Erudite Thoughts
Debunking JP Morgan’s alarmist report on Top Glove and the Glove Sector
In yesterday’s Edge (11/12/2020), we get another article from an investment bank, peddling the same mantra of over-supply of gloves. JP Morgan is a highly respected financial institution. I am surprised and disappointed that it would lend its name to a report that is largely a seat-of-the-pants analysis, with spurious claims and arguments without any concrete supporting data.
Let me list down its fake claims and speculative hypotheses and debunk them one by one:
- JPM: Global testing trends have plateaued
Rebuttal: With cases soaring to meltdown levels, how is it possible for testing to have plateaued?
- JPM: Testing trends have started to trend downwards from their peaks since the end of September. Therefore glove prices have peaked.
Rebuttal: Top Glove has just reported that ASP will be 30% higher in 2nd quarter
- JPM: The expectation that the use of gloves per capita would double post Covid-19 is "overly optimistic", given global population growth is substantially slower
Rebuttal: JPM is equating growth in per capita use of gloves post pandemic to world population growth, which is about 1.1%. Isn’t this is ridiculous? Top Glove's sales have been growing at a rate of more that 13% p.a. even before the covid pandemic. After the pandemic, the world will become more health and hygiene conscious and it is entirely plausible that per capita consumption will remain high
- JPM: Glove production capacity is expected to grow 87% in the next three- to five years
Rebuttal: JPM claims that an 87% growth in production capacity (if true) over 5 years will lead to over-supply. But 87% growth over 5 years is only 13.3% per year compounded. Top Glove’s CAGR for the last 5 years was 23.6% and the 4 years before the Covid pandemic was 13.5%.
- JPM: We can take a leaf from the crude palm oil industry which saw a decade of oversupply post a supernormal cycle in the early 2000s
Rebuttal: Comparing glove with palm oil is again nonsense. Palm oil oversupply is unavoidable as the FFB (which is perishable) from the increased planted acreages have to be converted to oil. But glove manufacturers can shut down production lines when demand drops. So increased capacity does not have to mean oversupply.
And glove is not a commodity like palm oil. The health and medical segment accounts for 69.4% of global glove sales and gloves for this segment command a premium price as quality is crucial. Hence, buyers are less likely to change suppliers and so price is also less likely to drop. Therefore, the established large glove supplies will have a great competitive advantage over new entrants.
- JMP: Additionally, glove makers' profitability is expected to be negatively affected by higher raw material prices and rising labour costs.
Rebuttal: Raw material and labour cost increases is a fact of life and applies to almost all manufacturing industries. And as cost increases applies to all competing companies, the increased costs are usually passed on to the consumer. This will not affect profitability. By bringing up the cost issue, which is a non-issue, JPM is clearly trying to stretch its argument to justify paring the fair value of Top Glove’s share price to RM3.50.
- JPM: Retail and foreign participation are at all-time highs. It is thus difficult to find incremental dollars to drive this sector higher
Rebuttal: There is no sense to this statement. Investors come and go; buy and sell. Money will always chase profitable growth stocks when negative sentiments are proven wrong
- JPM: Top Glove is using cash to support capacity growth instead of debt
Rebuttal: Yes ROE will be higher with use of debt but ROE is already very high anyway. And prudence in using surplus cash is not necessarily bad.
This JPM article is a very poorly reasoned one. It is obvious that it is another shameful attempt to spook glove investors into selling and thereby creating buying opportunity for the fund managers in JPM. We know that share prices are driven by sentiments and investors can be irrational but any price declines or surge will normalise eventually. The earnings visibility of glove companies is clear for the next 4 quarters. Whether the good earnings will taper beyond that we will know in due course. For the sake of humanity I hope the 4th, 5th and 6th waves will not come, but it is not inconceivable that they may come.
Disclaimer : This article is purely for the purpose of information and opinion sharing. You should not make your investment decision based on it and you are strongly recommended to seek independent verification and advice.
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More articles on Erudite Thoughts
REASONS WHY GLOVE SHARE PRICES WILL RISE AND RISE THROUGH 2021 AND BEYOND
Created by sutp | Dec 10, 2020
Discussions
23 people like this. Showing 50 of 69 comments
I M AFRAID IT IS NOT SO SIMPLE JUST CANCEL ORDER LOH...!!
THEY ARE SOME LEGAL COMPENSATION ISSUE TO FOLLOW THRU BY THEIR CUSTOMERS LOH...!!
Posted by supersaiyan3 > Dec 12, 2020 11:28 PM | Report Abuse
The 3% cancelled order was mainly due to delay of supply caused by temporary closure of factories.
