************

When JP Morgan reinstated its coverage of glove stocks, its first report on Dec 11, 2020, shook the glove stock prices to the core. Among other negative assertions, it opined that Top Glove share had a fair value of only Rm3.50, never mind that the company had just reported a record quarterly profit of Rm2.37 billion. The next trading day, the Top Glove share price fell from the previous high of Rm6.92 to the low of Rm6.50, Harta, Rm14.40 to Rm11.80, Kossan, Rm5.85 to Rm4.65, and Supermax, Rm7.85 to 6.72. The prices continued falling for more than a week.

When I published my forecast for Supermax FY21E at Rm4.1 billion in my essay on Nov 18, 2020, SUPERMAX SHARE PRICE CRUMBLES - TO SELL OR TO BUY MORE, I got brickbats from some fellow investors. I was way off the marks from the esteemed research houses. Their FY21E numbers ranged from Rm2.99 by Affin to Rm3.85 billion by TA. As you can see from the table below, after the release of Supermax’s Q2FY21A on Jan 29, most of the research houses have adjusted their numbers closer to my Rm4.1 billion, with the exception of KAF. Somehow, KAF analyst is still dwelling in its La La Land. It forecasts Supermax FY21E net profits at Rm3.54 billion. You don’t need to be a CFA to figure out how ridiculous this Rm3.54 billion number is. It is especially so now that the Q2FY21A is already announced. The KAF analyst must have this incredible, incredible telescope to look into the future that they saw Supermax accounts were rigged and would be adjusted down in time. For goodness sake, KAF. Supermax has already accumulated a profit of Rm1.85 billion in two quarters. The company has reported that the higher ASP has not yet been imputed into the earnings of Q2FY21. This is a coded statement from Supermax telling the market that they can expect Q3FY21 earnings to be higher. It is not possible that a professional stock analyst should miss this cryptic code. Coupled with increased production capacity, it is simply mindboggling to imaging that quarters 3 & 4 earnings would come in at Rm0.85 billion each? That’s essentially what KAF’s Rm3.54 billion forecast for FY21E suggests.

Why do the members of the investment public hold those research houses in such holy awe? Do they really have such an incredible telescope that can look into the future, or have the investors been so brainwashed like Donald Trump supporters that they could not tell facts from fiction? I, too, wanted to find out. So I spent time putting together the past reports published by the research houses.

Towards the end of Feb 2020, the novel coronavirus in China was already in full bloom. Yet, no research house would forecast the Supermax earnings for FY20 higher than Rm200 million or Rm0.2 billion. Even in late May 2020, they still could not foresee that the Supermax FY20 earnings would exceed Rm300 million. At that time, Supermax only had a little more than one month to complete its 2020 financial year. We all knew by now that the Supermax earnings for FY20 came in at Rm525.6 million. In the May 2020 forecasts among the research houses, the number that came closest to the actual FY20 earnings achieved by Supermax was Rm275.1 million. It was made by TA. Even that was way off the mark. If I compare forecast-to-actual using their Feb 2020 numbers, the discrepancies are even worse. The highest forecast among the research houses for the Supermax FY20 earnings in Feb 2020 was just Rm132.2 million. This was again made by TA. So, in Feb 2020, the most brilliant forecast on the Supermax FY20 earnings by these awe-inspiring research houses was off by a whopping 75% when compared to the actual achieved by Supermax. Mind you. Feb 2020 was only FOUR months away from the end of the Supermax 2020 financial year. Although TA came in top in terms of accuracy to actual, we can’t give it the victor’s crown. The best was still an abysmal forecast.

So far, I have compared the research houses’ forecasts made from late Feb and May 2020 for FY20. If they could not get their forecasts close to actual with only 1 and 4 months from the financial year closing, we can forget about their forecasts for FY21 from Feb and May 2020. Those numbers were downright embarrassing. Let’s just skip a few and dissect their forecasts for FY21 from Oct 2020 (though you can make the comparisons from the table below on your own).

After Supermax announced its Q1FY21A quarter results on Oct 27, most research houses woke up from their slumber. BIBM made the biggest adjustment to its May 2020 forecast. It raised Supermax FY21E earnings from Rm0.28 billion to Rm3.9 billion, a whopping Rm3.62 billion increase. It was the closest forecast made by the research houses in Oct 2020 to my Rm4.1 billion number. TA is not far behind at Rm3.8 billion. Others were still half-asleep. Affin forecasted just Rm2.99 billion for FY21E, and Nomura, Rm2.83 billion. These two were the sleeping beauties. The rest forecast above Rm3.0 billion.

Alright. I have done my collective service by researching the numbers. You can pour through them in the table above if you are interested. Interpret them in whichever way you choose.

