November 29, 2021

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The Argument For & Against Glove Sector. Pick Your Side. But Choose Wisely.

   

 
 
 
 
 
 
If there is a fear index created to measure emotions of investors for the past 1 week in Malaysia especially, I believe the chart of that fear index probably hit limit up for 5 consecutive days. This is no joke at all when we look at how much the healthcare index and specifically the glove stocks have fallen in the past weeks. 
 
It is hard to imagine that these stocks were just touted as the Darlings of Bursa barely 1 month ago by the entire investment community be it banks, funds, media, retailers and others. What has changed in 1 month? Did the share price hit new high before leading to this protracted irrational selloff? Or did the factories burnt down? Or was windfall tax imposed? Or did US and Europe banned gloves from Malaysia? 
 
Answer : None of the above. In fact, nothing changed. Fundamentally or structurally. 
 
Vaccine news - factored in. 
Windfall tax news - factored in.
Customs Detention - factored in.
Labour Remediation fees - factored in.
 
My 4 points above are just highlighting the major concerns in the analyst reports which are often bantered about by those who do not believe in the glove story. There may be more considerations like politics, raw material supply, USD strength and what not. But let's not go there yet as I will share in my table below. 
 
Things will get worst before it gets better?
 
In many ways, I can say with conviction based on channel checks that the selloff really went into full gear when Local Funds / Institutions pulled the rag under the investors' feet. Meaning, they not only failed to support, they even sold the stocks across all sectors specifically Gloves. Some say they did it to book profit, some said they don't believe in the Glove story anymore due to vaccine, another extreme is taking the view that Glove stocks are overvalued. This is where I differ. I am of the view taking profit is fine, as it is part of risk management. However, I think the lack of understanding and knowledge caused a gap in deriving the value of Glove stocks. At the end of the day, it all comes to profit & growth. Neither are at its peak for Glove stocks. The earnings will continue to grow, the cash flowing into the company will continue to sustain and the visibility is for the next 12 months / 4 quarters. Not next 1-2 months. 
 
In fact, the post Covid-19 Normalisation of ASP argument hold no ground at this juncture because no one knows when Covid-19 will end. Not Fauci, Not Nor Hisham, Not WHO and definitely not Trump. So how is it that the share price currently are trading at close to / below post Covid-19 ASP normalisation valuation at FY 2022/ 2023? This is what I cannot wrap my head around.
 
Furthermore, funds have no where to go for yield. Dividend yielding stocks was crushed this past year due to Covid-19, your traditional defensive stocks like Utility, Banks, Consumer staples, REITs are not giving the dividend as expected. But if any company or sector can deliver bumper dividend / special dividend, it is the Glove companies due to their cash hoard.  
 
In a way, whilst writing this article, I have a mixed feeling. I feel the Local Funds shot ourselves in the foot and killed our own uptrend both in the Glove stocks & the Index, because of the naysayers and non-believers in the capability, entrepreneurial spirit and competitive nature of these Glove manufacturers. In fact, even Foreign Analyst from Foreign Banks are more bullish about our Glove Sector than Local Analysts from Local Banks. However, I am also excited with this opportunity. 
 
In the event my conviction turns out right, this selloff has given many investors who dare to be a contrarian to take an opposing views against funds by buying on weakness to make huge returns. Fundamentals always prevail over short term trades. No one can time the market to perfection but share price moves in tandem with earnings. Earnings grow, valuation is cheaper, share price rises. It sounds simple but its the truth. I believe Local Funds & Institutions who threw the shares will realise they are making a huge mistake sooner than later.
 
 
So Which Side Are You On? Pick Your Side But Choose Wisely.
 
 

For Gloves

 

Against Gloves

Record Earnings For The Next 4 Quarters (Minimum. May Be More than 4Q)

 

Vaccine Approvals / End of Covid-19 Pandemic

Committed & Lock In Orders with Deposit Paid

 

Post Covid-19 Normalisation of ASP

Delivery Lead Time of 20 months

 

Too Expensive Valuation

Huge Cash Hoard / Net Cash position

 

Windfall Tax

Potential Special Dividend / Yield Play

 

Labour Remediation Fees

Further ASP Increase

 

Higher Cost of Raw Materials

Additional Capacity

 

Potential Oversupply from New Entrants Into The Market

Structural Change in Demand & Hygience Practices Post-Covid 19

 

Weaker USD, Stronger MYR

Continuous Stock Piling by Governments

 

US / Local Election

Rerating of Latex Gloves ASP as Nitrile Gloves waiting time far exceeds Latex Gloves

 

End of Loan Moratorium, Retail Investors leave Bursa

 
Food for thought: 
 
Warren Buffett: Why I'm Buying U.S. Stocks Now
 
  

A Message to Local Funds Especially Macquarie Bank...
Malaysia Do Not Have FAANG. But We Have Gloves.

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