2020-12-12 23:35
SOHAI LOH....PALMOIL TAKES 6 YEARS TO BEAR FRUITS BUT GLOVES TAKES 9 MTHS TO START PRODUCTION MAH...!!
WHO IS LIKELY EASIER TO OUR PRODUCTION LEH ?
PALMOIL IS PERISHABLE CANNOT KEEP....BUT GLOVES NOT PERISHABLE & CAN KEEP...WHO IS LIKELY & EASIER TO OVER SUPPLY LEH ??
OF COURSE GLOVES MAH....CAN BE EASILY STOCKED UP BCOS NOT PERISHABLE MAH..!!
"JPM: We can take a leaf from the crude palm oil industry which saw a decade of oversupply post a supernormal cycle in the early 2000s
Rebuttal: Comparing glove with palm oil is again nonsense. Palm oil oversupply is unavoidable as the FFB (which is perishable) from the increased planted acreages have to be converted to oil. But glove manufacturers can shut down production lines when demand drops. So increased capacity does not have to mean oversupply.
And glove is not a commodity like palm oil. The health and medical segment accounts for 69.4% of global glove sales and gloves for this segment command a premium price as quality is crucial. Hence, buyers are less likely to change suppliers and concomitantly price is also less likely to drop. Therefore, the established large glove supplies will have a great competitive advantage over new entrants."
2020-12-13 00:00
I think one of the biggest mistake the JP Morgan analyst done is they thought the current ASP has been price into the Quarter Report.
For everyone information, if you place an order with Top Glove today, the ASP maybe is USD90-USD100 per carton, which is equivalent to RM400 per carton (1000 pcs). But this order TopGlove will only fulfill by maybe Q4'2021. That mean, this RM410 per carton sales will only reflected in Q4'2021 or Q1'2022.
For current quarter Q1'2021, the revenue show in the report is reflecting the ASP during Apr-May'20 period, at that time, the ASP is around USD55 per carton, equivalent to RM220 per carton.
If you take Topglove current quarter revenue to calculate, it would be RM4,759,253,000 / 21,250,000 carton* = RM223 per carton.
*21,250,000 carton is derived from 85bil pcs / 4 quarter / 1000 pcs per carton.
2020-12-13 00:28
Comparing glove with palm oil. Palm oil have substitute, glove don't have.
2020-12-13 01:22
JPM: Retail and foreign participation are at all-time highs. It is thus difficult to find incremental dollars to drive this sector higher
???!! Does this means the Retail and foreign participation are at all-time highs, so it is very hard for us to goreng up?
2020-12-13 01:26
Actually these operators disposed TGlove but got caught short because TS has been consistently mopping up their shares either through company SBB or via their own personal capacity. This is causing a major panic amongst the operators because of the coming call warrants due. They wanted to further press down the glove company shares but since they had run out of bullets, they come up with unsubstantial articles to cause panic, hopefully inducing a lower price because retailers throw them or due to margin calls. They are cunning to only target Tglove because of TG position as the industry taikor plus TG happened to have lots of unfavorable news recently. So be careful, do not fall into their traps.
To prove my points, just count the numbers of call warrants due in December - hartalega, kossan, smax and tg. It is ridiculous how Bursa allows them to issue that many CW, every week there are sure some due. For these exercise, I would choose to use TG, Smax, MBB and PBB because they are actively traded and garner the most attention in recent months. The total combined numbers of CW for TG and Smax are 59 whereas MBB and PBB have a total of 19 CW. Then calculate the cash settlement prices and you would know the IBs are losing their pants in recent months because the exercise price and ratio were set too low for Smax and TG. They do not have any issues with MBB and PBB cash settlement prices. That is why the IBs would continuously come out with ridiculous articles and amplified the negative news to their advantages. Then count from Mac, April and May 2021 onwards. You would be shocked at the "expected prices" they have set forward for Smax and TG. My question is "what gives?". What caused the change from a lowly TP of rm3.50 to rm12 (and higher than rm20). That time you would see the true colors of IBs because they would come out heavily to promote what they had decried earlier and they would also give fantastic valuations and TPs. There is no love lost in business, to each, his own. Hence please do not take my word for what it is, do your own homework and derive your own conclusions from it!
2020-12-13 01:57
JPM has 9.8%of Topglove and over 6% Harta in their portfolio. Let see if these numbers increase or decrease after 31st Dec, then you'll know if they are spoofing or walk the talk. If they really think the tp is 50% of current price, they should have sold at least 50% of their holdings if not all.
2020-12-13 02:34
Tarnish the image of TG = tarnish the image of Msia.....
