Trading With A View

Author: tradeview   |   Latest post: Wed, 21 Apr 2021, 2:28 PM


(Tradeview 2021) - Should Investors Take Off Their Gloves?

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2020 came and went. Whilst it is a watershed year, it is nonetheless a year that investors in the stock market will never forget. Apart from myself, many have studied, analysed and commented on the glove sector including specific glove companies. Amongst all sectors, the glove sector is the most crowded in terms of analysis and scrutiny. After all, it is a uniquely Malaysian Cinderella story. I have read many wonderful observations and analysis, and thankful for the free sharing. I can tell from the articles, voluminous amount of work have been done by fellow writers.

As per my past writing, my favourite Glove stocks which I deemed are long term value stocks would be Riverstone Holdings Ltd, Hartalega Holdings Berhad and Sri Trang Agro. Each of these stocks are listed respectively on SGX, Bursa and SGX / SET (dual listed). Rest assure, this article is not about their wonderful results and record breaking earnings or cash position. Instead, I will spent this article mostly showing readers the performance of the stock price in the past 1 year since the start of the pandemic, towards its peak and its selldown.
1. Riverstone (Adjusted for 1 for 1 bonus)
2. Hartalega
3. Sri Trang Agro Industry PCL
For ease of reference, I took the stock price of each glove companies from mid April to today's closing market price. 
  • Riverstone rose from SGD 62 sens to SGD 1.31 - An increase of 111%
  • Hartalega rose from RM 7.25 to RM 9.41 - An increase of 30%
  • Sri Trang Agro rose from THB 11.70 to THB 48 - An increase of 310%
How about the profits and cash position increment for each of this company?
  • Riverstone revenue rose 85%, net profit rose 396%, dividend rose  and cash position rose 398%
  • Hartalega revenue rose 123%, net profit 536% and cash position rose 1211% (conservative estimate using similar revenue (RM6.5 billion), net profit (RM 2.76 billion) and cash position (RM 4 billion) based on Q3 FY 21
  • Sri Trang Agro revenue rose 25%, net profit rose (loss of THB 149 million to THB 9.5 billion), dividend rose 5x and cash position rose 1010%.
Because the companies have different reporting timeline, so it is hard to compute full year results as comparison. However, based on what I provided above, record results (best have yet to come, likely the next quarter), you can use it as a gauge to compare the valuation vs the current share price. Well, surely seasoned analysts or those with contradicting view will surely argue, 2020/2021 is a one off event due to the century pandemic. Hence, must discount it and not factor the calculation in such manner. Also must compute it against 2022 or even 2023. This is where I would like to point out an important distinction which some failed to appreciate. 
Every stock has a company behind it, and every company has an intrinsic value. The intrinsic value is what determine what the company is worth. In essence, the stock price is a manifestation of the intrinsic value. The argument then lies with how to compute the intrinsic value. Of course, it is somewhat a mixture of science and art. One thing is for sure and most would agree, an important metric to look at is earnings. For me, to know the intrinsic value, it is important to value the company based on (Assets - Liabilities = Equity) + Ability to earn / grow profits + Ability to sustain profits + Ability to pay dividends. Apart from that, Retained Earnings which is part of Equity is an aspect that is overlooked by investors. In short, we can conclude the higher the company's retained earnings, the more valuable the company is. This is in fact, highlighted not by me, but by Warren Buffet in his recent Annual Letter to Berkshire Shareholders 2021. You can read this passage here -
So this is where I would like to draw your attention. Whenever I read articles saying "gloves are overvalued" or "gloves are dead", I am often bemused by the ignorance of individuals who make such shallow comments. The value of a company does not diminish or gets eradicated once supernormal profits disappears. This is simply because when a company makes profits, the profits translate to retained earnings and of course the retained earnings can then be used for other things like paying dividend, investments or future capital expenditure. The supernormal profits may reduce like how Covid-19 reduces but the value of the company does not reduce unless it starts making losses overnight. The higher the profit, the higher the retained earnings, the higher the value of the company. In essence, the company's value holds itself and that is why share price maintains at a certain level. Even if next year or following year the earnings fall, the value built and accumulated do not get wiped out unless the retained earnings are deployed egregiously resulting in losses to the company. It is absolutely wrong to equate the share price chart of gloves, to the Covid pandemic infection & death rate chart. 
Owens & Minors is one of the notable PPE maker and supplier in US. It has a history of over 100 years. Despite the vaccine roll out and all the talks of pandemic being over, the share price continue to perform and sustain in tandem with the earnings. This is due to the structural change and hygiene behaviour pattern following Covid-19. Investors are knows the importance of such company now and appreciates its retained earnings, future earnings visibility and accord it higher value compared to before. None is rushing to take profit the way it is happening in Bursa. In fact, the performance of Owen & Minors shows the major flaw in the thesis of a Foreign IB research report.
Mercator Medical, the superstar polish glove maker that rose to fame on the back of the pandemic is still 7X its stock price back in April 2020 and sustaining well even after falling from the peak of PLN 770 to what it is today. We must remember, Mercator unlike our Big 4 did not even enjoy the same level of global reputation and standing yet it is sustaining much better than the price action of our local glove makers.
Intco Medical needs no introduction anymore. It is one of the top two glove players in China which have recently came on the news touting to build 190 billion glove capacity factory in the coming years. As a background, Intco traditionally is a vinyl glove maker and one of the largest in the world. Vinyl gloves are also known as "poison plastic". Seeing the demand and value paid for nitrile gloves, Intco is venturing big and even raising US 1 Billion on a secondary listing in Hong Kong to achieve this. Although its capacity is only 20+ billion now with more than 60% production in Vinyl gloves, the stock price have continue to risen and sustained very well. To put things into perspective, Intco Medical market cap today is bigger than Top Glove and Hartalega. It is also bigger than Supermax + Kossan + Riverstone + Comfort + Careplus + UG healthcare combined. Is Intco medical such a good glove player and ours so inferior to China's glove maker. Does this make sense?
Looking at the stock price performance of other glove makers which have been through a superb record shattering 2020, for the stock price to revert almost back to where it was despite the profits, cash and balance sheet strength defies logic. The irrationality and emotions flooding the market is not only retail investors. In fact, I think the retail investors in Malaysia have done very well and held on to the conviction in the face of huge RSS selling, institutional selling. I take my hats off to them as it is extremely tough to go up against such adversity. The age old adage which states, "the market can stay irrational longer than you can stay solvent" is absolutely true.



