, crazy and out of the norm would be what it takes to scale such heights. At times, I am not sure what is becoming of the world anymore. 

In relation to the stock market, everyday, I am learning something new, toying with new ideas and trying to bridge the gap between expectations and reality. I have always understood being a fundamentalist is very lonely. Most path taken is not that common. With the flood of new retail investors, social media and surge in "Gurus", the market may not behave as in tune with the usual rationality that I am used to. In 2020, investors were always searching for resilient stocks which are shielded from the pandemic and is able to deliver earnings. In 2021, investors are looking beyond recovery. Those who are screaming buys on tech stocks mostly do not know what they are shouting about except to justify with the common hip words "5G, AI, IOT, Solar, Green, Renewable, Digitalisation etc".

So how do we navigate the market as it is? I asked myself this question almost every day. To sit out a rallying market is to miss out on opportunities. At the same time, to be highly vest in an overextended irrational rally, is to take a huge risk. The good thing is, we are retail investors. We should use this to our advantage. Our capital is small, we are nimble and we have the luxury of time. The luxury of time is not what hedge funds, professionals or banks have. They need to churn out returns every single day, month and year to justify taking clients money. We do not face such pressure. We are not forced to pull the trigger or swing the bat. This is what I hope you all will remember. One of the best lessons I have learnt from investing over the years is risk management is as important as picking the right stock. 

It is never easy investing in the stock market. Over the CNY, I have heard how many people became stock market experts in the course of 2020. Often during such conversations, I am usually a very good listener. A big part about investing is to be a good observer, listener in order to gauge the market sentiment, feel on the ground in order to have better market insights. If you are always the one talking, I do not think you would benefit much in terms of learning from others. My takeaway from these CNY conversations which revolved around glove stocks, GameStop, BitCoin, Tech stocks, EPF withdrawl, "what's next year theme" would be - Retail investors did well in 2020, is hungry for more action in 2021 and can't wait to have another stellar run.

There were honestly no sense of fear or worry but more skewed towards optimism. In my view this is a good thing. Being all solemn and worrisome wouldn't help with the current predicament. Optimism translates to confidence and confidence is important from the aspect of investor confidence, business confidence and consumer confidence. However, whilst I do think it is important to remain invested in the stock market, I will adopt a rather cautious stance in 2021. I believe that the market is due for a correction, before it can continue any further uptrend or historic rally. When too much optimism is in the market, it becomes exuberance. Over-exuberance at any point in time, is never good. You can have a look at this viewpoint from Michael Burry, famous from the movie "Big Short".

https://markets.businessinsider.com/news/stocks/big-short-michael-burry-warns-stock-market-huge-risk-crashing-2021-2-1030106969

In a nutshell, this is what I would do in such times. Take your time in looking to enter stocks. If you want to take a position, be prepared to hold it for some time. If you are not, stay sidelines. For position in good fundamental stocks which may yet to be performing or temporarily underperforming, do not be too worried as overextension in the market goes in both directions (upwards and downwards). This is why I am advocating as what I always have been, build a balance portfolio and build up the cash coffers. By doing so, in the event there is a correction, investors can navigate better be it to average down or take fresh positions in their favourite companies. By being heavily invested as they were in 2020, would be a dangerous move considering many sectors or stocks are "overvalued".

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Food for thought: 

(Tradeview 2021) - What I Learn of Fundamental Arbitrage Through Sri Trang Agro

   

Last year August 2020, I wrote a piece about Sri Trang Agro as a long term value stock due to the strong fundamental nature of the company which meets all my metrics as a long term investment. As of Friday 19th February 2021, 7 months since I wrote about the company, Sri Trang Agro hit all time high at $ 1.97 and THB 43.50 (Sri Trang Agro is the holding company of Sri Trang Gloves and is dual listed in Thai Stock Exchange and SGX). For those who missed my earlier write up for Sri Trang Agro, feel free to revisit here :

https://www.tradeview.my/2020/08/tradeview-2020-long-term-value-pick-3.html

Most readers would known by now that Sri Trang Agro is one of my favourite Thai listed company. I have written extensively and believe it is a well managed company. The problem have always been the question of Sri Trang Agro versus Sri Trang Gloves. When I first highlighted Sri Trang Agro, many were asking me why didn't I choose Sri Trang Gloves instead which was all the rage. Many told me to focused on a pure play glove maker like Sri Trang Gloves instead of Sri Trang Agro which would be susceptible to holding company discount. In fact, at a quite a long stretch, Sri Trang Gloves valuation was far ahead of Sri Trang Agro. The biggest frustration came from the huge valuation gap and the subpar share price performance of Sri Trang Agro which was sideways for a long time. This concern is valid and indeed a deterrent for investors. 

