Just a quick note - the total shorting for Top Glove, Hartalega, Kossan, and Supermax, just crossed the RM2 billion mark on Friday. The total short sale trades value for the last two weeks on these 4 counters alone stands at RM2,003,029,511 based on Bursa's data.

This is equal to 91.07% of the total value of the short positions on any stock on Bursa Malaysia for these two weeks since regulated short selling was allowed again.

enigmatic, thank you for your comment.

I think GillianTan78 was mostly venting his frustration. My goal with this article was really to look in the exact things that might be off with JP Morgan's report and see if I may be able to find a logical answer to these things.

This might be just coincidental but:

The Commander of Defense Supply Center of the United States says the US plan "to invest a half-billion in the domestic production of nitrile gloves, used for nonsurgical purposes in hospitals, as well as the raw material for those gloves, nitrile butadiene rubber (NBR)."

https://news.bloomberglaw.com/health-law-and-business/u-s-to-continue-needing-2-2-billion-n95s-per-year-post-pandemic

Supermax's US expansion will cost US$550 million.

https://www.theedgemarkets.com/article/supermax-incorporates-new-subsidiary-us

observatory, thank you once again for your comment.

I just want to reiterate again - I didn't question JPM's skills of being able to calculate the contract liabilities in the company's quarterly report as percentage of their expected revenue for the financial year. I just gave the example, because JPM could have likely relatively easily gotten the information on what the company's policy on deposits is and what the order cancelation outlook is, by simply asking. They provided this information to me, so it doesn't appear to be commercially sensitive.

Their general point is clear. However, this means that we cannot trust any future prospects data, ever, because the future is always uncertain. Deposits are the closest thing to a guarantee that a provider of goods or services has that if he produces and allocates certain products/services for future delivery, the buyer will accept the delivery and will pay in full. The practice of taking deposits as guarantee for future delivery and payment dates back at least a millennium and it is essential to any type of business where delivery of production is not immediate. Questioning the validity of that practice for forecasting business decisions is the closest thing to hokum I can think of.

NewbieCK, the volume for Kossan is actually the second highest after the volume from last Monday (the day of the big short).

Regarding Top Glove and Supermax, it is possible that the short seller might not have been able to find counterparties willing to lend out their shares. This seems to be the case in particular with Supermax where the volumes have been low throughout the last couple of weeks.

The effort appears to be predominantly on suppressing the stock price of Kossan, and to a lesser extent - Hartalega. It seems like the short seller has mostly given up for now on the idea of breaking even on Top Glove's stock.

Here are the daily short sale trade volumes for today up to now (4:30pm)

Top Glove - 1,450,000 shares (7% of total daily volume)
Hartalega - 1,400,000 shares (25% of total daily volume)
Kossan - 4,700,000 shares (28% of total daily volume)
Supermax - 730,000 shares (<1% of total daily volume)

stockraider, thank you for your comment, although I can see you have copy-pasted it in a number of other places.

pBlue thank you, I was just about to explain that.

Here is the latest data on the daily RSS trades and the net short position on each of the 4 glove stocks:

https://imgur.com/iS4ndjp

Sales, Vairocana9999, dusti, thank you for your comments. I hope my posts help somehow.

qqq33333333 and observatory, thank you for your comments.

observatory, I just want to point out that I am not arguing with the arithmetic skills of the JPM analysts. The collected deposits indeed come to RM1 billion as of the latest financial report, which is about 5% of the projected revenue for FY21 (according to JPM's projections). However, a lot of adjustments need to be made, and this arithmetic explanation is way too simplistic. Some things that need to be taken into account which we don't have complete information on, are:

- What part of the collected deposits represent deliveries due FY20 versus deliveries that flow into the next financial year;

- What part of the collected deposits are for to spot orders versus standard orders;

- How much deposit the company collects for spot and for standard orders;

- What is the cancelation outlook and have there been any material cancelations recently.

Without this data, the 4.7% quoted in JPM's report is largely meaningless.

