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With the vaccine narrative, the market sentiments have decidedly swung against the glove stocks, never mind that the big four will continue making billions. In the short run, fundamentals are no match for sentiments. Case in point, AirAsia. It's a business that will continue to lose hundreds of millions quarter after quarter. Airlines depend on the economy of scale to make money. Even in the best of time with high load factor, AirAsia managed to make only wafer-thin profits. In terms of fundamentals, Supermax and AirAsia are poles apart. So are the investor sentiments on them right now.

The mitigating factor is sentiments on stocks don't stay constant forever. They change over time. I firmly believe that the day will come (measured by months, not years) as the vaccine narrative settles and the glove profitability remains buoyant despite the declining spread of covid-19, the glove stocks will once again become the darling of the stock market. The fundamentals of Supermax are rock solid. But the market can remain disconnected from reality for a long time. For those who go long, time is on your side. Hold on to your shares if you are underwater and don't loan them to the IBs. The shorties will have nothing to sell.

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When JP Morgan reinstated its coverage of glove stocks, its first report on Dec 11, 2020, shook the glove stock prices to the core. Among other negative assertions, it opined that Top Glove share had a fair value of only Rm3.50, never mind that the company had just reported a record quarterly profit of Rm2.37 billion. The next trading day, the Top Glove share price fell from the previous high of Rm6.92 to the low of Rm6.50, Harta, Rm14.40 to Rm11.80, Kossan, Rm5.85 to Rm4.65, and Supermax, Rm7.85 to 6.72. The prices continued falling for more than a week.

When I published my forecast for Supermax FY21E at Rm4.1 billion in my essay on Nov 18, 2020, SUPERMAX SHARE PRICE CRUMBLES - TO SELL OR TO BUY MORE, I got brickbats from some fellow investors. I was way off the marks from the esteemed research houses. Their FY21E numbers ranged from Rm2.99 by Affin to Rm3.85 billion by TA. As you can see from the table below, after the release of Supermax’s Q2FY21A on Jan 29, most of the research houses have adjusted their numbers closer to my Rm4.1 billion, with the exception of KAF. Somehow, KAF analyst is still dwelling in its La La Land. It forecasts Supermax FY21E net profits at Rm3.54 billion. You don’t need to be a CFA to figure out how ridiculous this Rm3.54 billion number is. It is especially so now that the Q2FY21A is already announced. The KAF analyst must have this incredible, incredible telescope to look into the future that they saw Supermax accounts were rigged and would be adjusted down in time. For goodness sake, KAF. Supermax has already accumulated a profit of Rm1.85 billion in two quarters. The company has reported that the higher ASP has not yet been imputed into the earnings of Q2FY21. This is a coded statement from Supermax telling the market that they can expect Q3FY21 earnings to be higher. It is not possible that a professional stock analyst should miss this cryptic code. Coupled with increased production capacity, it is simply mindboggling to imaging that quarters 3 & 4 earnings would come in at Rm0.85 billion each? That’s essentially what KAF’s Rm3.54 billion forecast for FY21E suggests.

Why do the members of the investment public hold those research houses in such holy awe? Do they really have such an incredible telescope that can look into the future, or have the investors been so brainwashed like Donald Trump supporters that they could not tell facts from fiction? I, too, wanted to find out. So I spent time putting together the past reports published by the research houses.

Towards the end of Feb 2020, the novel coronavirus in China was already in full bloom. Yet, no research house would forecast the Supermax earnings for FY20 higher than Rm200 million or Rm0.2 billion. Even in late May 2020, they still could not foresee that the Supermax FY20 earnings would exceed Rm300 million. At that time, Supermax only had a little more than one month to complete its 2020 financial year. We all knew by now that the Supermax earnings for FY20 came in at Rm525.6 million. In the May 2020 forecasts among the research houses, the number that came closest to the actual FY20 earnings achieved by Supermax was Rm275.1 million. It was made by TA. Even that was way off the mark. If I compare forecast-to-actual using their Feb 2020 numbers, the discrepancies are even worse. The highest forecast among the research houses for the Supermax FY20 earnings in Feb 2020 was just Rm132.2 million. This was again made by TA. So, in Feb 2020, the most brilliant forecast on the Supermax FY20 earnings by these awe-inspiring research houses was off by a whopping 75% when compared to the actual achieved by Supermax. Mind you. Feb 2020 was only FOUR months away from the end of the Supermax 2020 financial year. Although TA came in top in terms of accuracy to actual, we can’t give it the victor’s crown. The best was still an abysmal forecast.

