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Saturday, 1 August 2020

(Tradeview 2020) - Weekend Time (Q & A : 1st of August) Gloves Vs Vaccine

Dear fellow readers, 

As my gesture of thanks for all the support these years has led me initiate a new weekly segment of  "Tradeview Weekend Time". 

This is not about what I do during my weekend but rather I shortlist 3-5 questions from public during the week about the share market / economy that either emailed me, left a comment or private message me and share my answer or feedback to the public. 

I think it is only fair that communication be two ways where readers who enjoy my writing have the opportunity to question, debate, criticise or exchange views. As such, I encourage all of my readers who are keen to ask a question to do so. Whatever the question it may be, I am sure it will benefit others as well in this learning process. 

Without further ado, let me kick off the segment with the following Questions :

Q1. Hi,

I am new to stock market, i just opened a trading account in July.

I heard from my colleague and read some news regarding the recent stock market rally, and i hope i could also earn more income in this tough economy. Due to the pandemic, is it safe for me to allocate part of my fund on glove/healthcare counters? or are there any better alternatives for long-term investment now?

Thank you for your time.

Ans : 

I think it is a good start for you to consider investing in the stock market as a way to diversity your income stream. Opening the CDS and trading account is the first step. Kudos to you. Now the second and most important step you must take is to start reading widely and learning about the stock markets. Avoid hearsay and rumours or tips. Learn the fundamentals of valuing stocks and calculating then forecast the potential of a stock. If you are ready to do all these mentioned above, you are ready to invest in the markets. Otherwise, I would suggest for you to simply just put your hard earn savings in the bank because it is indeed a tough economy and the share market often punishes the greedy, the ignorant and the egomaniacs. 

Now on whether you should put your funds into the healthcare or glove sector, I think you must have known from people around you and the media that this sector is red hot for the past 6 months. In fact, it would appear technology, healthcare are the two best performing sectors in the global markets as well. If you want to enter the stocks at this juncture, I would say the risk reward ratio is much smaller than what it was few months ago because the share price has went up a lot. This % of returns are not small. Assuming someone invested in Top Glove when it was RM5, at today's price it is trading at RM26, a phenomenal 5X return in 6 months. Would you still dare to put your money now? Of course, some believe Top Glove may still go up higher due to unprecedented earnings. I am of the same view. However, when it comes to investing, another important rule to not forget is the margin of safety. Entering now, your margin of safety is smaller. So you must be able to take the volatility and swings in share price that comes with the premium attached to you buying into the hot sectors. Is there upside still? My short answer - Yes. 

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Q2. Hi Tradeview Author,

Firstly, I have to say that your articles are a true enjoyment to read as your writing makes plenty of financial sense. Being a shareholder of a Public Listed Rubber Glove company, I hope to hear your view on the question below.

'What are your thoughts of the impact on Rubber Gloves Companies share prices after a vaccine is successfully developed?' 

Thinking from a realistic view, more rubber gloves will be used as compared to the current Covid-19 testing once a vaccine is available. Currently, most countries are only practicing targeted Covid-19 test (instead of mass testing) and big manufacturers are already struggling to cope with the demand. Wouldn't the demand be even greater when more rubber gloves are needed to inject the vaccine to whole population of this world? I'm just perplexed when analysts are mentioning that demand will eventually taper off to a more normal level once a vaccine is developed. 

Thank you and have a great weekend.

Kind regards,

Ans : 

I think we are experiencing one of the most unique opportunities of our lives especially those who are invested in the share market. Even more so, if you are in Malaysia's Bursa KLCI Stock exchange. This is because the glove manufacturers in Malaysia collectively controls 65% of world market share. This has resulted in the huge creation of wealth in KLCI as a by product of manufacturing life savings medical PPE for front liners in the battle against Covid-19. If my readers invested in Riverstone Holdings Ltd the same time as I did at the same amount of S$ 0.90 sens, today one would be sitting on a hefty profit of 4X their initial investment at S$3.76. Which means, if one invested S$ 10k, today it would be worth  S$40K. Why am I telling you this? Well, I want to show you that I myself is a strong believer in the earnings growth and potential of glove manufacturers, just like you.

However, in everything in life, there is a balance. Yin & Yang. Newton's Third Law - for every action there is a reaction. List goes on. This is especially so in the share market. Everything that goes up must come down. For over 30-40 years, Malaysia glove manufacturers has toiled and sweat in an utmost competitive environment with over 300 players in the industry. Today, the industry has consolidated with about 20 world class players and 70% of them in Malaysia. This industry isn't built overnight and the success enjoyed by them with record market capitalisation (bigger than banks, ports, plantations, property developers) is well deserved though unexpected. Who would have thought of this miracle run by the glove players? It took a pandemic of a lifetime to propel them to world stage and international prominence. It was this global pandemic that devastated economies and took lives which caused the huge shortage in demand resulting the ASP of 1000 pieces of gloves to spike from USD $ 25 to USD $ 160 spot rate.

So similarly, the ending of this pandemic would naturally spell an end to the fairy tale run of the glove makers. It doesn't mean they will not be profitable. It is just that they will be less profitable than now. True, when we administer vaccination (assuming it becomes compulsory), medical professionals need to wear gloves. However, the % of those who may use gloves are not in the same proportion, intensity and quantity of those who uses gloves to attend to urgent patient cases at the peak of Covid-19. Additionally, the usual nature of human to take things for granted will reduce their eagerness to procure and stockpile gloves or PPE in the event vaccination are readily available. So the fear and psychological needs for gloves would reduce. Furthermore, the glove players are all expanding capacity to meet the shortfall, hence the demand gap narrows. Therefore, what the analysts are saying is not wrong and in fact, reasonable. I believe there is still upside to glove stocks in terms of their earnings and share price. But we must also be prepared for the run to taper off eventually should the pandemic resolves because we of the gradual slow down in earnings. Remember that the share price of a stock is always forward looking 3-6 months. 

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Hi Sir,

Is Top Glove, Supermax or Comfort Better?

Ans : 

My favourite is Riverstone Holdings Ltd. I have not sold a single share until now. However, your question is not about Riverstone. So I shall move on. I think it is known fact that Top Glove has the largest manufacturing capacity is the one with the largest market capitalisation. Supermax is an OBM player instead of OEM like the others with own distribution channels and sales outlet. Comfort is a smaller OEM player which is slowly increasing capacity. All 3 are not exactly in the same basket.

Now OBM player would enjoy better profits margin as they control their own selling, distribution and manufacturing price. OEM player controls only the manufacturing price. Hence Supermax would enjoy Supernormal profits as they can enjoy the full end to end. Top Glove cant. However, Top Glove have volume, and with volume, comes big profit especially in a time like this where demand far outweights supply. However, as your question is quite general, I will just assume you are asking which is better to invest in and make profit from the share price. At this juncture - Supermax and Top Glove is neck to neck. Reason is because although Supermax went up more in % terms and Top Glove is laggard, Supermax is coming from a lower base and poorer performance in past years due to higher distribution cost as a result of being an OBM player. However, Top Glove still have a US Customs Detention issue lingering over their head. If this matter resolves successfully, it will be catalyst for Top Glove to push past RM30 at the very least. 

Finally for Comfort, it is smaller cap stock which got the interest of retailers who may find the bigger cap stocks like Supermax and Top Glove expensive. In actual fact, whether a stock is expensive or not depends not on the absolute price but the valuation. This is a general retail investor misconception. I think Comfort at RM5 is pushing their valuation unless their coming Quarterly Results will give everyone a shock.    


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