Just for Sharing
Are Glove Stocks still a Good Buy? Supermax as a Case Study
Wisdom for Freedom
Publish date: Sun, 12 Jul 2020, 12:47 AM
Investment is all about risk management. To manage risk is to invest within circle of competence. And keep expanding the circle.
When the glove bonanza is too hot to neglect, one will try to understand what is the rationale behind the craze, and to see if the party has just started or it's already near to the end.
Take SupermaX as an example, now that all the good news like higher ASP every month, own distribution centers, OBM margin, strong demand up to 1.5 years etc, are already all over the place, looks like the prospect is guaranteed which we have no doubt, but would look at the valuation if it still makes sense to join the party?
2020Q3 (Jan-Mar'20) results show 71M in net profit, a good quarter of >100% increase both YoY or QoQ. That was when Covid has already been spreading since late Jan in China.
Let's assume the subsequent 3 quarters will have 100M in net profit respectively, that makes up the 4 quarters to be 371M. And some people may say this is still way underestimated. Ok. Let's make it to 400M then.
That translate to the EPS of 0.2941. Let's round it to 0.3.
Now let's look at few scenario:
- PE 25x => TP = RM7.50 in the next one year
Some people may argue the interest rate environment is so low that such a hot stock deserve higher PE. Ok. Let's be more optimistic.
- PE 30x => TP = RM9.00
Come on. This is unprecedented pandermic the mankind is ever experiencing. Plus the low interest environment and government is encouraging spending and investing. Ok.
- PE 40x => TP = RM12.00
Well since this is an extreme bonanza kind of situation and market filled with liquidity, let's be even more optimistic.
- PE 50x => TP = RM15.00
Ok now this starts to sound like a TP?
Some may still opine that the valuation can go up to PE60x which translate to TP of RM18.00, due to whatever reasons.
Investors have to be reminded that this is a forward PE anticipating the earnings of 2021 will increase more than triple from the previous year. And subsequent years have to be at least the same growth to keep the sentiment intact.
Now let's try to ponder about a few points:
- With the superior demand and increasing profit margin, will these attract more new players from different industries to venture into it? Will existing players expanding capacity like no tomorrow to capture the once in a lifetime opportunity? Based on supply and demand law, when supply is over demand, what will happen to the price? Apparently high ASP is just something that last for a period of time and it's not sustainable. Because high margin will lead to high competition which results in low margin due to price war, before it eliminated the weak players and stabilized to normal margin.
- A similar scenario happened to face masks before. Price of the Chinese face masks fabric and production equipment plummeted after plenty of new players rushed into the business, causing excessive supply. Similarly, once the glove makers all over the world start to boost production in full force (though they are mostly concentrated in Malaysia), how long will the glory days last?
-
Based on Peter Lynch the cocktail party theory
- Stage1: At the party, people are not talking about stocks. There is little to no interest to talk to an equity fund manager. The folks are inclined to talk about plague with a dentist than about stocks. The market is likely to head higher.
- Stage2: People may talk about stocks but still think it's risky. They still talk more about plague than stocks. Generally market has up about 15%. A few care.
- Stage3: Market has gone up about 30%. People start asking fund manager like Lynch on what stocks to buy. Most has bought a stock or two.
- Stage4: Fund manager like Lynch are surrounded by crowd. This time not asking for a recommendation but instead telling him which stocks to buy. Dentist is offering stock tips. This is a good indicator that stock market is near to its top.
- Now back to the real life. How many people around us which previously show no interest to stock investing, are talking about stocks recently? How many even made a handsome profits from stocks but know nothing or superficially about the business? Does your barber and colleagues tell you they also bought glove stocks? What's the frequency of you seeing FB ads like stock investment class promotion, tips groups etc? How many gurus are promoting the use of margin finance? How many articles and research reports are released to justify certain high valuation stocks? Which stage are we in the cocktail party?
- Nevertheless, the theory is more like a concept rather than a hard rule. The high valuation may even get higher. No one knows about what is going to happen. In this manner we need to ask ourselves how much of the stock price is built based on firm foundation and how much is built as castle in the air due to buyer sentiment?
- All the good factors and good news have already known to the market and mostly priced in to the stock price with super-optimism. When the "super" stocks do not meet market expectation, even the results are very good, or if a vaccine has been successfully developed where glove demand may hit its peak in near future, what do you think the stock price will react? The stock price will probably collapse due to sentiment change which will cause market to think it does not deserve high PE anymore. This will lead to further price drop, because the EPS and PE have multiplying effect, which is known as "Davis double-kill effect". The outcome can be devastating.
So do we have an answer as to whether the glove play is still intact?