However, my rationale was simply, there is deep value in Sri Trang Agro because of the arbitrage difference between Sri Trang Agro which is trading at too steep a discount to Sri Trang Gloves considering Sri Trang Agro still hold more than 50% of Sri Trang Gloves. Also, the diversified nature of its business between upstream and downstream (from plantation to finished goods) and the strong management team would protect the downside of the company. In essence, Sri Trang Agro was punished because of the dismal commodities price where natural rubber price was low from Covid-19 because of suffering automotive sector and industries that require natural rubber raw material (besides latex glove).

Now with the huge interest in glove stocks dissipating due to the unwarranted fear of ASP falling off the cliff as a result of the pandemic ending, Sri Trang Gloves and other glove stocks have been impacted irrationally. Sri Trang Agro on the other hand buck the trend and broke new record high in terms of the share price movement. This is because of their diversified nature of being a full upstream and downstream player. Natural rubber being a commodity have trend upwards in line with commodity "upcycle". This will directly benefit Sri Trang Agro bottom line especially when the investors are flocking towards recovery play and economic reopening. On top of that, their gloves division will continue to provide strong earnings visibility. Another reason is their exposure to hemp plantation. With the Thai Government recently legalising cannabis, this have led Sri Trang Agro being given attention although this venture have yet to kick off or bear fruits.

This is why I find investors at times behave irrationally. They move with news flow of potential future earnings (unproven) rather than actual solid earnings track record with earnings visibility. Nonetheless, despite the noises and emotional turmoil, I know many fundamental investors held on although some were anxious when they emailed me to enquire. To all my readers who believed and held on to Sri Trang Agro, a well deserved returns for you all after going through all the ups and downs. 

For those who thinks that fundamental investing or value investing is dead, this is a proof yet again that you do not need to do active trading daily to do well in the stock market. Finding good stocks, holding on and sitting through, letting the passage of time and value to be realised is the key to building wealth over a sustainable period of time. Active short term trading is fun, exhilarating and give a sense of thrill. Just like gambling. Whilst some would argue its the way to make money from Bursa, not long term investing, I beg to differ. Such short sightedness is a way for Bursa and brokerage houses to make money, through transaction fees. Time and again, history has shown for fundamental investing all it takes a good selection of quality companies, the returns would be astronomical. Likewise, for all the accumulated short term trades, one mistake is enough to wipe out a portfolio. 

The beauty in finding a company which is undervalued, both fundamentally and via an arbitrage would provide a base or “defence” against any potential selloff. The downside is protected. Arbitrage investing is one of the many strategies that seasoned investors adopt along the likes of  earning yield investing, dividend investing and others. I often adopt this method in 2020 to determine whether to invest in stocks because of the volatility and uncertainty. This have resulted in outcomes which exceed expectations for my private portfolio in 2020 with the likes of Wilmar International Limited, BIMB-Wa and APB Resources Berhad outperforming many stocks and the larger market albeit at a gradual and slower pace. Of course, the downside is the waiting time. One ought to be patient. Just like reading an article, if you are only willing to read the first 3 paragraphs and not finish the article, you would miss the most interesting bit at the tail end. Back to the topic on hand, if investors ever come across fundamental arbitrage opportunities, one should not hesitate to take it even if it requires a little more time waiting. Remember, wealths is built over time, not overnight. 

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Food for thought: 

(Tradeview 2021) - Mega First Corporation Bhd Long Term Value Stock (Update)

  

Last year August, I wrote about MFCB as a long term value stock due to the strong fundamental nature of the company which meets all my metrics as a long term investment. As of close of Friday, MFCB closed above RM 8 and hit a new all time high. For those who missed my earlier write up for MFCB, feel free to revisit here :

https://www.tradeview.my/2020/08/tradeview-2020-long-term-value-pick-4.html

With the permission of a fellow reader, who asked for my view in the course of the week, I will be sharing my views for the benefit for all. 