The point I am making here is this: the investment bankers and their research houses do not have the monopoly of wisdom and foresight. They certainly do NOT have that incredible telescope to pierce through the future to know what the market will be. If you analyze their forecasts from Feb 2020 on, you can clearly see that their numbers were just fairy tales. Even one month before the 2020 financial year-end, most of them were still more than 80% off actual. Notice that I have not commented on their FY22E numbers. I don’t see why I should get there. Those numbers are just fairy tales. If they couldn't get their numbers right just one month before the Supermax financial closing, surely you couldn't expect any better forecasting from them that far out in time, could you? “Once beaten twice shy,” says the wise.

I have been investing very profitably for more than a decade. Never did I believe any of those opinions from the analysts. I read their reports only for factual information. I do my own research and analysis. I work with my three most trusted companions. Their names are fundamental analysis, technical analysis, and time horizon.

Forget the fairy tales propagated by the investment bankers for a moment. Let’s dissect what the facts are on the ground today.

FACTS:

1. The glove manufacturers know their business far better than JP Morgan and all the eunuchs sitting in their offices. In  Supermax Q3FY20 report on May 20, 2020, it states,
   
   “The demand of gloves has exponentially increased this year amid the global COVID-19 pandemic. The surge in demand has resulted in a rapid rise in average selling prices (ASPs), as buyers rush to secure their supply of personal protective equipment (PPE), including medical gloves."
   
   What did the eunuchs do? Whether it was self-interest, incompetence, or hubris, they totally ignored the manufacturers and forecast way, way below the actual.
   
   As of now, the manufacturers across the board are telling the market that demand will still outstrip supply for at least 2 years out. What did the research houses do? They turned a deaf ear and cut the FY22E earnings forecast by as much as 67% (KAF, again!). It's hard to teach an old dog new tricks.
    
2. Whether or not gloves are used for vaccination, it has little impact on the overall consumption of gloves. On Jan 13, 2021, JP Morgan again tried to con the investors by showing a picture of someone administering a vaccine without gloves. It frightened the daylight out of some investors. They promptly threw their glove shares to the open arms of JP Morgan and other IBs (I’ll elaborate on this later). I did see some published pictures that healthcare workers in the UK and Singapore did not use gloves to administer the vaccine. But from yet other published pictures, I observed that all the US healthcare workers used gloves to administer vaccines.
   
   Here’s the math. There are 7.5 billion people on this planet. If all are vaccinated with the 2-shot vaccines, and the gloves are discarded after each shot, the world would need 30 billion gloves. Not all can be vaccinated in a single year. Let’s assume that it takes the world 3 years to vaccinate everyone and only half of the healthcare workers wear gloves. The potential lost volume is only 5 billion gloves per year (30÷3÷2). Based on Top Glove estimate that it produces 93 billion gloves with 26% of the world market, we can determine that the current world consumption of gloves for 2021 is 357 billion. Coupled with the expected organic growth of 15 to 20% per year, the 5 billion potential loss of consumption is minuscule. So, the hoax perpetrated by JP Morgan to spook the investors into selling the glove stocks is unconscionable. Their army of CFAs could have easily punched out this simple calculation. I guess, serving truth just wasn’t at the top of their menu.  
    
3. The vaccines are here. Most of North America, Western Europe, and other wealthy countries are likely to have most of their citizens vaccinated by the end of 2021. These countries are likely to see their infection rates tapering by the summer. These wealthy nations represent just a little more than 700 million people – less than 10% of the world population. The saying, “No one is safe until everyone is safe,” rings true in this global village. The pandemic still has legs for many more years to come. The scientists are still not sure how long the antibody will last after administering the vaccine into a human body. Should the Covid-19 vaccines need to be administered annually like the flu vaccines, it will take many more years for the entire world to be vaccinated. So long as the Covid-19 remains a threat in one corner of the world, the rest of the developed world will continue to take heightened precautions from reinfection. That means consumption of gloves will not decline even after the wealthy countries have all their citizens vaccinated.
    
4. The scientists are still unsure of the variants from the Covid-19 that started in the UK, South Africa, and Brazil. The information has begun to trickle down that the current varieties of vaccines appear to be less effective against the SA and Brazilian variants. Some even assert that the vaccines are also less effective against the UK variant. In short, there is no certainty. The fear of uncertainty will most certainly ensure that the world will continue to take heightened precautions. As such, heightened demand for gloves will continue.
    
5. The demand curve for gloves has shifted. This is an economic phrase meaning the pre-pandemic pattern of glove consumption is now outgrown by a new pattern. In the past, disposable gloves were mainly consumed by the western world, particularly in the healthcare sector. The pandemic has changed that. Now every country which can afford it uses gloves. In addition to the healthcare sectors, they are now widely used in other industries – food, travel, mechanic, hospitality, etc. I believe, with this structural shift in consumption pattern, the consumption of gloves may actually rise as the infection rate falls and the commercial sectors get back to near normalcy.
    
