Shed some tears for gloves

IT has been the best year for the equities market since 2013. The fairy tale run on the glove sector anchored the euphoric run of Bursa Malaysia that is on track for a strong finish compared to 2019.

IT has been the best year for the equities market since 2013. The fairy tale run on the glove sector anchored the euphoric run of Bursa Malaysia that is on track for a strong finish compared to 2019.

It was just the enigma corporate Malaysia needed as the country was reeling under the Covid-19 pandemic and political uncertainty.

The wealth created from the run of glove companies is enormous. From glove producers to chemical suppliers and equipment providers – they all benefited and recorded extraordinary profits.

Newcomers to investing did not need a fancy 20-page research report to understand why the glove producers were beneficiaries of the Covid-19 pandemic. All they needed to know was that the glove manufacturers source their raw materials in ringgit, paid their workers in ringgit and sold the end product in US dollars.

The rising US dollar against the ringgit and demand outstripping supply were just the ingredients to set the sector on fire for 2020.

The top four glove companies – Top Glove Corp Bhd, Hartalega Holdings Bhd, Supermax Corp Bhd and Kossan Rubber Industries Bhd – had a total market capitalisation of only RM36.8bil in January this year.

At their peak, which the companies achieved between the months of August and October, the top four companies had a combined market capitalisation of RM203.49bil.

Wealth created was an astounding RM166.69bil, which is 12% of Malaysia’s gross domestic product (GDP) for 2020. There are others such as Careplus Group Bhd, Rubberex Corp Bhd and HLT Global Bhd that enjoyed multi-year highs. If we take into account the paper wealth created by all the companies related to gloves, it would easily be more than RM170bil.

Today, the prices of glove stocks have dropped. The combined market capitalisation of the top four producers is RM129.35bil – meaning the top four companies have lost about RM74.14bil in value from the peak.

Nevertheless, it still has been a good year for those who had faith in the glove stocks. Anyone who put in money between April and June this year would have enjoyed fantastic returns.

Supermax gave the best returns among the top four. According to Bloomberg, its 12-month total return is 877%, which is something that the stock that has languished for the past 10 years would probably not achieve again unless there is another pandemic.

All the major glove producers have sold their capacity for 2022 and some even locked in sales for 2023. The producers have collected between 30% and 50% of the indicative price and are sitting on cash received from the booking of orders. Supermax is sitting on cash of RM1.2bil after achieving its best ever performance in its 33-year history.

The balance of the payment will be finalised when nearing delivery. So, final prices of gloves that are to be delivered in six months will depend on the prevailing market prices at the time of delivery.

Glove producers feel that demand, and hence prices, would continue to hold up for another year or two.

Supermax, in its latest annual report, stated that even for the longer term, the demand for gloves would sustain because of increased hygienic and healthcare awareness and that there was no alternative to gloves.

However, gloves, like any other products, go through a cycle. All indications point to the cycle having peaked and prices weakening on the back of a massive oversupply and weakening demand in the next one year.

JP Morgan issued a critical report on the sector and why the scintillating run of glove stocks would come to an end. The research house stated that the big four producers will add 130 billion pieces of gloves per annum in the next three to five years while the peripheral players have a capacity to produce 20 billion pieces. According to JP Morgan, the number of gloves coming into the market will add 87% to the capacity of 2020.

Mass vaccination has started and it is only a matter of months before most countries start their inoculation programmes. Singapore is to start their vaccination by year-end while Malaysia is expected to follow suit soon.

Kossan GlovesKossan Gloves

It will take some time to inoculate the entire global population of 7.5 billion people. But the vaccination will help stem the spread of the virus. The optimists are looking at middle of next year when the Covid-19 will be a thing of the past.

Apart from demand, three other factors do not favour the glove manufacturers at the moment. Firstly, it is labour intensive and after the recent brouhaha, wages and living conditions have to improve if the companies want to continue exporting their products to developed countries. Both wages and living conditions are sticky and will not come down even if prices drop.

Secondly, the dollar is on a dive. It is nearing a seven-year low against the ringgit, which does not bode well for the profitability of the glove companies. The US is going to print more money to reflate the economy, pointing to weaker dollar ahead.

Thirdly, Bursa Malaysia has allowed for regulated short selling (RSS) from January, which is just two weeks away. All major glove players are under the RSS list, which means that it can be shorted if sentiments are not in their favour.

The sector attracted institutional funds in May and June this year when it became evident that glove makers were going to report healthy earnings. Not investing in these stocks would have resulted in the funds under-performing the market.

But now the funds are leaving the sector as indicated in several research reports. Glove producers are professing that the game is not over yet but the smart money thinks the fairy tale run has come to an end.

M Shanmugam is a former specialist editor of The Star. Views expressed here are his own.

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