Q: She said, "I held on MFCB for a long time, added when it dropped below RM 7. Yesterday I sold half at RM 7.45, today I sold the balance at RM 7.70. I am very heartache now as MFCB is RM 7.89. I feel painful because every time I take profit, it seems to go higher. When I hold it doesn’t move. How can I prevent this in future?"

A: In essence, this is about long term investing vs short term trading. For short term traders, they enjoy the thrill, excitement of fast money, quick income, small wins. For long term investors, they are not interested in small returns, they are fishing for larger windfall. Some people like to feel like a winner and winning means making money in the stock market. So they enjoy the feeling of being a winner as often as possible. They cannot stand seeing a red portfolio or at a loss. So whenever their losses start piling up, they sell. Whenever their profit comes, whether big or small, they take. At the end of the day, the real winner is the brokerage who basically makes commission from the frequent trades with none or minimal risk involved. 

However, a long term investor looks at the company like buying a property or land. They understand it may not make money in the short term, so long there is capital appreciation in future, in the mean time, as long as there are some form of income yield (dividend yield is just like rental yield), which may not be large but can cover some cost, they are happy. Often, it is this group of people who makes the most money. Not immediate, but in the long haul. 

Coming back to MFCB, it is a good company and have huge potential. The management is strong and they have a recurring cash flow from their cash cow Don Sahong dam. Their expansion plans are paying off after 10 years of hard work and till today, they have yet to realise their full potential yet. Their results would be out this month. When I call it my Long Term Value Stock, it is because its a long term investment. Sure, if it the share price moves faster towards the goal, I am happy too. However, I would not rush to take profits because of the potential. As an investor, we must look at the potential, not immediate short term gains. Having said that, if you are happy with the profits, don’t want to risk further and can accept missing out on future upside, then by all means take profit. Don't feel heartache thereafter, as you still landed yourself a good profit. 

So to overcome this issue, you have to ask yourself, what is your intent of investing in the first place? Is it to seek immediate gains, or to build wealth?

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Food for thought: 

Tradeview Commentaries (1st Feb 21) - Why GameStop’s Phenomenon Resonate with Malaysia’s Glove Retail Investors Part 2

            

Pic : TMZ

In the past year, retail investors participation in stock market globally like US, South Korea were at record highs. This is largely due to the prolonged Covid-19 lockdown and flood of liquidity expanding the money supply in the economy (M3). 

Locally, in 2020, foreign funds outflow from KLCI ballooned to RM25 billion. On the contrary, Retail investors were net buyers at RM14 billion and local funds at RM11 billion. Hence, it can be concluded it was retail investors who supported KLCI. As a result, Bursa is on track to deliver record profits for FY20/21 due to record high retail participation, so are the IBs and other brokerage firms. Active retail participation is a boon for the stock market. If social media changes the landscape and levels the playing field between retail investors and institutions, it should be welcomed. Of course some level of oversight is a must to prevent abuse however the same can be said towards the conduct of the Foreign IB whose research report was a sales piece to pitch to institutions to capitalise on RSS ban lifting in KLCI to short the 3 glove stocks. If Regulators intend to clamp down on retail investors, equal scrutiny should be accorded to those questionable IB’s analysis. 

Irrationality in the stock market swings both ways and over time it will normalise. A fundamentally sound stock will not go down indefinitely. When the buying volume and momentum outweigh selling, the share price goes up and vice-versa. The point to note, however, it is important for funds to come in to support for share price ascension. For glove stocks, it has been punished irrationally and retailers banding together can be seen as a reactionary market forces. 

Indeed, the circumstances of GameStop vs Gloves stocks while sharing a common distaste for shorters, the substance is different. Unlike GameStop, the Glove stocks are undervalued, delivering continuous record profits and good dividend yields. The demand won’t disappear overnight just as when I repeatedly said the vaccine announcements won’t eradicate Covid-19 instantly. 3 months since Pfizer / Moderna announcement, globally and Malaysia is in a much worst state than 1 year ago. For those who choose to ignore the supernormal profit of glove stocks, please reassess your valuation model impartially. This is not the same where a company disposes their core business and net a huge windfall, declare one-off dividend and is left without a profitable business the next year. How many times have we seen the glove stocks grow post pandemics (H1N1, SARS)?