So far, I have compared the research houses’ forecasts made from late Feb and May 2020 for FY20. If they could not get their forecasts close to actual with only 1 and 4 months from the financial year closing, we can forget about their forecasts for FY21 from Feb and May 2020. Those numbers were downright embarrassing. Let’s just skip a few and dissect their forecasts for FY21 from Oct 2020 (though you can make the comparisons from the table below on your own).

After Supermax announced its Q1FY21A quarter results on Oct 27, most research houses woke up from their slumber. BIBM made the biggest adjustment to its May 2020 forecast. It raised Supermax FY21E earnings from Rm0.28 billion to Rm3.9 billion, a whopping Rm3.62 billion increase. It was the closest forecast made by the research houses in Oct 2020 to my Rm4.1 billion number. TA is not far behind at Rm3.8 billion. Others were still half-asleep. Affin forecasted just Rm2.99 billion for FY21E, and Nomura, Rm2.83 billion. These two were the sleeping beauties. The rest forecast above Rm3.0 billion.

Alright. I have done my collective service by researching the numbers. You can pour through them in the table above if you are interested. Interpret them in whichever way you choose.

The point I am making here is this: the investment bankers and their research houses do not have the monopoly of wisdom and foresight. They certainly do NOT have that incredible telescope to pierce through the future to know what the market will be. If you analyze their forecasts from Feb 2020 on, you can clearly see that their numbers were just fairy tales. Even one month before the 2020 financial year-end, most of them were still more than 80% off actual. Notice that I have not commented on their FY22E numbers. I don’t see why I should get there. Those numbers are just fairy tales. If they couldn't get their numbers right just one month before the Supermax financial closing, surely you couldn't expect any better forecasting from them that far out in time, could you? “Once beaten twice shy,” says the wise.

I have been investing very profitably for more than a decade. Never did I believe any of those opinions from the analysts. I read their reports only for factual information. I do my own research and analysis. I work with my three most trusted companions. Their names are fundamental analysis, technical analysis, and time horizon.

Forget the fairy tales propagated by the investment bankers for a moment. Let’s dissect what the facts are on the ground today.

FACTS:

1. The glove manufacturers know their business far better than JP Morgan and all the eunuchs sitting in their offices. In  Supermax Q3FY20 report on May 20, 2020, it states,
   
   “The demand of gloves has exponentially increased this year amid the global COVID-19 pandemic. The surge in demand has resulted in a rapid rise in average selling prices (ASPs), as buyers rush to secure their supply of personal protective equipment (PPE), including medical gloves."
   
   What did the eunuchs do? Whether it was self-interest, incompetence, or hubris, they totally ignored the manufacturers and forecast way, way below the actual.
   
   As of now, the manufacturers across the board are telling the market that demand will still outstrip supply for at least 2 years out. What did the research houses do? They turned a deaf ear and cut the FY22E earnings forecast by as much as 67% (KAF, again!). It's hard to teach an old dog new tricks.
    
2. Whether or not gloves are used for vaccination, it has little impact on the overall consumption of gloves. On Jan 13, 2021, JP Morgan again tried to con the investors by showing a picture of someone administering a vaccine without gloves. It frightened the daylight out of some investors. They promptly threw their glove shares to the open arms of JP Morgan and other IBs (I’ll elaborate on this later). I did see some published pictures that healthcare workers in the UK and Singapore did not use gloves to administer the vaccine. But from yet other published pictures, I observed that all the US healthcare workers used gloves to administer vaccines.
   
