Explaining the Malaysian “Glove Stock Mania” of 2020, and it’s subsequent fall
Two years ago, the “glove mania” started to gain steam in the Malaysian stock market, capturing the attention of institutional and retail investors. This article serves to encapsulate the saga thus far, and provide a timeline of key events.
Intuitively, the price of gloves would go up if demand for gloves were to rise, but this article aims to explore further in-depth what made these gloves (1) so special, (2) attract such lofty valuations, at a time representing two of the top three companies in Bursa Malaysia and (3) contextualise the stock rally and subsequent fall.
Why was there no fervour over companies that produced masks? Or why gloves?
For one, masks are easier to manufacture as only a sewing machine is needed. In contrast, gloves require complex dipping lines which are created by specialised contractors like HLT (whose stock price benefitted from the pandemic as well).
Glove plants are a capital intensive venture. For instance, Supermax, one of Malaysia’s largest players, is building a new facility in the US that for only the first phase, would cost a staggering RM1.5 Billion. Upon completion of the four phases, Supermax would be able to produce 19.2 billion gloves. (Reuters, 2021).
There are three main types of gloves commercially used, namely latex(rubber), vinyl(plastic), and nitrile. Latex gloves are the most flexible of all and vinyl are the cheapest but least environmentally friendly as they’re non-biodegradable.
Nitrile gloves, as a latex alternative, are the most suited for medical environments catered to the masses. It eliminates the risk of latex allergy reactions, making them the most highly demanded and hence, lucrative type of glove (Ventyv, 2020)
Fun Fact: Top Glove from 2011, had increased their product mix year on year, offering more nitrile gloves to their clients. In 2011, it was 11% and in 2020, 47%, meaning if the market price were to rise, they’d be able to profit greatly, considering nitrile gloves were in demand.
The conclusion is that once the pandemic hits, demand would increase for all sorts of Personal Protective Equipment (PPE), which includes masks and gloves. However, masks did not experience a chronic shortage as simply put, it’s easier to manufacture. Gloves on the other hand require capital equipment and raw materials like butadiene and nitrile.
Analysing the business model and underlying economics
50% of the cost of gloves comes from raw materials (which makes it particularly hard for new entrants). Profit margins were extremely thin pre-pandemic due to the industry’s competitive environment. For context, the average selling price of gloves was around 20 dollars per carton, and the large players would sell a carton for 18 dollars.
“Why were the large players able to keep costs lower?”
Large players are able to keep costs lower as they can exploit Economies of Scale, where when the quantity produced increases, the average cost of a unit falls. This may be for a confluence of factors such as the ability to leverage on fixed costs. Machines may cost the same, regardless of whether it’s operating at 40% or 100% capacity.
Source : (https://www.thebalance.com/economies-of-scale-3305926)
When the pandemic hit, demand for these products would rise, hence (assuming supply grew at a slower rate) the prices would rise, and the profits would rise. Even so, how did the profits rise so astronomically that the quarter on quarter percentage increase was 3412%?
Costs actually decreased, due to the overall global fall in the cost of raw materials. Butadiene, a “raw material” component, is derived from Crude Oil, which was as low as $16 a barrel (compared to its average price of $70 in 2019).
If costs remained the same, this means that any increase in price would translate to pure profit.
If the average selling price per carton was 20 dollars and the cost was 18 dollars, the profit would be 2 dollars.
However, if the average selling price was 40 dollars, if the cost is still 18 dollars, the profit would soar to 22 dollars, which is a 10 times increase.
The quarterly report illustrates this, with the profit margin being only 9.4% in Q2 2020, but a whopping 53.5% in Q2 2021. It didn’t help that gloves could be classified as an inelastic good, meaning there’d be little resistance to price increases as consumers are still willing to purchase the goods.
The underlying economics are pretty simple and the increase in profits would mean the stock price would rise as an increase in profits makes the business more attractive. However, for context and perspective, here are some anecdotes related to the “glove mania”.
- While there’s no evidence that the two are related, the Malaysian stock exchange (Bursa Malaysia) halted trading at 3.30pm due to a “technical issue”. The same day Top Glove lost RM2.10, Kossan lost 44 cents, and Comfort Gloves lost 21 cents.
- Top Glove nearly overtook Maybank, Malaysia’s largest bank, as the “most valuable company in Malaysia”.
(Source : https://twitter.com/jalilword/status/1282867827620208640)
A trip down memory lane : Glove Share Performance
Ready for take-off – April 2020
Unfettered Optimism and Expansion Plans
On 15th April 2020, Supermax started its series of stock buybacks, which lasted until 30th April, spending a combined RM58 million in cash.
When companies buy back their stock from the market, investors see it as a signal that the upper management believes the stock to be undervalued. Investors, like the authors, were puzzled. Not only was the amount spent on buybacks equivalent to half of their 2019 earnings, but the share price was hovering near all-time highs.