Ideally we hope everyone is making money from the bonanza. But in reality we know it's not. The value investors may find nothing attractive in this kind of stocks anymore, while the theme players or trend followers may still think the party is not over yet.
It's not a matter of right or wrong, but more to one's value system and what type of investor are you. At the end of the day it's all about risk management. Currently it's definitely higher risk and relatively lower return if you enter now. Because all the big sharks have already on board. Still can go in? Ask yourself if you are a small fish or a big shark? Or are you willing to swim along with sharks? You may still make money but, are there better other stocks to invest in the market which you can sleep soundly at night?
"Investment risk comes primarily from too-high prices, and too-high prices often come from excessive optimism and inadequate skepticism and risk aversion." Howard Mark.
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Discussions
2 people like this. Showing 49 of 49 comments
Good article ! Just let the party continue and see how many smiling and how many crying in the end. Human greediness has no boundary and no limit. There's no sure thing in share market. Good luck to those daredevils but big sharks always watching from afar waiting to swallow small fish.
2020-07-12 02:07
Herbert chua also said supermax 100mil profit . ...lol...the only 2 or same person who think so.
2020-07-12 08:03
hello, this author please dont come out with a rubbish article and kena scold la. please read some research before post this kind of rubbish. if i can report you scam, i will report you. HELLLO, supermax 1 Quarter 100m ??? hello brother, please do your homework. dunno about glove then go back sleep ok ?? grapes are sour is correct
2020-07-12 08:23
Vaccine coming soon... all glove stocks going to slump soon... BEWARE !
2020-07-12 08:59
When price is high, manufacturers tends to produce more and more, just like the face mask facing acute shortage in the early stages of covid-19 but now is easily available with very cheap selling price because manufacturers keep on producing millions of face masks in order to take advantage of the high prices.
2020-07-12 09:11
greedy44444 : Can you share your source of info? Which vaccine is coming out from which manufacturer from which country? If not, stopped spreading fear at every glove counter. Trying to lowball panic seller?
2020-07-12 09:14
Furthermore wearing glove is not compulsory in most countries compare to wearing mask. So in two to three months, same thing will happen to glove prices when market is flush with gloves. So don't risk your hard-earned money by buying glove stocks now. There are many relatively cheaper and good quality stocks in bursa that could give you better returns in percentage term and higher dividend yields.
2020-07-12 09:14
greedy44444 : Manufacturing a face mask is entirely different scale, technology and capital compared to medical glove. Doesn't fit into comparison at all.
2020-07-12 09:17
Posted by greedy44444 > Jul 12, 2020 9:14 AM : Furthermore wearing glove is not compulsory in most countries compare to wearing mask. So in two to three months, same thing will happen to glove prices when market is flush with gloves. So don't risk your hard-earned money by buying glove stocks now. There are many relatively cheaper and good quality stocks in bursa that could give you better returns in percentage term and higher dividend yields.
You got it in reverse, wearing a mask is not compulsory in many countries, some even went on protest to reject wearing one. Wearing a medical glove by medical pros are absolutely compulsory, along with all other protective gear. It doesn't take a genius to see such a simple basic twisted logic. Think smarter Try harder.
2020-07-12 09:21
Smart investor should read mr koon comment.
300m per quarter shouldn't be an issue
1.2B per year x PE 30 = 36B market cap
2020-07-12 09:27
Vaccine come out fr USA. No way USA will get it correct. USA can't even decide to wear a mask to control the virus spread. Most likely vaccine will come out first by China follow by uk. USA will soon become a emergency country since scientist predict by end August to September , virus spread will multiply . USA will backward by at least 10 year.
Even now , Korea, Thailand , Japan, Australia no of cases going up after opening up.
India will be next big virus thing.
Most likely the progress of vaccine cannot catch up with the mutation or changes of the virus.
End of he day, mask and glove is the vaccine for the virus.
2020-07-12 09:51
Produce glove is 100 time difficult compare to mask.
Need very high quality control and high technical skill.
China may able to produce but it will take time (2-3 year) to catch setup and get approval by fda of USA and Europe.
Mask , ah dog ah cat or auntie can made it at home.
2020-07-12 09:56
TOTALLY a failed comparison. Mask & gloves treating it as the same animal??? Cmmon... can study more b4 posting such thing? Very embarrassing u know. Then ur profit computation so simple one ah? Like schoolboy method. Aiyo pls la.
2020-07-12 10:10
Thanks to the Donald T Duck & Mickey Mouse show in the US, gloves is experiencing unprecedented demands and pricing and US is Supermax biggest market. 100m profits is ticking my toes. Sure Huat Kaw Kaw this time.