   Here’s the math. There are 7.5 billion people on this planet. If all are vaccinated with the 2-shot vaccines, and the gloves are discarded after each shot, the world would need 30 billion gloves. Not all can be vaccinated in a single year. Let’s assume that it takes the world 3 years to vaccinate everyone and only half of the healthcare workers wear gloves. The potential lost volume is only 5 billion gloves per year (30÷3÷2). Based on Top Glove estimate that it produces 93 billion gloves with 26% of the world market, we can determine that the current world consumption of gloves for 2021 is 357 billion. Coupled with the expected organic growth of 15 to 20% per year, the 5 billion potential loss of consumption is minuscule. So, the hoax perpetrated by JP Morgan to spook the investors into selling the glove stocks is unconscionable. Their army of CFAs could have easily punched out this simple calculation. I guess, serving truth just wasn’t at the top of their menu.  
    
3. The vaccines are here. Most of North America, Western Europe, and other wealthy countries are likely to have most of their citizens vaccinated by the end of 2021. These countries are likely to see their infection rates tapering by the summer. These wealthy nations represent just a little more than 700 million people – less than 10% of the world population. The saying, “No one is safe until everyone is safe,” rings true in this global village. The pandemic still has legs for many more years to come. The scientists are still not sure how long the antibody will last after administering the vaccine into a human body. Should the Covid-19 vaccines need to be administered annually like the flu vaccines, it will take many more years for the entire world to be vaccinated. So long as the Covid-19 remains a threat in one corner of the world, the rest of the developed world will continue to take heightened precautions from reinfection. That means consumption of gloves will not decline even after the wealthy countries have all their citizens vaccinated.
    
4. The scientists are still unsure of the variants from the Covid-19 that started in the UK, South Africa, and Brazil. The information has begun to trickle down that the current varieties of vaccines appear to be less effective against the SA and Brazilian variants. Some even assert that the vaccines are also less effective against the UK variant. In short, there is no certainty. The fear of uncertainty will most certainly ensure that the world will continue to take heightened precautions. As such, heightened demand for gloves will continue.
    
5. The demand curve for gloves has shifted. This is an economic phrase meaning the pre-pandemic pattern of glove consumption is now outgrown by a new pattern. In the past, disposable gloves were mainly consumed by the western world, particularly in the healthcare sector. The pandemic has changed that. Now every country which can afford it uses gloves. In addition to the healthcare sectors, they are now widely used in other industries – food, travel, mechanic, hospitality, etc. I believe, with this structural shift in consumption pattern, the consumption of gloves may actually rise as the infection rate falls and the commercial sectors get back to near normalcy.
    
6. In the Feb 2021 revisions, without exception, every research house forecasts that the Supermax earnings for FY22E will fall to between Rm2.1 (MIDF) and Rm3.3 billion (RHB). Some of them have the audacity to project earnings up to FY2024E (it tickles me that these eunuchs couldn’t get their forecasts close to actual despite making them within one month of the financial year-end, and they want us to believe their fairy tales 4 years out!?). You can choose to believe this fairy tale or ignore it. Based on their records compiled for you in the table above, it is safe to opine that the research houses have lost all credibility. They couldn't get their forecasts right one month out, how can we expect them to do any better so far out in FY22E? This is plain common sense.
    
7. All research houses (except 1) agree with my Nov 18 projection of Rm4.1 billion earning for FY21E. Many have adjusted their forecasts to even exceed my prediction. What this means is that Supermax will exhibit at least 6 continuous quarters of rising profits – a feat few corporations in Malaysia have accomplished. What does the market do in the face of such unprecedented feat? Sell down the damned share! Does it make sense? Certainly not. Does it make sense to the likes of JP Morgan? Certainly not. A catch-22, which I shall explain later.

Next, I shall attempt to make sense of the Supermax stock play based solely on my analysis. If you are tired of reading, you can log off here. But what I am about to share may be quite revealing based on the numbers I have crunched.

OPINIONS

I wrote earlier that I would explain why JP Morgan and the likes bought the Supermax shares thrown to them by the sellers with open arms, and why it didn’t make sense for them to want to depress the stock price (albeit, at least not forever).

You would have already figured out that the IBs are not charitable organizations out to make you rich. Heck, no. Their very existence is to make money, a lot of it. The only way for them to make lots of money in Bursa is to rocket the stock price sky-high. They can’t make much money by shorting the stocks. There is a 3-4% limit in the Bursa RSS system (have they decided whether it is 3 or 4%?). How can the IBs make huge profits with such a restriction? No, they can’t. Does it make sense to short such a highly profitable company like Supermax where its share price has already declined by close to half? No, it doesn’t make sense. Then why are they doing it? Accumulation!