Supermax released their quarterly report on the 20th of May 2020, with their profit more than double of last year’s, the first clue of how “phenomenal” the coming financial year will be.
For context, when Supermax began its stock buybacks, the price was RM0.98. By the 20th of May 2020, its stock price was RM2.88, a 193% INCREASE.
Following that, Top Glove made a series of statements with its CEO Lim Chai Wei speaking to media outlets, reaffirming its aim to be a Fortune 500 company by 2030. Investors were also pricing in Top Glove’s plan to list in Hong Kong, which in the investors’ eyes brings more “prestige” to the company’s image. The company would also be exposed to the international stage, and with that comes potential new contracts and opportunities. Supermax announced their plans to do a dual listing in Singapore (which would also bring it more exposure). An expansion plan was announced as well which would allow them to produce 19.2 million new gloves per annum in the United States, which is double their capacity. In the short term, a flurry of good news can lead investors on the sideline to get caught up in the optimism and enter to join in the rally.
As the stock market is a forward-looking mechanism, investors would want to get in “at the floor” before the actual bump in earnings were achieved. Some also argued that the rally was bolstered by the first movement control order and people working from home. Add on the 6-month loan moratorium, retail investors could have the time to monitor markets, and with more money to spend (as they don’t need to pay loans), the glove industry seemed like too much of an attractive proposition to ignore.
Tangible Profits (June 2020)
The first Quarterly Report (QR) of the windfall earnings series came on 11th June 2020 as Top Glove reported their figures for the third quarter of 2020, which sparked a correction as investors sought to take profit from gloves. In the QR, net profit came in at RM400 million, shattering previous records. Monthly sales orders went up by some 180%, resulting in long lead times, which went up from 40 days to around 400 days. This meant orders placed in June 2020 would only be delivered over a year later. This surge in demand has allowed glove manufacturers to raise their prices unrestrictedly as the demand for gloves is inelastic. Following the marked increase in glove demand from virtually every country in the world, the Group’s utilisation rate rose from a pre-COVID level of 85% to above 95% in Q3 2020, resulting in greater efficiency and economies of scale.
Fall back to earth (November 2020)
As valuations hit exorbitant levels, investors started to find reason to take profit. The bull run ran out of fumes as positive vaccine news started to circulate, pointing to an end of the pandemic. Investors also came down to earth, realising that supplies will gradually increase and the astronomical earnings won’t last. With positive vaccine developments, investors are also finding value in heavily battered recovery stocks like banks, thus shifting investors’ attention and funds away from the healthcare sector.
Top Glove’s attempts to support its share price (Oct 2020 – February 2021)
In a span of five months between Oct 9, 2020, and Feb 22, 2021, Top Glove Corp Bhd bought back its own shares for about RM1.42 billion after the share price hit a record high and while cash coffers were expanding fast as it was making supernormal profit. This is one of the many aggressive attempts Topglove conducted to boost investors’ confidence, on top of the listing on Hong Kong exchange and paying special dividend in 2021.
The aggressive share buyback was jaw-dropping, given the quantity spent. Some veteran investors believe this could well be the biggest amount ever spent by a single company on share buyback in Malaysia’s corporate history. The incident spooked a major controversy in Malaysia, as the massive amount of money could be utilised elsewhere especially on improving the criminally low standard of labour treatment in its factories.
One last push – GameStop Mania (Jan 2021)
The final and arguably most memorable event during the glove saga was of course none other than the “GameStop Mania”, which fueled TopGlove to jump as much as 15% on Friday, the 29th of October. The rally came as several Malaysians, inspired by thee success of American amateur stock traders who helped shoot up the share price of ailing gaming retailer GameStop on Wall Street, started “Bursa Bets”. Glove discussion groups were created primarily on Reddit and Telegram, with the aim of attempting to short squeeze. The most popular one, “TOP Glove Investors Discussion!” on Telegram exceeded 45,000 members at its peak.
The group, a collective of presumably stock and option traders, called for “unity” against “institutions”. The group claimed the market to be rigged and manipulated by large institutions like JP Morgan, who work to suppress share prices of local glove makers. JP Morgan earned an unfavourable reputation over this group for its unfavourable coverage of Top Glove’s share price, giving it Target Price of RM3.80, which was seen as low considering it was trading well above RM6. The telegram group accused institutions like JP Morgan of profiting by short selling and giving sell calls simultaneously to glove counters. By giving a sell call, retail investors would react by selling, hence causing the share price to drop. This drop in share price then enables the institution to profit by short selling glove shares.
Since the majority of retail investors have lost money given the suppressed market condition in Bursa over the past two decades, this populist theory to put the blame on the manipulation by “sharks” and institutions easily fueled their anger, prompting many to join. A retired uncle’s message that circulated around WhatsApp groups summed it all up, saying “I’m buying TopGlove tomorrow to show my support to the retail investors, and to send the message across to show big institutions that us retail investors aren’t afraid of them, I don’t care whether I make money or not”.