2020-07-12 10:41
This write up is amazingly crap.
While what written about when stock price has escalated, the risk is higher, how many investors do not fathom this. Investors know that "mother is a lady", dont have to restate the fact.
It is totally crap to talk about PE of 50x, 60x ..... & so on.
I think he purposely tried to agitate others in this forum. Even a novice will by now know that Supermax is not talking about PAT RM100mil per qtr. That is history. Even PAT RM200mil per qtr will be too conservative, just like what CGS CIMB admitted that his ASP escalation on Hartalega is too conservative, and the enhanced ASP is here to stay for even FY2022.
So if OEM model is talking about ASP escalation is too conservative, just think about OBM model. By know, the consensus is FY2021 PAT will be above RM1bil, and hope that FY2022 will be able to emulate FY2021.
By then with EPS of 80sen and about, then you allocate PEx that Supermax deserves.
Anyway this is open stock market, if it is too hot for u, pls just sell and exit, or don't even join the race. Let others who embrace the same vision continue the journey.
2020-07-12 10:58
From TA point of view, Macd high now.bad news will start to come out.funny bloggers will tell u overvalued stories intentionally or unintentionally. let the last washing come n become the last chance to onboard cheaper.lol....if coming quarter 100mil I cut paper bird.
2020-07-12 14:49
aiyoh, stock market is like MUSICAL CHAIRS!
when the music is on, everybody make money.
when the music stop, everybody rush to get out.
the real question is: when will it stop? tomorrow? next week? next month? next 3 months? Nobody knows! And when it stops, you dont want to be the one still standing up without a seat!
2020-07-12 15:20
another sour grapes article without thinking and knowing the industry ... how can gloves compared to face masks LOL ! what a joke
2020-07-12 15:26
last time iris goreng up from 10sen to over rm1! rumour was US wanted to buy iris technology for its national ID. when the music was on, everybody happy happy. when the music stopped suddenly, everybody mad rush for exit, want to get out also cannot.
now as far as gloves are concerned, the music is ON! until when? nobody really knows. Anybody who claims to know is just guessing, like u & me
2020-07-12 15:30
buy or sell gloves at your own risk
make money, thank youself, nobody else.
lose money, blame youself. nobody else.
2020-07-12 15:31
biasalah, this is the stock market. every time sure got some goreng shares. now it's tech & gloves. next time will be ___, ___, etc. only the company names changed, the goreng herd behaviour is the same.
2020-07-12 15:36
if u buy or sell gloves, do at your own risk. nobody is putting a gun over your head to buy or sell.
2020-07-12 15:38
everybody is entitled to their own opinion. some say undervalued, some say overvalued. there is no right, no wrong, just opinions!
so dont blame the writer of this article. it's just his/her opinion.
2020-07-12 15:40
I mean, tell me, who was the first few who came out calling buy when Supermax was only 1.60! Now who are those calling to buy more when Supermax hit 11.00!
2020-07-12 15:43
example:
before the US subprime crisis in 2008, there were some ppl were saying the US housing market was overheated, but these ppl were ridiculed by the finance and banking fraternity.
finally when the housing bubble burst, these ppl were worshipped. Hollywood even made a movie honouring them - "The Big Short".
now back to malaysia. As we are in a glove bull run, the glove naysayers are ridiculed. not surprisingly.
2020-07-12 15:48
I believe most of you have made a good fortune out of this stock. I congratulate you sincerely. If you have a kind heart you will continue to make money.
The estimated earning might be ignorant from your perspective because an IB even predicted 350M earning the next quarter. But will it maintain this record high earning the subsequent quarters is another question. Imagine if you were a glove buyer, you have no choice but to buy higher ASP stocks the first few times because it's urgent, but in the background you will definitely be all out to source worldwide few cheaper suppliers to keep the cost down, else you will most likely be screwed. And the supply will catch up eventually. This is business 101. My point here is not to predict the EPS correctly, but more to an idea to point out where do we stand in the current situation. I actually hope the IB is right. But the key point is, is it sustainable? Do we have an exit strategy?
A cold water at this time is definitely potong stim. I'm sorry. But you have to understand there are so many new and young investors in the market now are losing rationality to the glove craze, and wrong mindset is instilled that making money is that easy without realizing that this is actually not a market norm but unprecedented and exceptional one. This will be harmful to their future investment journey when they made money at this kind of situation, overestimating the ability but underestimating the luck factor.
Some say i have ill intention. Yes. But my ill intention is to myself. Because i'm holding the same stock like you too. I believe it will continue to head higher in short term because looks like the sentiment is still intact. But I'm trying to balance myself between greed and fear. Period.