Warning: What I am about to opine is not based on facts. There are just gutfeel based on years of trading, reading, and analyzing. So please read with your eyes wide open and take it with a pinch of salt (some may even say, a spoonful).

I believe the objective of the IBs is not shorting the stocks per se. They are shorting to depress the price so that they can buy the shares on the cheap. In simple terms, they are like your ordinary shopkeepers. They need to have stocks or inventory to sell to their customers for a profit. They are suppressing the price for two reasons.

One, as I said, the IBs are restocking their inventory. They need to accumulate as many shares as possible. Otherwise, it would not be worth their while to rocket up the stock price. Remember, they are in this to make them rich, not you. They are simply buying low and selling high.

Two, they need to drain the swamp. What this means is that the IBs need to get rid of as many weak players as possible. Those who want to sell, they will make them sell. I have meticulously compiled the transaction volumes from Aug 5, 2020, to Jan 27, 2021. I am publishing the numbers below as a gift if you care to consider them.

From the table below, you will find that, between the current price and Rm7.50, many investors are looking to get out. JP Morgan and the likes have been feeding the market with fake narratives. They brainwash the retail investors that the Supermax stock is overpriced. Once the price reaches close to their costs, those investors rush out to sell. Mathematically, the IBs should clear the swamp of weak players by about May/June. Coincidentally, this is when the IBs have structured their structured warrants with breakeven as high as Rm21.50. (You can refer to my article, SUPERMAX SHARE PRICE - WILL IT BE SUNK BY JP MORGAN? ) Once the stock price achieves the previous high of Rm11.95, I believe, the Supermax stock price will take off. There will be nothing to stop the IBs from powering ahead in so far as clearing the swamp is concerned.

Next, the IBs will have to create excellent narratives or storylines to bring the stock price to the stratosphere. As I have expounded in my previous writings, the glove story is too good for the IBs or market makers to pass up from making a bucket full of money.

So, what’s the takeaway for you? If you believe this story, don’t sell even after you have recovered your costs. Don’t be drained away by the market makers. If you are a strong holder, you can help reduce the number of shares the market makers need to drain by holding on to them. Liberation Days will come sooner. But don’t take my word for it. John Maynard Keynes said, “The markets can remain irrational longer than you can remain solvent.” Yes, the market price for Supermax is irrational. As I have described, there is rationality amid irrationality. Do you have the stomach and the understanding to wait it out? The peace of mind rests in the strong fundamentals of Supermax as a going-concern and the time-tested reliability that profitable companies will always trump manipulation over a reasonable time horizon. Supermax stock is super profitable. Don’t let the analysts fool you.

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SUPERMAX: WILL IT BE TAKEN PRIVATE

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Jan. 18, 2021By Sarah Mervosh

Source: The New York Times

The California state epidemiologist has recommended that the state pause the distribution of more than 330,000 doses of the Moderna vaccine after a “higher than usual” number of people showed signs of a possible severe allergic reaction.

The recommendation comes at a dire moment in California, which is experiencing one of the most acute outbreaks in the nation. About 40,000 people are testing positive each day — the equivalent of the daily caseload for the entire United States as recently as September — and California’s hospital beds are filling up.

The state epidemiologist, Dr. Erica S. Pan, made the recommendation “out of an extreme abundance of caution” after several people who received the vaccine at one community clinic needed medical attention in the span of 24 hours. Each appeared to experience a possible “severe” allergic reaction, and officials recommended not using other vaccines from that batch until an investigation was completed, the health department said in a statement on Sunday.

According to the Centers for Disease Control and Prevention, an example of a severe allergic reaction is if a patient needs to go to a hospital or be treated with epinephrine.

The recent reactions were related to a vaccine distribution at Petco Park in San Diego, a spokesman for the California Department of Public Health said. It was not immediately clear how the delay would affect the state’s overall rollout of vaccines, which has been choppy and plagued with confusion.

