To All Readers,

This is my first article on i3. Please be nice and let me know your thoughts! This is also not a buy or sell call. All research is for illustration purposes only. I bear no liability for any losses incurred with regards to this article. However, you are free to share part of your profits with me.

Rubber Gloves (Fundamentals) Covid-19 Wave

• It is a given that this pandemic has changed the dynamic of the gloves demand worldwide. The glove manufacturers around the world, including those in Malaysia are (and will continue to) capture the market shift in demand by raising the ASPs.
• The ASP increase contributes to the bottom line without incurring any additional cost.
• As an example, TOPGLOV, which happens to be the biggest gloves manufacturer in the world, recorded RM 2,400,518,900.00 Profit after Tax for the 1^st Quarter 2021. Yes, that is in the span of 4 months.
• This supernormal profit after tax is about 1.81x the previous quarter.
• And on top of that, the show is not over. As per CGSCIMB report on Rubber gloves, and from the TOPGLOV analyst briefing, the ASPs will continue to rise. At least until the 1^st Quarter 2021, discounting further hikes going forward.
• Bottom line, I expect the Profit After Tax will continue to grow in orders of magnitude for the quarters ahead.

Vaccines- including m-RNA by Pfizer

• The emergency approval by the FDA in the US and other government agencies has let to a fast rollout of the vaccines. After the announcement, the price of the gloves manufacturers worldwide dropped, expectedly.
• The premise is that these vaccines will prevent further transmissions of the Covid-19 virus and end the pandemic. I hope it will so we can live our life’s normally.
• On top of that, the Covid-19 vaccine produced by Pfizer uses a ground-breaking technology called m-RNA.
• This technology does not have a small quantity of the virus (like other vaccines) to be injected to the human body to teach our antibody how to react to the virus.
• This technology, years in the making pre-Covid, was deployed in warp speed. When other vaccines needed years from conception to production, m-RNA needed only 1 year. (some report said the vaccines was designed in a matter of hours). Truly an amazing feat by humankind.

Vaccines-Logistical Nightmare

• However, despite this disruption in the vaccine market by Pfizer, there is still the production and distribution challenge for the vaccines.
• The vaccines need to be produced and distributed. For the Pfizer vaccine, it needed to be shipped all around the world at -70deg C. They will need lots of dry ice, just to start of with. This haven’t include storage, cold trucks, special regulated cargo planes etc…
• Production and Distribution of a vaccine to combat a global pandemic is a mammoth task.
• To vaccinate 70% of the whole world production (2 doses), all the vaccine producers collectively would need to produce 9,800,000,000.00 doses to combat this pandemic.
• Up to today, there is no fast way to produce and distribute that amount of vaccines fast.

Glove and Vaccines

• Before the vaccine can be distributed and administered to a high enough amount of people to control the pandemic, Covid-19 still outrages the world.
• Bill Gates, a small-time entrepreneur who founded a small company called Microsoft, predicted that the worst of Covid-19 will come in the next 3-6 months. I agree with his assertion.
• Gloves would be more needed to combat this.
• On top of that, the demand for gloves is estimated to increase by 7% due to vaccines rollout.
• Yes, you read it right. Tan Sri Lim Wee Chai, the chairman of TOPGLOV expected the vaccine will further increase the demand of gloves. (The Star, Nov 25, 2020)
• I hope all glove manufacturers grab this opportunity to increase the ASPs for their gloves.

Share Price depression

• Despite such a positive development for the gloves companies, the share price of Malaysian glove producers went tumbling down. Supermax went from the mid RM 9.XX to high RM 6.XX today, a -33% drop. What gives?
• The first thing is the sentiment that the vaccine will prevent Covid-19 transmission instantly. While I hope this is the case, the reality of producing the vaccine and distributing it is a gargantuan task.
• And to vaccinate enough human beings in a certain locality to achieve herd immunity, it will take a long time. How long you may ask? No one knows but it will not be in the in the first half of 2021.

Warrants Issued Pre Covid

• The Second thing to highlight is the sheer numbers of warrants issued by certain IBs massively discounting how long covid-19 will last (https://klse.i3investor.com/servlets/stk/stwarrant/7106.jsp)
• Most of this warrant would be “In the Money”, meaning, most likely the IBs must pay the warrant holders the difference between the share price and the exercise price at the call date.
• The big mishap by the banks would cost the bank a lot of money.
• As an example SUPERMX-C82 (due 18/12/2020: exercise price is RM 1.10), even at suppressed SUPERMX Price RM6.95, The bank has to pay about (6.95-1.10)/1.75* 40m =~ RM133.7m to the warrant holders.
• This is a big loss to the banks (hopefully some of you warrant holders out there made some money).
• It is also not in the best interest for these issuing banks to issue reports (high TPs) that will further increase their losses.
• I have no proof with this claim, however, is it possible for the IBs to work in cohorts to supress the share prices to avoid losing heavily on the warrants?

Forward Looking Bursa?

• Some narrative that has been floating around is that the market is forward looking, and that the Gloves rally that we see is over.
• However, I would propose a counter-narrative to this:

1. The reality on the ground is that the battle against Covid-19 is far from over. As a matter of fact, it is just the beginning.
2. During the effort of humankind against the virus which will last a long time, we would need more gloves.

• The recent slump in glove stocks is not the end of the glove rally, but an over-anticipation of the effects of vaccines and warrants at pre-covid price calls.

Action Plan.

• With all these known facts, I would like to propose a contrarian proposal against the tide.
• At Forward PE 5-10, your downside to loosing is very minimal, and yet your upside is huge. I would buy more glove stocks at this juncture.
• I recall a famous quote by Benjamin Graham, “In the short term, the stock market is a voting machine, and in the long term, the stock market is a weighing machine.”
• Gloves might not be the popular kid on the block right now, but It is indeed the heaviest. The tide will turn and the gloves' share prices will reflect its true value.

And quoting OTB, Final decision is always yours.