Let's promote rational discussion.
2020-07-12 16:07
You don't get rational discussion out of euphoria. As Ben Franklin said, appeal to interest, not reasoning. And it isn't in the majority's interest who, either have made so much money on gloves stocks, or just getting into the game to hear information that goes against their interest.
2020-07-13 09:34
the problem isn't about whether Supermax is gonna make $100 mil or $300 mil next quarter or the qtr after. The question is how sustainable is it at this level of earnings and margin, and what is the normalised earnings? Sure, if Supermax can sustain $300 mil per quarter or $1.2 bil per year, that could perfectly justify current valuation of $20 bil. But if they can't, then where does the $20 bil market cap leave you, that is the risk?
Another thing to remember is there is a 'rush' of stockpiling gloves throughout the entire supply chain from manufacturers like Supermax all the way to end users i.e hospitals. That is why there is such a margin expansion. No one know how much 'backlog' orders are in the supply chain now. Everyone is afraid of not getting their orders so natural behavior tells you to 'over-order' just to be safe, hence creating a massive backlog from distributors, wholesalers to manufacturers. That is why you see all manufacturers ramp up productions to meet the demand. However, when COVID settles down (a possibility that can happen even without a vaccine), how long would it takes to clear out those stockpile coming from the backlog, that is a big thing. So what you can possibly see is Supermax has such an outstanding quarter after quarter of $300 mil and suddenly revenue collapse when everyone realised there are too much stockpile that they have to stop ordering from Supermax or any other manufacturers just to clear them off.
2020-07-13 09:48
100million per quarter? You still have no idea what is happening out there.
2020-07-13 13:53
Ricky Yeo what are you talking? After we sell then we join you promote sell lo! Now still holding lol
2020-07-13 16:17
I SOLD MY SHOP LOT FOR SUPERMAX. HOPING TO BUY MORE WHEN I CASH OUT 9 MONTHS LATER.
2020-07-13 16:34
That's one good common sense point.
"Ricky Yeo Another thing to remember is there is a 'rush' of stockpiling gloves throughout the entire supply chain from manufacturers like Supermax all the way to end users i.e hospitals. That is why there is such a margin expansion. No one know how much 'backlog' orders are in the supply chain now. Everyone is afraid of not getting their orders so natural behavior tells you to 'over-order' just to be safe, hence creating a massive backlog from distributors, wholesalers to manufacturers. That is why you see all manufacturers ramp up productions to meet the demand. However, when COVID settles down (a possibility that can happen even without a vaccine), how long would it takes to clear out those stockpile coming from the backlog, that is a big thing. So what you can possibly see is Supermax has such an outstanding quarter after quarter of $300 mil and suddenly revenue collapse when everyone realised there are too much stockpile that they have to stop ordering from Supermax or any other manufacturers just to clear them off."
2020-07-13 23:21
I'm surprised with the attacking comments like i have an influence to the stock price movement. And the point i want to convey was totally diverted to whether it's 100M or 300M per quarter..but this is merely an example. The idea is, the stock price is fragile in the sense that is built based on the sky high sentiment. One may argue it's backed by super bright prospect. Yes. Now that the expectation has been set to so high that a small little negative news is enough to collapse the price. Experienced player may take cover and run in time. How about inexperienced players who swim naked?
Price vs Value.
Trading vs Investing
Trading is when you buy with lower price and expect to sell with higher price
Investing is about finding good business, value its growth and be a shareholder.
Both ways earn money. Just different approach.
To me currently buying glove stocks is more like trading rather than investing.
Those who has already made a good fortune from glove, congratulation! Remember to take cover.
Those who has not. Need not feel sad. Observe the entire process, develop critical thinking, sharpen your investment knowledge, don't miss in the next round as there are still plenty of opportunities.
Buy what you understand and win. You will be able to replicate the results.
If you buy something you don't understand and win, whether is good luck or bad luck, who knows?
"Ricky Yeo You don't get rational discussion out of euphoria. As Ben Franklin said, appeal to interest, not reasoning. And it isn't in the majority's interest who, either have made so much money on gloves stocks, or just getting into the game to hear information that goes against their interest."
2020-07-13 23:23
It's not wrong to take profit now . Don't be too greedy . After all the big punters left , you might regret you are still in the train when the train crashed. History repeating itself 1997.
2020-07-14 11:05
It's a well written article by Wisdom putting the basics of supply and demand back in the picture. I'm a value investor myself but with the craziness, I've also jumped in to swim with the sharks. Let the party continue. Tomorrow, RM20! Huat ah!
2020-07-14 15:32
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