On another note - my personal expectation was that the RM880 million in contract liabilities reported in the FY20 annual report of the company was going to be the peak level as they reported lead times of 620 days at that point. However, additional RM200 million in contract liabilities were reported in the 1QFY21. This likely means that the excess RM200 million comprises almost entirely deposits for spot orders.

bullpiano and Keyman188, thank you for your comments.

Keyman188, 3 of the 4 reports you mentioned were mentioned in my article above. These are of course only 4 of more than 20 reports. The PublicInvest report was not mentioned, because it includes an "ESG discount". However, as I have mentioned elsewhere previously, ESG matters predominantly when it affects the financial performance of the company. In this case, there are no ESG concerns as of January 2021. There were such concerns in July 2020, and in November 2020, but the report was issued at a later date.

Hi ruby20, thank you for your comment. These notes are indeed valuable.

wkc5657, Gaussian, AdCool, witan, treasurehunt, super_newbie, MatKoh, thank you very much for your comments.

Please, let's not get carried away. I personally don't think there is a breach in the code of ethics of CFA in this case. However, the report is odd enough for there to be merit for us to comment on it.

My personal interest was to discover specifically which parts of the analysis were off, and it turns out it's the part with the FY22 and FY23 net profit projections. There are no specific explanations on why the profit margins are expected to be so low, and this is what bothers me as a reader of the report. I would be interested in getting an explanation on that in particular.

@MatKoh see here: https://imgur.com/xfrR0HP

SteadyT, i3 don't even want to tag/label my posts accordingly, and auto-delete my posts when I publish the link here. Why do you think Bursa/SC would react differently?

GillianTan78, thank you for your comment.

I read your post on the same topic, which was focused on the information provided in The Edge's article. I liked it.

One of the answers I received from Top Glove was on a question I had about the percentage deposit they collect from customers for both spot orders and non-spot orders. As I mentioned I will publish their response as soon as I get the permission to do that, but the percentage is materially different from JP Morgan's estimate. In ther report they mention (quote from The Edge): "the deposit paid is merely 4.7% of projected revenue for the financial year ending Aug 31, 2021 (FY21)." I am sure that this information would have been given to JP Morgan if they had asked for it since they are a substantial shareholder of Top Glove (20th largest shareholder in the company).

Have JP Morgan not contacted Top Glove to ask for information before publishing their report?

Ironically, yesterday Stephane Bancel, the CEO of Moderna, talking about COVID-19 at JPMorgan Healthcare Conference that "we are going to live with this virus, we think, forever." (reference)

Important disclaimer: Any views expressed are for informational and discussion purposes only. None of this information is intended as, and must not be understood as, a source of advice. It is imperative that you always do your own research and that you make any decisions based on your personal situation and your own personal understanding.

Yesterday an article published by The Edge mentioned a report by JP Morgan with a very grim expectation expressed on the glove sector. To be more precise, The Edge's article was based on a "research note" by JP Morgan dated January 11. I managed to view the original report, through a membership I have, and it is actually dated January 6.

As with AmInvest's report (you can read my notes on it here), I will not comment on the assumptions made, no matter how inconsistent with real world data and trends they are. I will solely focus on the numerical values from which the target prices are derived. To reiterate, JP Morgan's target prices are RM3.50 for Top Glove, RM8.50 for Hartalega, and RM3.80 for Kossan. These target prices are substantially lower than the consensus target prices, and even substantially lower than the target prices of the next most bearish analyst. For instance, for Top Glove, the nearest most bearish analysts are Macquarie at TP RM5.80, and the infamous AmInvest at TP RM6.50. Coincidentally, Macquarie have outstanding structured warrants that would be in the money if the market price of Top Glove goes above RM6.627, expiring on January 29 (see here).

We will once again focus our attention on the figures for Top Glove, because that is the company that has released the largest amount of data about its current and expected financial position publicly and therefore the company for which revenue and earnings are most predictable. A few days ago I sent an email with questions to Top Glove to fill some of the gaps of data that was not available publicly yet. They replied to me yesterday, and I am currently seeking their approval to share this additional data publicly. I will do so as soon as I get the approval.