I understand valuation is subjective. The argument can go on indefinitely. So let’s leave it as that. I am just a blogger and a retail investor. In my years writing, I have always put the interests of my readers and retail investors close to my heart. It pains me to see many subjected to losses resulting from “pump & dump” operations. This means I would not write on companies or sectors which I deem risky, questionable or fundamentally weak. 

I would like to take this opportunity to share my honest view on the “Glove Movement” with retail investors.

1. Do not invest in glove stocks if you don’t believe in the fundamentals and not willing or able to hold for the long term. Only do so if you believe in buying a wonderful company for the long haul.

2. Do not get carried away, caught up in the hype and be emotional. No point using hard earned money to spite anyone, be it IBs or shorters. They don’t care about you, only their books.

3. Do not use margin to invest in stocks, only excess cash. Invest within your means at all times (regulators can clamp down, banks can impose margin caps anytime)

4. Avoid structured warrants, derivative products especially if you have no knowledge.

The stock market will keep evolving with the advancement of technology. Retail investors, looking out for each other may just be a new way forward. I do not know for sure, but this is surely an experience we will all remember. 

End Part 2

 

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Food for thought: 

Tradeview Commentaries (30th Jan 21) - Why GameStop’s Phenomenon Resonate with Malaysia’s Glove Retail Investors Part

           

Dear all, the largest telegram group now consist of over 42,000 members. Since the “Glove Movement” started 4 days ago, it spread like wildfire capturing people’s attention. Notable experts, regulators, pundits, prominent investors have weighed in over the weekend on this phenomenon which was largely inspired by the GameStop rally in Wall Street. 

Many were quick to distinguish the GameStop, AMC stocks and the Gloves stocks in Bursa pointing out a short squeeze would not happen in Bursa due to the 4% RSS limit, glove stocks are not oversold up to 140% and robust regulations in Malaysia. I do agree that a short squeeze like GameStop will not happen for the Glove stocks in Bursa. 

However, those who assume retail investors are naive and this is just a elaborate ploy of some unscrupulous “Gurus” manipulating social media to start a “pump & dump” operations failed to recognise a crucial underlying issue. Why did GameStop resonate with Malaysia’s investors?

If you look at the largest telegram group, people from all walks of life are there, from VVIPs to students, all banding together for the Glove sector. It was an organic movement with no leaders. Hence, it is not right to brand and undermine those who participated in the group as manipulators. 

In my humble view, the common denominator is that retail investors share a strong distaste towards the short selling facilitated by some IB towards the Glove stocks. To be fair, whether Permitted Short Selling, RSS or IDSS are actually healthy for a vibrant stock market. It’s like your gastro system which flush out the bad elements to ensure your body is healthy. However, too much, too sudden or extreme cases, it cause a severe reaction. In this case, the short selling was not conducted towards a struggling company with weak fundamentals. It was towards fundamentally sound glove companies. Shorting selling by right, should be directed towards a overvalued or fraudulent companies like Luckin Coffee, Wirecard AG. 

Retail investors have found the glove stocks easy to understand, relatable and a story of entrepreneurship. Many view them as underdogs who succeed in the midsts of this economic debilitating global pandemic after years of hard work. To some, they feel a huge sense of pride to know Malaysian gloves are protecting the global population. I have not seen such unity in our increasingly fractured country since national badminton heroes competed for 4 gold medals in 2016 Olympics. Yesterday, the Government announced Malaysia recorded the largest trade surplus for December in 23 years. The Glove sector played a huge role there. In addition, even Bursa’s Chairman acknowledged if not for the 3 healthcare counters IHH, Hartalega & Top Glove, KLCI would have fallen 11% in 2020. Indeed, KLCI is one of the poorer performer in the region since 2021. This coincided with the massive selloff of glove stocks for the past 2-3 months. How did this happen? 

Sure, it started with the vaccine announcement in November 2020 which led to premature optimism by the investment fraternity on economic recovery and reopening spurring profit taking. This was further exacerbated by the Foreign IB’s research report which led to facilitation of massive short selling exercise at the start of the year. Citing The Edge, in the first trading week of the new year, there were 196.19 million shares worth RM1.09 billion shorted during that week. An old timer in the investing fraternity said he has never seen such weight of money being put on the table before this on Bursa. The short selling volume accounted for 56% of the week’s total volume. It did not end there and today Top Glove, Kossan & Hartalega are the 3 most shorted stocks in Bursa. Coincidently, these 3 stocks were sell calls with ludicrous TP in the Foreign IB’s report. Therefore, it would appear the Glove Movement in Malaysia is not about manipulating the market but a reactionary force. 