The possible allergic reactions had stemmed from the same batch of Moderna vaccines, which included more than 330,000 doses, among 3.5 million vaccines allocated to the state. California has distributed less than a third of its allocated vaccines, below the national average, with 2.2 percent of the state’s population having received a first dose, according to a New York Times vaccine tracker.

Allergic reactions are a rare response to some vaccines. Some estimates suggest that for a similar type of coronavirus vaccine, made by Pfizer-BioNTech, the risk of severe allergic reaction is about 1 in 100,000.

Sarah Mervosh is a national reporter based in New York, covering a wide variety of news and feature stories across the country. @smervosh

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Barring insider information, analyzing a buyout gleaned strictly from public information is extremely difficult to call correctly. I have made four such calls (including Supermax). The first was Unisem, which I was partially correct. A Chinese company bought 51% of Unisem without taking it private. China was on a mission to achieve self-sufficiency in its semiconductor industry. Money was not an issue. China was willing to spend whatever amount to acquire its stated goal. That news caught my attention. Unisem was well connected in China and had well-established manufacturing there. It appeared a natural fit for the Chinese to acquire it.

The second was moot due to the toxic political climate prevailing at that time. Given the ongoing political mood, I don't expect it to happen any time soon.

The third one, I believe, will eventually take place. It's a matter of time. But time is always of the essence.

This brings us to the fourth, Supermax.

We are well aware that the U.S. was caught with its pants down in this pandemic. It could not ensure sufficient supplies of disposable gloves to combat the pandemic. The U.S. vows not to repeat this mistake. It wants to have absolute control over the strategic supplies of PPE. This strategic goal is quite comparable to China striving to be self-sufficient in semiconductors. However, the U.S. ambition to be self-sufficient in PPE alone is not a sufficient ground to infer that Supermax might be a takeover target. The seemingly unrelated events that follow might give us some clues to make this conjecture.

• Remember, Operation Warp Speed? The U.S. government had literally poured money into vaccine research to fix the runaway disaster caused by its mismanagement of the Covid-19 pandemic. With unlimited funding from the U.S. government, the pharmaceutical companies succeeded in producing vaccines from inception to injection within a matter of months rather than years. Such a model to achieve the nation’s strategic needs is a well-worn path in defense, space, and now healthcare. Private businesses could use this model to negotiate with the U.S. government to ensure lucrative pricing on strategic needs before plunging into production with guaranteed profits. Taking note of this procurement strategy is an important step to help connect the dots, which I shall explain later.
• Supermax bought back a total of 14.1 million shares at an average price of Rm7.83 from Sep 10 to 29. It had stopped buying back since, despite the price falling to the low of Rm5.38 on Jan 4, 2021. On the contrary, Tan Sri Lim has been feverishly buying back Top Glove shares. Strange?
• On Dec 3, both Dato’ Seri Thai and Puan Seri Tan Bee Geok transferred all their 982.7 million shares into Supermax Holdings Sdn Bhd. Why now?
• On Dec 11, JP Morgan reinstated coverage of glove counters with garbage, damning report, totally devoid of the usual stock analyst methodology, that caused a gap-down in glove counters. It forecasted the fair value of Top Glove at Rm3.50, Hartalega, Rm 8.50, and Kossan, Rm Rm3.80. Strangely, Supermax was conveniently left out of the coverage. Why?
• So, out of the blue, JP Morgan decided to reinstate its research coverage of glove companies, which, they claimed, are dud. Those who had worked for the stockbroking firms know that their research departments would not waste time to initiate coverage on failing companies. They would only commence coverage of companies with growth prospects so that their clients would be interested to trade in those stocks. In fact, they would soon stop covering stocks that are failing. And here, we have the world-renowned con-artist deciding to reinstate its coverage of glove companies that they claimed are failing! It just doesn't square. ( List of frauds committed by JP Morgan )
• On Dec 21, Supermax announced that it would invest US$550 million to manufacture medical gloves in Delaware. There was nothing unusual about this announcement as Supermax had been actively building its organization in Western countries to expand its business. It was a strategic investment. Or so it seemed?