.......but the backdoor gomen, traitorman and assman are busy with babee movie trivialities (small men focus on small stuff)
Not serious matter like this one
2020-12-13 07:21
Posted by PureBULL ... > Dec 13, 2020 8:40 AM | Report Abuse X
Professional words: NOBODY'S SAFE TILL EVERYONE IS
n not everyone in the world dares to take those imperfect vaccines.
like all pandemic, it disappeared by itself. this giant PANDEMIC could take 3 years more.
GLOVES truly can help, n should be given a premium valuation not just tech stocks.
The best proven medicine : Everybody must take care n stay SAFE as the circuit.breaker
ttps://www.themalaysianinsight.com/s/289389
2020-12-13 09:03
JPMorgans holding percentages are % of their own portfolio. Not % ownership of the company. The world would be a better place without crooks and Bursa would be a much better place without JP Morgan, Macquarie and their ilk
2020-12-13 09:31
i hope most of u dont take the vaccine
so that i have good chance of getting jap asap
2020-12-13 09:34
.......it disappeared by itself.....
ie wat dornald duck said, n he got a taste of it, haha
2020-12-13 09:37
Can't beat them. They always succeed in recollecting tickets that they want.....
.....by hook or by crook
2020-12-13 10:32
THE DEMAND FOR GLOVES ALREADY PEAK, COUPLE WITH SHARP INCREASE IN CAPACITIES & COMPETITIONS & VACCINES COMING WHICH IS A RECIPE FOR SHARE PRICE COLLAPSE FOR GLOVES COMPANIES LOH!!
TheStar Sat, Dec 12, 2020 08:10am - 1 day ago
Peak gloves
WHEN the price of crude oil was onward to its historical highs, we were introduced to the phrase “peak oil.”
Peak oil was to show how production of crude oil was at its high and why the world will not see oil gushers in the frequency it has in the past. Well production did rise, given the historic prices that made marginal fields, deepwater and fracking viable.
But demand unfortunately did not keep up because the high prices meant the world started looking at alternative and renewable energy.
Like high oil prices back in the day where the oil majors were sloshing in cash, the same now may be said of our glove manufacturers.
The role and importance of gloves cannot be understated in the global fight against the Covid-19 pandemic although there is much room for improvement in terms of how some in the industry handle the welfare of their workers.
Top Glove Corp Bhd’s extraordinary profit of RM2.38bil in the first quarter of its 2021 financial year was symbolic of high demand and prices, and it was more than the RM1.87bil it made for the whole of its 2020 financial year.
There is no doubt other glove companies will be making super-normal profit for some time but it will be unfathomable to expect that trajectory of profit increases to continue.
As the world starts rolling out vaccines and as more people get inoculated against Covid-19, then the catalyst for the huge profits would increasingly get muted. The argument that the vaccine rollout will require the use of gloves is true but much of that will be one time use. The world has a population of 7.8 billion people and 16 billion pieces of gloves, or 32 billion if there needs to be two injections, to administer a vaccine to each and every person. Top Glove alone makes way more than that.
Then there is competition from new suppliers. Germany is starting to make rubber gloves seeing the demand and profits companies are making, which would indicate that the barriers of entry are not high for a business that can be automated to a way larger degree than it is in Malaysia. Then there is the production increase from existing manufacturers and new players just in Malaysia that are entering the business.
The glove players will make more money than prior to the pandemic but how will the supply dynamics change and prices react will bear watching over the long run.
2020-12-13 10:50
Everyone also wish & pray for covid 19 end soon, but nobody kow when is the time for fully recovery..dont tell 2021/2022 or 2023, tomorrow wat gonna happen we also dont know..u can look gd to your analysis but dont look down on virus covid 19, vaccine out is gd for everyone, but doest mean vaccine is elixir..even vaccine only 10 months old, how long can sustain vaccine immune still a question mark..dont forget nation n worldwide covid cases raising everyday..comply sop stay at home is the best way to kill the virus , by the way i wish Jp morgan can sell 3.50 on glove market, i am ready here...huat la..
2020-12-13 12:06
U do not need to know exactly when covid19 is ending, just sell early b4 too late mah...!!
Posted by herry168 > Dec 13, 2020 12:06 PM | Report Abuse
Everyone also wish & pray for covid 19 end soon, but nobody kow when is the time for fully recovery..dont tell 2021/2022 or 2023, tomorrow wat gonna happen we also dont know..u can look gd to your analysis but dont look down on virus covid 19, vaccine out is gd for everyone, but doest mean vaccine is elixir..even vaccine only 10 months old, how long can sustain vaccine immune still a question mark..dont forget nation n worldwide covid cases raising everyday..comply sop stay at home is the best way to kill the virus , by the way i wish Jp morgan can sell 3.50 on glove market, i am ready here...huat la..
2020-12-13 12:09
U want sell just sell la..u think is too late just go ahead n sell la.lose money nvm ,dont lose confident, huat la..