End Part 1

 

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Food for thought: 

Tradeview Commentaries (28th Jan 21) - Of GameStop, Gloves, Short Selling & Short Squeeze

            

Most by now would have heard about the parabolic rally of GameStop of 1600% since 12th Jan 21. Some are calling it a mania, some argue it’s the sign of a bubble, some say it’s due to the Fed’s liquidity. The fact of the matter it was a case of short selling went awry due to organised retailers fighting back, over-selling by shortsellers who couldn’t get enough stocks from the market to cover their position and prominent names lending weight during the height of the frenzy. It became a movement and sparked unprecedented wave of reactions in the investment community. Now, what has this got anything to do with us back home in Bursa? 

The top 3 most shorted stocks in Bursa since the lifting of RSS in 2021 would be Top Glove, Kossan, Hartalega. RSS known as Regulated Short Selling require approval from the exchange. Primarily, large funds / institutions are involved in RSS who take a view to short the stocks in return for profits. In order to execute RSS, they need to have in hand or access to large amount of quantity of stocks they plan to short. This was why, we saw EPF ceased to become substantial shareholder of Top Glove on 8th Jan 21 when it lend its shares for short selling (SBL). Recently, EPF recalled closed to 55 million shares and became substantial shareholder again. 

When a Foreign IB research came out with an outlandish sell report in December 2020, I was perplexed by the entire premise and analysis of the report. I have never came across a report like that. What bewildered me wasn’t the questionable analysis but WHY would a sell side initiate the first report on the glove sector as a strong sell with ludicrously low target price across the board. I spoke to analysts and those in the industry, where they too were surprised. As Bursa is generally a long market, sell side rarely initiate with a strong sell for new coverage. Come January 2021, it became clear what the true purpose of the report. It was to facilitate short selling of these 3 stocks in Bursa immediately upon lifting of RSS where funds can execute short selling through this Foreign IB. This Foreign IB would make huge fees from the execution of RSS for their clients. 

After doing some channel checks, it turns out this Foreign IB in fact made a huge profit in 2020 facilitating foreign fund flows into our Glove sector during the rally in 2020. Now, this Foreign IB is simply doing the opposite. This was why, the Foreign IB research produced 4 reports during January month reiterating the sell call, when the glove sector sustained and at one point rallied back due increased in Dividend payout ratio by Top Glove, Share Buy Back by Kossan and Major shareholder buy back with own funds by Hartalega. 

Of course, we have all witnessed Hartalega’s record shattering results recently to know well enough that the glove sector is not only doing well, its strong earnings are sustainable even with the vaccines announcement since Nov 2020. Hartalega at USD 55 per carton could deliver record earnings, what more other glove makers who have much higher ASP. 

The issue at hand is the earnings visibility, strong fundamentals and sustainability of ASP due to demand far exceeding supply due to a structural step up in demand, heightened hygiene awareness and large healthcare budget allocations by government all around the world. Based on these reasons, it is clear that the institutions and market participants took profit too soon expecting a speedy recovery of economy due to vaccine without considering the possibility of even a MCO 2.0. The short selling via RSS by funds further exacerbated the irrationality of valuation towards the glove sector. 

I am a believer of fundamentals and think the glove stocks are undervalued by all metrics regardless of what is being misrepresented by some to mislead investors. These are wonderful Malaysian companies that have stood the test of times and are now world leaders. To invest or otherwise, that’s a decision only you can make. 