To summarize, here are the pieces we have on the chessboard:

1. The U.S. government wants to be self-sufficient in PPE.
2. The Thai Family transferred all their shares into a Sendirian Berhad company.
3. Supermax stopped buying back its shares.
4. JP Morgan used their megaphone to drive down the glove counters without mentioning Supermax in their reports.
5. Supermax planned to manufacture in Delaware.

WARNING: Before we put the pieces together, let’s be clear. I have no inside information. It’s about analyzing from available public information and employing investor instinct. I may be right. I may be wrong. But, insider trading is obviously illegal. To make inferences based on public information are not. So far, everyone appears to operate above board, even JP Morgan, howsoever we might disagree with its practice. Their reports represented their opinions. I don’t believe there is any deal signed between the parties. No one is obligated to announce matters that are still under discussion. 

Let’s imagine a movie plot if you were to take on Uncle Sam’s call to make America self-sufficient in PPE. Here’s what I think a rational businessperson would do.

1. First, they would work out their plan, which includes how they would go about securing PPE supplies. Let’s say, they had identified Supermax as the perfect size glove company to acquire.
2. With a plan in hand, they would negotiate with Uncle Sam for a commitment on the price of gloves roughly based on the current market, exactly like how the vaccine players did.
3. They would need to contact the key players at Supermax and make sure that they are receptive to the idea without signing anything. There would be nothing to announce since all parties were only exploring and considering the possibility.
4. Now, as a good businessperson, they would want to pay as little as possible. But they would have to pay an attractive price to unlock the 38.25% owned by the Thai Family. Excluding the Thai Family's stake, there would be 1.62 billion shares held by other investors for them to mop up. Supermax shareholding is among the most fragmented. Based on the last annual report, the next largest shareholder after the Thai Family held only 1.59%.
5. To mop up as many shares cheaply might not be easy. The Bursa rules require an investor to disclose as substantial shareholder when their ownership reaches 5%. To overcome the 5% huddle, they would have to rope in a consortium of investors. Roping in more investors is also a good investment practice to spread out the risk. With 10 members on board, mathematically the consortium could buy up to 1.31 billion shares in the open market without triggering the substantial shareholder rule. Should the consortium manage to buy this number of shares at an average price of Rm9.50, it would only cost them Rm12.4 billion. After this, the investors would have to surface as substantial shareholders. By this time, the free float in the market would be very tight. The price would have shot up to at least Rm13. They might be able to mop up a further 150 million shares at an average price of, say, Rm15. By the time they announced the takeover, the price would be fairly close to what the Thai Family would be willing to sell. (I imagine anyway between Rm20-25 would be attractive, if I were the Thai Family.) So, let's assume that the last 1.198 billion shares cost the consortium Rm23. The total cost paid to take it private would work out to about Rm42 billion. After deducting cash on hand in Supermax, the actual cost would be under Rm40 billion, which is less than US$10 billion. With guaranteed pricing from Uncle Sam, the payback period might be less than 10 years. What an excellent investment.

The consortium would buy over Supermax Holding Sdn Bhd to complete the transaction. It would be a lot cleaner. I doubt the consortium would want to keep the listing. Why would they want to share the profits with us and subject to Bursa rulings? It just doesn’t make sense.

Now JP Morgan could walk away clean with nothing whatsoever to do with Supermax transaction. It did not even mention Supermax in its research coverage. But all stock players know if JP Morgan hit Top Glove, Hartalega, and Kossan, Supermax share price would similarly be affected just the same. And it did. Would this be collusion? Nah. It will be hard to prove.

As for the Thai Family, walking away with a cool Rm23 billion after a 33-year hard work, well, can’t really complain, can they?

What about the Supermax Delaware manufacturing facilities? This last piece of the puzzle is what makes Supermax such a Goldilocks takeover target. It is a perfect story to convince Uncle Sam. The strategic PPE will soon be producing onshore in the home state of President Biden! Supermax is a well-established glove manufacturer with a reliable supply chain. It is a perfect fit to provide strategic glove supplies to Uncle Sam. Not too big, not too small. It comes at just the right price.

The end. The fiction movie rolls to a conclusion. Will it come to life like Jumanji? We’ll see.

