With Regulated Short Selling (RSS) finally allowed effective 1st January, the first week of trading in 2021 saw the biggest short-selling volumes in the large rubber gloves stocks. All four largest glove makers ended at week’s highs, which must be bruising for profit-motivated short sellers. Statistics from Bursa Malaysia however, do not reveal the breakdown of hedgers, arbitrageurs and profit seekers amongst the short sellers. Long-only investors in TOPGLOV may be relieved to know that with TOPGLOV’s latest net short position of 2.34% (of issued shares), it leaves just 3-4 more days of shorting before hitting the newly imposed 4% ceiling cap assuming average daily volumes done last week. Fundamentally, all the big four glove stocks offer plenty of upside, hence our OP calls remain on TOPGLOV(TP: RM8.50), HARTA (TP: RM21.00), KOSSAN (TP: RM7.50) and SUPERMX (TP: RM9.05).

Active trading in gloves stocks as short selling resumed. The market ended the first trading week since the resumption of Regulated Short Selling (RSS) on 1st Jan 2021 with a list of 48 net shorted stocks versus 34 outstanding net shorted stocks as at 31st Dec 2020 (only stocks with net shorted positions exceeding 0.1% of issued shares are reported). Rubber gloves stocks were the most actively shorted, with the sector’s four largest ending as the most shorted stocks during the week. See the 10 stocks with the largest percentage of total net short position below (percentage of issued shares) as at 8th Jan 2021 and the changes in net short position since 31st Dec 2020.

Data suggests shorted gloves stocks ended the week in loss positions: Key observations on gloves shorting that we managed to uncover or deduce from available data are as follows (see page 4 charts):

i) There were zero short covering during the week as the changes in net short positions were consistent with the cumulative daily gross short sales.

ii) The volume of daily trades were a sizeable percentage of total traded. In TOPGLOV case, the shorted volumes were 27% of total traded for the week, HARTA (35%), SUPERMX (6%) and KOSSAN (28%).

iii) Shorted volumes were most aggressive on the first day (Mon 4th Jan) with TOPGOV short-sells accounting for 31% of total traded on the stock that day, HARTA 50%, SUPERMX 17% and KOSSAN 47%. They were least aggressively shorted on the last day (Fri 8th Jan) when buyers overwhelmed sellers, with these four stocks gaining, 11% for KOSSAN, 12% for TOPG, 15% for HARTA and 21% for SUPERMX.

iv) Friday’s closing prices were sharply above the average shorted prices of the respective stocks: TOPGLOV’s closing price of RM6.50 is 16% above average shorted price of RM5.59; HARTA’s RM12.50 closing is 17% above average shorted RM10.66; SUPERMX’s RM7.30 is 30% above average shorted RM5.63 and KOSSAN’s RM4.50 is 11% above RM4.04.

Further short selling cannot be ruled out, but the extent is limited by the newly imposed 4% cap on RSS aggregated net short position: When the SC and Bursa announced the lifting of the suspension on RSS, they introduced two ‘enhanced control measures’ namely:

i) The daily gross short position limit for Approved Securities will be reduced from 3% to 2%; and

ii) A new cap of 4% on RSS aggregated net short position will be introduced.

On the second measure, it appears there is little headroom for further shorting for TOPGLOV. Based on the average daily volume traded last week, it would take just over three more days before the 4% limit is reached assuming shorts are done at average daily volumes of the past week.

Data suggests foreign institutions were the short sellers last week: Immediately after Pfizer announced that its Covid vaccine was 90% effective on 9th November 2020, gloves stocks were heavily sold off. During the period 10th Nov – 31st Dec 2020, foreign institutions and local retail were the buyers while the local institutions were sellers. The first trading week of 2021 saw foreign institutions selling, which we believe were mostly made up of short sellers, while local institutions turned buyers and local retailers continued buying.

We see a fair chance of some short covering soon: While it cannot be ascertained if the short sellers were mostly hedgers or profit seekers, we believe the gloves stocks may have reached a trough last week. Even if the shorters continue, there is limited room for shorting bell-weather TOPGLOV. And for profiteers who see prospects of a quick profit diminishing, short covering may soon follow. We remain firm in our OVERWEIGHT call on the rubber gloves sector. Our analyst Raymond Choo remains steadfast in his Outperform calls on all the four stocks. Market feedback we obtained seems to suggest that the recent sell-off have in no small measure been driven by fear of ASP falling sharply to USD35/1,000 pieces by 2022. While we disagree with such a bearish prediction, even if ASP does fall to USD35/1,000 pieces from the current blended price of USD90/1,000 peices, Raymond’s extracts below suggest there remain upside to target prices for TOPGLOV (+27%), HARTA (+54%), SUPERMX (+13%) and KOSSAN (+47%)

Source: Kenanga Research - 11 Jan 2021