Ultimately, unlike GameStop, the short squeezing plot didn’t work out in Malaysia. Short squeezing occurs when a stock moves sharply higher, prompting traders who bet that its price would fall to buy it in order to avoid greater losses.The plot of “short squeeze” didn’t work as only an insignificant 3% of TopGlove shares were shorted, compared to GameStop’s 140%. Since the failed attempt at a comeback, the share price of glove counters continues to bleed until today.
Glove stocks as of 2022
During the beginning of the year, Supermax traded below a Price/Earnings ratio of 1, which to some may have seemed improbable. A common interpretation of the PE ratio is how much an investor is paying for a dollar of profit for the year. By this logic, a PE ratio of less than one means the shareholders are paying less than what the company has made this year.
Of course, this valuation method isn’t always appropriate as we also have to take cash flows and dividends into account. This perhaps, is a lesson on how purely theoretical knowledge cannot be applied to the stock market and how investors must always be aware of the associated risks. Additionally, this could also serve as a lesson on the role of expectations and sentiment in the market. Looking back at the plans, Supermax’s and TopGlove’s plans to list in Hong Kong and Singapore are nowhere to be seen. The only major development on the plans they’ve made was that Supermax has recently announced their objective to invest 350 million USD to build the first of the four phases of its U.S. manufacturing plant in December 2021.
The Author’s View, which does not represent FLY:Malaysia
The author believes that the fall in ASPs was brought on by aggressive expansions of existing players and newcomers, who saw their profits dwindle greatly. Going forward, oversupply is still an issue, but Malaysia has historically been a global leader for gloves.
Malaysia has a better supply chain ecosystem compared to the new player, China. For one, they have easier access to cheaper natural gas, and their industry leaders possess valuable experience in this sector. Evidence supporting this is such that the new firm, Blue Sail Medical in China, saw a net loss in the third Quarter of 2021, whereas Hartalega in Malaysia is still making a 45% net profit within the period.
Careplus, a smaller glove manufacturer sunk into the red in Q4 2021 while Hartalega and Kossan are still earning more than double their pre-pandemic profits in the same quarter. How the industry shakes out going forward, like most things, is uncertain.
Even so, personal preference and conviction is that the titans of the industry are titans for a reason, and will thrive as they’re the fittest of their kind. Kossan, the third largest glove company in Malaysia by volume and market cap, highly emphasises on investing in automation and customer relationship, giving it a promising future by staying competitive. The author’s top pick is Kossan by a wide margin, as he believes that judging by the lower than pre-pandemic share price, investors have overlooked the company’s steady growth prospects by not taking into consideration the cash pile they’ve built during the windfall year in 2021, which makes up more than half of the market cap. Given prudent management of their cash, the author believes Kossan with its considerable cash will use it wisely or otherwise return them to its shareholders in the form of dividends.
References:
Reuters. 2021. Malaysia’s Supermax to spend $350 mln for first U.S. facility amid import ban. [online] Available at: <https://www.reuters.com/markets/funds/malaysias-supermax-invest-350-mln-first-us-facility-2021-12-17/> [Accessed 30 January 2022].
Hltglobal.com.my. n.d. Products & Services – HLT Global Berhad. [online] Available at: <https://www.hltglobal.com.my/products-services.html> [Accessed 30 January 2022].
Ventyv.com. 2020. What’s The Difference Between Nitrile, Latex, and Vinyl Gloves?. [online] Available at: <https://www.ventyv.com/blog/whats-the-difference-between-nitrile-latex-and-vinyl-gloves> [Accessed 8 May 2022].
Naqib Idris, A., 2021. Top Glove sits on RM860 mil paper loss on massive share buyback. [online] The Edge Markets. Available at: <https://www.theedgemarkets.com/article/top-glove-sits-rm860-mil-paper-loss-massive-share-buyback> [Accessed 8 May 2022].
Zahid, S., 2021. Inspired by GameStop’s Wall Street rally, BursaBets investors drive up Top Glove shares today | Malay Mail. [online] Malaymail.com. Available at: <https://www.malaymail.com/news/malaysia/2021/01/29/inspired-by-gamestops-wall-street-rally-bursabets-investors-drive-up-top-gl/1945149> [Accessed 8 May 2022].
Ikram, I., 2022. Careplus sinks into red in 4Q amid lower glove ASP as market demand normalises. [online] The Edge Markets. Available at: <https://www.theedgemarkets.com/article/careplus-sinks-red-4q-amid-lower-glove-asp-market-demand-normalises> [Accessed 8 May 2022].
Researcher: Calvin Kwa
Reviewer: Muhammad Bahari
Editors: Abigail Phang and Ahmad Ayziel Zulkifli