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On a personal note, I would rather not see this fiction movie come to life. As some of you might recall, I am rooting for Supermax to reach Rm40. It is just not possible, some might argue. I agree. At Rm40, the Supermax market cap would exceed Maybank and Public Bank. But this is the stock market. With exuberance and hyped-up sentiments, anything can happen. Could anyone in their right mind ever imagine that the Tesla market cap would one day be larger than all the U.S. car manufacturers put together? Frankly, I wouldn’t buy Tesla shares at this inflated price. But at Rm40, Supermax shares would be valued at only 25x FY21 forward PE. Not too unreasonable if all the stars align. It’s not going to be an easy route to Rm40. The mRNA vaccine might go wrong, new Covid variants might prove more lethal, and when the disconnect between the stock market and real market returned to equilibrium, stock prices would fall. Investors would then flock to profitable companies like gloves in droves.

Investors might be uncertain about the earnings prospects of glove companies right now. The conventional thinking was that once people received the vaccines, the demands for gloves would collapse. With it, so goes the outsized earnings of glove companies. It would take a few months for the vaccine narrative to settle down. After that, should the demands for gloves continue to keep pace and Supermax earnings look sustainable, a 25x PE would look cheap for a fast-growing company like Supermax.

Let's take a worst-case scenario. Supermax profits crashed to Rm340 million per quarter. That quarterly profit would still add up to a 50 sen EPS. At normalized PE of 20x, Supermax shares would still worth Rm10. By the end of 2022, Supermax production capacity would have doubled.  Even a bear would not value it at less than 15x PE in a normalized market. The stock price could not justifiably get any lower than what it is. So, sit back and relax.

This remains my go-to principle for stock selection:

The stock price is like a dog on a leash. The dog can run up and down, left and right, but eventually, it comes back to the owner who holds the leash. In the stock market, that owner with a leash is the rising streams of earnings.

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Debating whether or not gloves are necessary for vaccination to support Supermax stock prices is simply barking up the wrong tree. The details are in the numbers.

If we assume that gloves are used to vaccinate the entire world population, the number of gloves required to get this job done is only 30 billion (i.e., 1 pair of gloves per shot and two doses per person). We know it is impossible to vaccinate 7 billion people in one year. Should the world target to complete this exercise in 4 years, it would be a pretty tall order. That means only 7.5 billion gloves are required per year for this purpose. When we contrast this 7.5-billion to Kuan Kam Hon's (Hartalega) statement of 120-billion shortfall in glove supplies, the picture becomes clearer that whether or not gloves are used for vaccination is quite immaterial to the overall earnings of Supermax.

In my opinion, the following are key considerations that will determine the extent of the Supermax rally in the coming months and years:

1. Glove companies will have at least 4 clear quarters of super earnings visibility (this is material in building up the sentiments for the next cycle of the glove rally).
2. Should the West succeed in curbing the spread of covid infection by May this year, it would not mean that the demands for gloves would fall off the cliff. Gloves will continue to be used in hospitals, clinics, other industries, and other countries still mired in coronavirus infections.
3. The pandemic has shifted the demand curve for gloves. Now, countries outside North America and Western Europe are learning the value of gloves as PPE. Industries other than healthcare have also learned to use gloves.
4. The butadiene shortages will ensure that glove shortage will not be met by expanding glove manufacturing capacity any time soon. The Petronas Chemical & LG Chem joint venture to manufacture butadiene will only begin construction this year. The construction will not be completed until 2023, barring any delays.
5. The new South African and British variants are a dark horse that may exacerbate the fight against the coronavirus pandemic.
6. The mRNA and mDNA vaccines may have longer-term side effects (already 23 deaths are credited to Pfizer vaccine in Norway).
7. On a macro basis, 25% of small businesses in the US have gone bust. Overall, consumers are a lot poorer. This translates into lower purchasing power worldwide. There is no way that, on average, businesses can return to pre-pandemic profitability. The current disconnect between the stock markets and real markets must return to equilibrium. When that happens, stock prices will fall. Investors will flock to profitable companies like - you guessed it right - gloves.

My bets are on Supermax to go higher - much higher.

Look out for my next essay - SUPERMAX: WILL IT BE TAKEN PRIVATE?

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