 

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(Tradeview 2021) - Malaysia's Glove Makers Deserve A Fair & Objective Assessment (Regardless Of Their Share Price)

           

When Bill Gates first actively went around the world promoting the development of vaccine research and spent much of his wealth raising awareness, there is the lack of attention given by the general public. However, with the Covid-19 pandemic, everyone started to call Bill Gates a visionary. His Ted Talk 5 years ago titled "The Next Outbreak" chalked up close to 33 million in views today with the explosion happening only when Covid-19 erupted in 2020. Feel free to watch it here : 

 

The argument can be said to be the same for Glove makers. Some 30 years ago, glove manufacturing was not what it is today. Glove manufacturing is an extremely tough, competitive and difficult industry earning only meagre margins as the bulk of the profits are taken by glove distributors abroad. Your big names like Cardinal, Ansell, Kimberly Clark and many others. The Malaysia glove industry came about because of the natural rubber / latex supply due to rubber plantations in the country. The access to raw materials as well as some level of manufacturing capability led to these savvy entrepreneurs to pivot from using Latex or Natural Rubber for tyres to new products like rubber gloves. Some saw the opportunity with the heightened awareness due to AIDS pandemic abroad. For many years, Malaysia glove makers sweat and toil being the "sweat shop" / OEM for foreign distributors, hospitals and government. Fast forward to today, the Glove industry have improved leaps and bounds, most importantly, Malaysia has become a world leader that controls the supply of gloves in the world with an estimated 67% of global market share. From 1980s till today, there were 250-300 glove manufacturers then, now there are only 45 world class players in the country.  

Manufacturing as an industry itself relies on productivity, cost efficiency and economies of scale to achieve cost optimisation in order to be become profitable. It is extremely hard to achieve that because most manufacturers will get pressed by their distributors or clients. Manufacturers are the lowest cost centre in the entire supply chain. Majority of the glove makers in Malaysia are run by family owned companies, very few by large MNC. This is because manufacturing is a hands on, laborious, 24/7 long hours complex operation. A machine breakdown or an electricity blackout for 1 day can easily wipe out the potential profits for the entire month. If not for this global pandemic, glove manufacturers would be extremely happy with a commendable high single digit to low double digit profit margin. 

I think most readers would know some of the things mentioned above by now, apologies for being long winded, but why am I repeating this? The reason I am sharing this is because, I hope readers know it has been an arduous journey for glove makers. This so called "windfall" or "stroke of luck" as stated by some did not happen overnight. It was due to lots of blood and sweat. It is very easy to be envious when others are doing well in a tough time. It is also very easy to condemn and criticise. Talk is cheap but that is the reality of today's world. When we are suffering, we hope the world suffers with us. This is because as human, we take solace in collective suffering. If we are the only one suffering, we would feel very depressed right? 

Actually, this is not the right mindset. In Chinese, there is this saying "将心比心”。Loosely translated, it means having empathy and putting yourself in others position. If you worked hard for all your life as an honest entrepreneur, and you have done right for most part, is it fair to be run down just because you are doing well today albeit with some flaws? Don't get me wrong, I am not defending any company in particular but the glove sector as a whole. In addition, there are many layers of problem with regards to ESG, labour issue in our economic sector which most people know about such as : 

1. Foreign labour dependency is not a singular issue of the glove sector but majority of the sectors in Malaysia because locals are not interested in 3D jobs - dirty, dangerous, demeaning

2. Agency monopoly / cartels exists which control the supply of labour between Governments (politicians) leading to exorbitant agency fees imposed on foreign labours.

3. Hypocrisy of foreign distributors and corporations that forces local glove manufacturer to lower cost, compress margins in order to enjoy profits on their end. (On one hand talk about ESG, on another hand press the price of OEM manufacturers. This is not only applicable in the glove sector but other industries too)

In 2014, I remembered our country's top national Badminton player was embroiled in a doping scandal. This was when he was World No.1 and at the height of his career. It was the worst possible scenario for any athlete. I remembered back then, most Malaysians were skeptical whether it was true. Eventually, our national hero was given 8 months ban due to illegal substance Dexamethasone. The point to note, our national Badminton shuttler wasn't aware and the drug was not performance enhancing but for rehabilitation given to him by those in charge of his care. He paid the price of the ban and came back to competition including the 2016 Olympics where he nearly won our country's elusive Gold medal. He said during his retirement press conference, that his greatest honour was being able to play for the country. I believe he was an exceptional talent. Those that comes in generations or decades. However, the Malaysia badminton ecosystem have always been able to nurture and support talents. This is because the sport itself had the support of the government, association and the people. If the media, government, associations back then chose to only focus on sensationalism / populism without giving the benefit of doubt and crucify him, he probably would not have the chance to rebound and make it for Olympics. Also, imagine, the world's impression of Malaysia's badminton when this doping incident exploded. Just because of one doping case which was a mistake, does it mean all Malaysia's badminton athletes are dopers? 