2020-12-13 12:12
The more gloves fall....the more confidence u lose loh...!!
Better sell early b4 too late mah...!!
Posted by herry168 > Dec 13, 2020 12:12 PM | Report Abuse
U want sell just sell la..u think is too late just go ahead n sell la.lose money nvm ,dont lose confident, huat la..
2020-12-13 12:18
If just for gambling just go genting which is more faster, investing is long journey..if u able bear the risk in what you invest into the company , you already know the value before you invest in..market is open everyone , u can decide your self..i wish JPM can queue cheaper to sell on market, huat la..
2020-12-13 12:19
Stocktraider..the more glove fall..i felt more confident cos i can buy cheaper..huat la..u dont bother me how was my investment strategy, urself take care ur stock position..hehe..
2020-12-13 12:22
Nothing negative news, is gd news cos can grab cheaper from JP MORGAN..hehe..since Jp morgan big mouth open, i will sell all my banks stocks monday to buy more gloves ,hehehe..
2020-12-13 12:49
THIS AN IMPORTANT KEY LOH...!!
Future gloves high margin falling means share price & profit affected loh!!
"Then there is competition from new suppliers. even Germany is starting to make rubber gloves seeing the demand and profits companies are making, which would indicate that the barriers of entry are not high for a business that can be automated to a way larger degree than it is in Malaysia."
"Then there is the production increase from existing manufacturers and new players just in Malaysia that are entering the business."
"The glove players will make more money than prior to the pandemic but how will the supply dynamics change and prices react will bear watching over the long run."
2020-12-13 12:55
The question is, what can we do with this unethical and unscrupulous low class JPM? Can we report them to any authority? So that their licence be reviewed and suspended?
2020-12-13 15:16
Look like Tan Sri Lim have to wait for another year to join in Malaysia Forbes billionaires top 5.
2020-12-13 15:50
Fidelity Funds - ASEAN Fund A-Acc-USD
Asset Attribute Proportion
TOP GLOVE CORP BHD ealth Care 2.00%
JPMorgan Malaysia (USD)
Asset Attribute Proportion
Top Glove Corporation Bhd. Malaysia - Health Care 9.80%
...kikik
2020-12-13 23:04
Fidelity Funds - ASEAN Fund A-Acc-USD
Asset Attribute Proportion
TOP GLOVE CORP BHD ealth Care 2.00%
JPMorgan Malaysia (USD)
Asset Attribute Proportion
Top Glove Corporation Bhd. Malaysia - Health Care 9.80%
...kikik
2020-12-13 23:04
八度空间华语新闻时事: 外媒: 揭顶级手套违防疫规定 吹哨员工惨遭工厂开除
https://www.youtube.com/watch?v=KfPbv4rjnmU
Astro 本地圈: 2020年经历犹如过山车 顶级手套喜忧参半
https://www.youtube.com/watch?v=KWqLnnXazdw
2020-12-14 01:11
The retail investors should stay united against the manipulators who short the glove counters everyday.Keep for the longer term. Be strong and we will overcome their modus operandi.They have to pay for the massive losses when the CWs expire.
2020-12-14 05:34
@Albukhary
Your statement may stand true on how revenue is booked. I'm not sure if on the receipt of an order (to be deliver 400+ days away) whether a percentage of that order's revenue is booked in immediately, or whether 100% is booked only after receipt by the customer.
Assuming the ASP figure you used is the blended ASP (for all the different varieties of gloves that they sell), your calculations still missed out one thing.
That is the value of spot orders which was sold during that particular quarter. Spot orders having a much higher ASP, and are to be delivered within a 3 month window. How you'll calculate that as a portion of revenue is something I'm uncertain of.
2020-12-14 14:32
Do they have a good rep.on current glove biz. If you think NO just ignore.....
2020-12-14 16:02
For something as essential as healthcare related, when you look at most of the glovemakers earning 50% of their revenue, something is not right. Such essential items usually dont command such ridiculous margins. Assuming everyone is operating at maximum capacity, TG 4.8b revenue - 2,4b profit = 2.4b cost. Assuming the average profit margin during normal times is 15%, well, 400m or so.
Yes, JP Morgan RM3.50 is a bit low... giving it just a PER of 7x based on 400m profit each quarter. I think RM6-7 is a fair value if they kept running at full capacity.
2020-12-14 16:46
THANK YOU sutp FOR YOUR PRECISION REBUTTALS OF JPM’S RUBBISH. I WROTE A FEW WORDS EARLIER ON JUSTIN’S BRIEF ON THE SAME TOPIC.
MUST BE THE COFFEE WE DRINK!
CHEERS
2020-12-14 18:10
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Anyone has JPM's valuation reports?
2020-12-12 23:29