Referring to my notes on AmInvest's analysis, the part that made the least sense was the calculated net profit for FY21. The case with JP Morgan is not the same. In fact, the estimated revenue and earnings in their report are above the consensus level of RM20.5 billion and RM10.5 billion respectively. JP Morgan's analysts expect FY21 revenue to come at RM22.956 billion, and net profit to come at RM11.674 billion. This translates into a net profit margin of 50.9%, which is perfectly in line with the consensus (see my AmInvest report notes for reference). Let's assume that JP Morgan's estimated EPS of RM1.46 for FY21 is accurate. As Top Glove recently released news on increasing the dividend payout to 70% for the financial year, and having in mind that the payout for 1QFY21 was 56%, dividend per share (DPS) for FY21 will come to RM0.97 according to JP Morgan's own estimate. At target price of RM3.50, this is a dividend yield for the year equal to a whooping 27.7%!!! Warren Buffett, arguably the greatest investor in the modern history of the world, has only been able to achieve 17.1% CAGR since 1985 (reference), so such a dividend yield would beat him by an enormous margin. Additionally, the report (again, it is dated January 6, 2021) provides outdated information to the clients of JP Morgan, because the dividend payout is estimated at 50% whereas the 70% payout announcement was made on December 4 (reference).

Did JP Morgan make a very significant miscalculation somewhere?

While JP Morgan did not deviate from the consensus at all with their estimate from the consensus estimate for FY21, the deviation is drastic for FY22. Their estimate revenue is RM11.971 billion, in line with the consensus RM13.4 billion. However, their estimate net profit is RM1.686 billion, way off from the consensus RM4 billion. In other words, the consensus profit margin for FY22 is 30%, while JP Morgan's is 14.1%, or more than twice lower. Even more drastically, for FY23, their estimated net profit margin is 6%, compared to consensus average 20%, or more than three times lower. There is no explanation on why the profit margin of the company is so much below the consensus average. The last time Top Glove has reported profit margin below 6% was in November 2011 - 9 years ago (reference). This is important, because JP Morgan peg their valuation to FY22 earnings, ignoring FY21 and any consequences this financial year might have on the financial position of the company.

Is JP Morgan saying that the largest glove manufacturer in the world will operate at entry level profit margins?

Note that JP Morgan believe that Top Glove will report RM11.674 billion in net profit for FY21. Additionally, they believe that the cash pile of the company by FY22 will be RM4.107. If we take these two figures, and we apply one of the most basic and most conservative valuation methods - discounted cash flow, we get that at RM3.50, 55% of that target price's value is contained in what the company is expected to earn this year alone.

@kl_guy, I tried, the link gets deleted automatically.

Wow, my comments get auto-deleted when I publish a link to the article. Anyway, click on my profile and go to "Blogs" if you want to read it.

Oddly, the i3 admin keeps deleting my posts with my link to my article on JPM's report.

Anthem2, thank you for your comment.

I am not sure about the methodology Morningstar use. However, Top Glove is a small part of the overall worldwide shareholding of JP Morgan. JP Morgan manage an enormous amount of assets - US$2.36 trillion as of 2019 according to Statista (https://www.statista.com/statistics/431790/leading-asset-management-companies-worldwide-by-assets/).

However, Top Glove is a very significant part of JP Morgan Malaysia Fund's portfolio, to which I have linked in the article above.

Right now enormous buy queue, and orders cannot get matched because the short seller stopped shorting at 3.9 million shares for now. There are very few other sellers at this price, so the huge buy queue cannot get matched.

"moneymakerx Waves coming to an end. Collect on dips. It will be better to collect on end of Jan - Mid Feb. Expecting another round of big attack then. Shortists will close their ranks before then to push up so that they can short again when IDSS comes in."

IDSS doesn't work the same way as RSS. IDSS short sales need to be closed the same day, so they don't affect the share price, with other things equal. RSS on the other hand means that a short position can be opened today, and closed a number of days in the future, thus suppressing the market price for this time frame.

950 thousand shares shorted for Harta - 27% of total volume for the day.