Few years ago, two former national shuttlers was banned for life for match fixing. One was a promising young star who even won the world junior championship. Due to the match fixing, he was banned for life. I felt the punishment to be harsh as he was young and misguided by a senior national shuttler. This boy trained his whole life to be a national player (neglecting his studies), now that he is banned for life what can he do next with such a long path ahead? People make mistakes, but unlike our national hero's case, his matter was not given the same benefit of doubt and a second chance. So, what has this story got anything to do with glove makers? There are many similarities in the varying ways some quarters of the media, experts or commentators treat our Malaysia glove makers. 

1. Because of the labour and ESG issue highlighted on a few glove makers, the entire glove industry was painted with a stroke of brush across the board as "forced labour industry"? Is that fair? How about those others glove makers who complied with all laws and regulations? Also, when we talk about forced labour, what about the other industries which are much worst? Why is the glove sector singled out? Is it because of the sky high profits they are making now? Have anyone been to the construction "kongsi" and plantation "estates"?

2. Just because the Glove makers are finally doing well, some have been loud to ask for windfall tax incessantly as it is a populist move. How about the years when they were making losses and taking out substantial loans, raising bonds for cashflow purposes? Where was the help? Also, the taxes and levies they have paid over the years to government, jobs created and capital investment made? Granted, MIDA have supported the industry with promotion, patent application and other forms of assistance. However, compared to other industries in our country, the glove sector predominantly was organically developed and grown by entrepreneurs of grit.

3. An objective media shines light in darkness and brings justice to the weak, it also condemns the powerful without fear or favour. I think the role of the media is extremely hard and good journalism should be respected. I have much respect for those who practice true journalism. However, for those media who brings down the ethical standard and good name of a free and impartial press in return of clickthrough or viewership, readers ought to be discerning. The 2 examples below : 

- News portal A decided to publish a letter from an anonymous contributor, referencing his friend (which is tantamount to hearsay) alluding that a glove manufacturer in the country lacks integrity and filled with hypocrisy. It is one thing to report a news with sources and keeping it anonymous to protect the identity. It is another to reproduce a letter by an anonymous writer referencing a friend. Isn't it a tad too much? If indeed the writer's friend went through grave injustice, there is the media and there is the law. The media cannot win your compensation, the law can. As a lawyer myself, I know for a fact we have robust industrial court that protects employees. 

https://focusmalaysia.my/opinion/top-glove-allegations-of-management-hypocrisy-and-lack-of-integrity/

-News portal B decided to conveniently attach the picture of glove manufacturing to a "clickbait" title on FMM letter to manufacturing sector warning of disastrous outcome if the Covid-19 issue does not come under control. FMM in the letter which I sighted, never once mentioned glove manufacturers. So why did the news portal do this? Was it a genuine mistake or a pre-conceived notion / generalisation to imply that Covid-19 cases are all from glove manufacturers? Is this fair to other glove makers who complied with all regulations and have no Covid-19 cases? How about the construction, electronics, furniture manufacturers and others which had Covid -19 outbreak? If this is not coloured lens, I don't know what is.

https://www.freemalaysiatoday.com/category/nation/2021/01/25/clean-up-the-act-or-face-disaster-fmm-tells-industry/

Yesterday, the government after conducting "Ops Glove" found that 90% of the glove industry players are compliant with the regulations and laws. Which means those who are in violation are in the minority. Those who violated and did not do enough, should pay the price and subject to the repercussions of the law. Everyone deserve a chance to improve and upgrade themselves failing which, they should be held accountable once more. As media reports on the flaws and failings of the glove industry, they should also shower praise for those who done right by the law. They should accord fair opportunity to hear both sides of the story instead of relying only on Andy Hall, the activists who has his agenda. Trial by media, shouldn't happen especially if sensationalism gets in the way of true journalism. Lastly, to be fair to all, apart from "Ops Glove", there should be other "Ops Bina", "Ops Sawit", "Ops Petroleum" etc. That way, it is fair play to all. Selective persecutions should not exist in today's society and I look forward to news portals above to continue to facilitate the role as the guardian of truth when the time comes. 

https://www.theedgemarkets.com/article/almost-90-employers-glove-manufacturing-comply-occupational-safety-health-laws-%E2%80%94-deputy

 

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Food for thought: