This is merely a question to ponder to. First, we have to ascertain what is exactly driving Topglove's seemingly excessive valuation. There are two variables investors are focusing on—:

1. Supernormal profits
2. Structural step up in glove demand

Many analysts and the glove companies themselves have projected for glove demand to nearly double from 2019(prepandemic) figures by 2023. In actual fact, glove demand has been rising at a strong pace even before pandemic, and expected to continue so. A major factor is the introduction of universal Healthcare in the USA and the high growth potential from major developing countries recording miniscule glove per capita usage. Under Joe Biden, the universal Healthcare is expected to expand even further, adding fuel to glove demand.

However, we should also be cognisant of the fact that China is a major glove producer itself and local glove makers may not benefit from its massive growth potential. But the stars still line up pretty nicely even without China. This also allays concern that China suppliers will flood the global market with supplies.

Since we can be confident with the rosy forecast, Topglove ex-supernormal profits could be easily worth double or more from pre-pandemic times assuming the supernormal profits are paid out as dividend. Don't forget Topglove could even capture a bigger market share percentage from before given its aggressive output expansion.

Now for the supernormal profits. At a theoretical RM 9 which is the latest target price research houses ascribes, Topglove's market cap is valued at RM 73 billion. Since Topglove ex-supernormal profits could be valued close to RM 25.4 billion.......

(Adjusted price of Topglove is RM 1.55 at 31 December 2020. Market cap is RM 12.7 billion. RM 12.7 billion*2) ......., that leaves RM 47.6 billion of value to justify. It is certainly tough for investors to wrap their heads around this exorbitant value. This is the variable that is the toughest to digest. The supernormal profit variable.

Supernormal profits to me simply means the excess of profits derived from charging far above the normalised glove ASP. Will Topglove really make RM 47.6 billion of supernormal profits? I am highly doubtful. I can only see that the total supernormal profits within reach to be only around RM 25 - 30 Billion. To be conservative, I would say RM 25 billion because it is really difficult to say what level of ASP can be sustained into 2022 and 2023 when the desperation for PPE eases as soon as mass vaccination shows effect. That leaves RM 22.6 billion in valuation gap. And suggest that Topglove is only worth around RM 6, after taking into account the dividends paid for last financial year, possibly less if you take into account the share buybacks at prices much higher than RM 6. Do not forget that Topglove has to spend a good portion of that supernormal profits to expand production. This article (https://www.google.com/amp/s/www.nst.com.my/amp/business/2020/09/625437/top-glove-spend-rm8b-capex-next-six-years) suggests Topglove may spend RM 8 billion in capex in the next 6 years. I will ignore discount rates because I wouldn't know what is the capex outlay for each year and it only complicate things. That significantly reduces Topglove's supernormal profits paid out as dividend to shareholders. Therefore, it can even be argued Topglove is only worth RM 5, after taking into account dividend paid last year and share buybacks above RM 5. And the gap widens to around RM 30 billion.

I am also reluctant to increase Topglove's ex-supernormal profit share price to justify the gap because i deem that over optimistic. Since we have to consider that the war chest of all glove players have enlarged significantly and they now have the financial power to fight for market share, thus potentially lowering profits. The risks are there, no doubt.

Now, even if you paint a rosier picture and say Topglove can make another RM 5 billion in supernormal profits, that lowers the gap to RM 25 billion, still a big amount. This may explain why certain quarters are pessimistic about Topglove at this share price even at RM 6. Because my slightly conservative calculation already put it at RM 5. On top of that, we do not know what the supply situation will be after a few years. And long shots/over optimism never pays off well.

So..... this leads to my question, is RM 5 or 6 really the fair price or is there more to it?

There could be a 3rd variable many are ignoring. There is tech valuation which many find dubious. And perhaps there is also something called pandemic valuation. There are two major pandemics occurring at 2003 (Sars) and 2009 (h1n1). In both circumstances, Glove ASP has really increased by a lot, just not as explosive as the current one. H1N1 gave glove makers a major boost. Aside from that we also had ebola. Experts and even Bill Gates have already sounded the death knell long ago, warning us about pandemics to come and yet to come. Pandemics are recurring, not one off.

For investors with keen insight, even before the 2020 pandemic, they could have looked back at SARs and H1N1 and seize the opportunity to buy glove counters in preparation for a pandemic. Some of us may look back and kick ourselves in the foot for not studying the history of glove companies. Those with the knowledge would have bought glove counters and held on to it when Covid was announced in China. Many did not.

I think it is already apparent the pandemic aspect of glove companies are beginning to cross many people's mind. Some may hold on to it to hedge against future pandemics. Many should have understood recurring pandemics which is getting more frequent would mean paying a premium for glove companies. Glove stocks are very suitable for pandemic plays because barriers to entry are high. And obviously, they collectively control almost 60 percent of glove supplies. This is not replicable in other PPE businnesses. Pharmaceutical companies are also not a good pandemic play because H1N1 and SARS did not really require mass vaccination, H1N1 quicker than vaccines came. And clinical trials are highly expensive and uncertain. Nothing can come close to glove stocks.

What seems to be more certain from here is that epidemics will recur and the trend for glove pandemic play is already solidified across 3 major pandemics, all which have proven the valuable pandemic aspect of glove stocks. The only question is can the major glove companies really maintain the high barrier to entry and their competitive moat. If so, more and more people will come to the realization to this other variable and incorporate it into glove stock valuation. But to really fully reap full benefit from this phenomenon is to hold glove stocks indefinitely, which many will not. I believe most of the shareholders who held Topglove/Supermax/Harta/Kossan back in 2009 are no longer shareholders today.

My question is, can the pandemic variable explain for the gap in valuation? I really do not know.

*This is not a buy or sell call. It is nothing more than an intellectual exercise to me as a keen observer of the stock market among all the noise going on