 Zoom was one of the hottest tech stock which captured everyone attention due to the pandemic too. It was the poster boy of pandemic so much so the stock itself went up 7 times to a peak of US 588 with a market cap US 172 billion. It even helped Li Ka-Shing recapture his title of Hong Kong's richest despite the impact that rampage through his notable companies CK Hutchinson, CK Assets and others. Why I am sharing this is to show you even though Zoom was regarded as the face of Covid-19 beneficiaries due to the work for home need for video conferencing, it still managed to stave off the plunge when the vaccine was developed and funds rotated towards recovery plays. Even outside of the sector, stocks like this can retain its value due to the "new normal" and "value of the company" which was brought to light resulting from the pandemic. Otherwise, Zoom may still take its time to jostle for attention of major funds and investors. 

One of my favourite boxing movie is Cinderella Man, by Russell Crowe. It is based on the real life story of James Bradock who was injured and had to work in the docks during the Great Depression just to survive. He returned to competitive boxing in order to make a living for the family during the most challenging time and despite being an underdog, he rose to the occasion to dethrone the incumbent and became the heavyweight champion. His nickname was the "Cinderella Man". The glove makers in Malaysia are tales of Cinderella, rags to riches and underdogs to world domination. It took 30 years to get to where they are. When the time came for them to rise to the occasion, they performed and delivered extraordinarily. 

History have shown, whenever the glove sector retraces, it has never gone back to previous low and it forms a higher low each time. However, most people painted doomsday scenario such as price war and oversupply yet in the end the sector prove them time and time again they were wrong. Indeed, China capacity may be scary but ultimately they don't have the expertise. In terms of efficiency, our glove makers still have at the upper hand. Glove making especially Tier 1 quality is not as simple as making mask. As for the US wanting to build their capacity, at the first place back in the days, their manufacturers chose to disposed all these assets as they they find it low value in nature and could not compete hence adopting the OEM model. 
I believe investors need to ask themselves what is their investment horizon, ability to hold (no margin, no leverage) and stomach the emotional rollercoaster. I do not deny sentiment plays a part in investing. Herd mentality, fear and greed swings share price. However, as  a true fundamentalist, I invest based on the value I see in the company. I have great faith in Riverstone and Hartalega for the reasons I have shared before and have a long investment horizon. Ultimately, investors must know the value of the company behind the stock price in order to determine the best course of action. 

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Email me at : tradeview101@gmail.com

Food for thought: 









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  10 people like this.
greedy44444 Very good write-up ! Congrats !!
03/03/2021 1:00 AM
huat8787 najib said we need 52 years to vaccinate everyone
03/03/2021 1:00 AM
Albukhary Good write up, wise thought.
03/03/2021 1:39 AM
ocpd Excellent analysis
03/03/2021 2:11 AM
mjong99 Excellent post
03/03/2021 2:16 AM
Ikanbilis999 syok sendiri post
03/03/2021 3:13 AM
paperplane Gloves even before pandemic is growing 9 to 1p% annually.
03/03/2021 8:26 AM
paperplane Just because post pandemic, ppl will not just stop using gloves anymore. It's a basic demand tool in many places. Ppl inside too speculative in short term and not wise for longterm. Hence they are 99% which lose money
03/03/2021 8:27 AM
skyz we all know gloves are taken a beating from the SS from the IB (not surprising if local institution has also took a cheap shot along with the foreign IBs) to slaughter the shaky base of retail investors who are easily intimidated. As long as there is not enough power balance to counter the power of the IBS, glove counter prices will always be easily follow the direction on how the IBs want to make money (go south also they can make money, go north also they can make money)
03/03/2021 9:14 AM
CynicalCyan You truly are immovable in your views on gloves, huh? I admire your tenacity.

But you omitted the part where Intco also sells other medical equipment as diversification, unlike Malaysian glove companies that are solely glove manufacturers.
03/03/2021 9:39 AM
Ben Tan CynicalCyan, for the first 9 months of 2020, 96.5% of Intco's revenue came from their PPE segment. Their expansion plans are practically entirely focused on this segment.
03/03/2021 12:10 PM
trylearn123 很欣赏你的见解到位,公司里的钱足够他们面对将来的难题,竞争加收购。很多科技股涨了很多倍,可现金贮备少的可怜,风暴来袭可能就不见了。自从第一次见你分析riverstone,我一直拥有着,也在加码着,至目前还是有50%赚率。黄老板是踏实的人,在新加坡上市。我守着这支股长久。股息很满意。
03/03/2021 1:34 PM
Erudite Terima Kasih. Article which comfort me.
03/03/2021 1:54 PM
Joe Ng the market cashes in profits several years early
03/03/2021 3:01 PM
zhangliang Great day 4 gloves...hope it will go on
03/03/2021 6:08 PM

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