6. In the Feb 2021 revisions, without exception, every research house forecasts that the Supermax earnings for FY22E will fall to between Rm2.1 (MIDF) and Rm3.3 billion (RHB). Some of them have the audacity to project earnings up to FY2024E (it tickles me that these eunuchs couldn’t get their forecasts close to actual despite making them within one month of the financial year-end, and they want us to believe their fairy tales 4 years out!?). You can choose to believe this fairy tale or ignore it. Based on their records compiled for you in the table above, it is safe to opine that the research houses have lost all credibility. They couldn't get their forecasts right one month out, how can we expect them to do any better so far out in FY22E? This is plain common sense.
    
7. All research houses (except 1) agree with my Nov 18 projection of Rm4.1 billion earning for FY21E. Many have adjusted their forecasts to even exceed my prediction. What this means is that Supermax will exhibit at least 6 continuous quarters of rising profits – a feat few corporations in Malaysia have accomplished. What does the market do in the face of such unprecedented feat? Sell down the damned share! Does it make sense? Certainly not. Does it make sense to the likes of JP Morgan? Certainly not. A catch-22, which I shall explain later.

Next, I shall attempt to make sense of the Supermax stock play based solely on my analysis. If you are tired of reading, you can log off here. But what I am about to share may be quite revealing based on the numbers I have crunched.

OPINIONS

I wrote earlier that I would explain why JP Morgan and the likes bought the Supermax shares thrown to them by the sellers with open arms, and why it didn’t make sense for them to want to depress the stock price (albeit, at least not forever).

You would have already figured out that the IBs are not charitable organizations out to make you rich. Heck, no. Their very existence is to make money, a lot of it. The only way for them to make lots of money in Bursa is to rocket the stock price sky-high. They can’t make much money by shorting the stocks. There is a 3-4% limit in the Bursa RSS system (have they decided whether it is 3 or 4%?). How can the IBs make huge profits with such a restriction? No, they can’t. Does it make sense to short such a highly profitable company like Supermax where its share price has already declined by close to half? No, it doesn’t make sense. Then why are they doing it? Accumulation!

Warning: What I am about to opine is not based on facts. There are just gutfeel based on years of trading, reading, and analyzing. So please read with your eyes wide open and take it with a pinch of salt (some may even say, a spoonful).

I believe the objective of the IBs is not shorting the stocks per se. They are shorting to depress the price so that they can buy the shares on the cheap. In simple terms, they are like your ordinary shopkeepers. They need to have stocks or inventory to sell to their customers for a profit. They are suppressing the price for two reasons.

One, as I said, the IBs are restocking their inventory. They need to accumulate as many shares as possible. Otherwise, it would not be worth their while to rocket up the stock price. Remember, they are in this to make them rich, not you. They are simply buying low and selling high.

Two, they need to drain the swamp. What this means is that the IBs need to get rid of as many weak players as possible. Those who want to sell, they will make them sell. I have meticulously compiled the transaction volumes from Aug 5, 2020, to Jan 27, 2021. I am publishing the numbers below as a gift if you care to consider them.

From the table below, you will find that, between the current price and Rm7.50, many investors are looking to get out. JP Morgan and the likes have been feeding the market with fake narratives. They brainwash the retail investors that the Supermax stock is overpriced. Once the price reaches close to their costs, those investors rush out to sell. Mathematically, the IBs should clear the swamp of weak players by about May/June. Coincidentally, this is when the IBs have structured their structured warrants with breakeven as high as Rm21.50. (You can refer to my article, SUPERMAX SHARE PRICE - WILL IT BE SUNK BY JP MORGAN? ) Once the stock price achieves the previous high of Rm11.95, I believe, the Supermax stock price will take off. There will be nothing to stop the IBs from powering ahead in so far as clearing the swamp is concerned.

Next, the IBs will have to create excellent narratives or storylines to bring the stock price to the stratosphere. As I have expounded in my previous writings, the glove story is too good for the IBs or market makers to pass up from making a bucket full of money.

So, what’s the takeaway for you? If you believe this story, don’t sell even after you have recovered your costs. Don’t be drained away by the market makers. If you are a strong holder, you can help reduce the number of shares the market makers need to drain by holding on to them. Liberation Days will come sooner. But don’t take my word for it. John Maynard Keynes said, “The markets can remain irrational longer than you can remain solvent.” Yes, the market price for Supermax is irrational. As I have described, there is rationality amid irrationality. Do you have the stomach and the understanding to wait it out? The peace of mind rests in the strong fundamentals of Supermax as a going-concern and the time-tested reliability that profitable companies will always trump manipulation over a reasonable time horizon. Supermax stock is super profitable. Don’t let the analysts fool you.