3.5 million shares shorted up to now - 15% of the total volume of trades.

witan and chamlo, thank you for your comments.

chamlo, it is just a speculation, that is why I didn't give a straight-up answer to the question. I just presented the latest facts.

witan "Normally how is average time before shorties need to close their position? 1 week or 2 weeks?"

We don't know. Apparently on the US market, it's 13 days in some cases, but I haven't seen clear guidelines for this on Bursa.

dusti, thank you once again for your comment. I understand what you mean now. Unfortunately, the report has not been withdrawn, and I doubt it will be withdrawn. Hope is it will get edited soon.

Shorting volumes for today up to now (11am, 2 hours after beginning of trade):

Top Glove: 1,610,000 (11% of total volume)
Hartalega: 695,100 (29% of total volume!!!)
Kossan: 1,672,700 (25% of total volume!!!)

The last few days the short seller has been defending the position on Kossan with their life, because that's the only stock that has actually dropped in price since 31 Dec closing.

dusti, thank you for your comment, but your logic escapes me. In order for me to know that the report is flawed, I would need to first read it.

LimitUp and Mabel, thank you for your comments.

pjseow and Andre Kua, thank you for your comments.

pjseow, that is indeed the case, and that is what appears to be significantly off with the report of AmInvest. There is no explanation or justification as to why the profit margin is given at 30% instead of 50%. On the contrary, according to the report the profit margins are not expected to suffer (at least for this year).

Andre Kua, supply is expected to be running behind demand at least until year-end 2023, according to reports by Margma. Of course beyond that point there is little visibility. However, setting up of a glove manufacturing facility with a working production chain is a major undertaking, which has proven over the years to not be achievable for everyone. New entrants have significant disadvantages to established players.

Revenue for FY22 (ending August 2022 for Top Glove) is mostly locked in with delivery times stretching 560 days from now for nitrile gloves (the highest revenue segment).

A quick update on the short position:

- It currently stands at 222,976,300 shares, or 2.72% of total outstanding stock of Top Glove; that is 1.28% from the allowable maximum of 4%.

- There has been closing of short positions equal to 3,680,900 shares, or 1.65% of the total short position up to end of day on Tuesday (the last day we have data for). In other words, 98.35% of the short position is still open, and the shares have not been bought back.

https://www.bursamalaysia.com/misc/missftp/sblnt/NetShortPosition20210113.pdf
https://www.bursamalaysia.com/misc/missftp/securities/securities_equities_rss_2021-01-13.pdf

Sikusiku I messaged you privately.

sikusiku and Up_again, thank you for your comments.

sikusiku, I updated the article earlier to reflect that change. However, the change is minimal and doesn't explain the rest of the inconsistencies.

MatKoh "Ben, you have the final tally? Anyhow, looking forward to your daily report. I'm sure we will gain further insights as always!"

These numbers are unconfirmed, as I think some clearing of orders is still ongoing, but the final numbers will be very similar. Short sell volume for the day:

Top Glove: 32,300 (negligible)
Harta: 259,200 (3.3% of daily volume)
Kossan: 360,200 (2.8% of daily volume)
Supermax: 170,700 (0.7% of daily volume) (this is strange, so we will have to wait for the official figures to be released)

CJkenho, thank you for your comment.

The only other piece of news I saw came from Focus Malaysia. There was a "whistleblower" who bad-mouthed the company to Focus Malaysia. They checked with Top Glove, and the company has replied promptly: https://focusmalaysia.my/top/top-glove-not-taking-mco-lightly-clarifies-claims-of-sop-breaches

LaoTzeAhSir and GillianTan78, thank you for your comments.

GillianTan78, I assume your comment is related to my other article from today: https://klse.i3investor.com/blogs/bursainvestments/2021-01-13-story-h1539320832-Who_Is_the_Mysterious_Gloves_Short_Seller.jsp

I didn't want to comment on the actual notes from the report, because I hadn't seen the actual report. However, it does seem like JP Morgan have done their best to selectively present only bits and pieces of information that fit their narrative.

Today the shorting attacked has moved to Supermax. 1,360,000 shares shorted up to now - the second highest daily short sale volume after "the big short" from last Monday.

Today the shorting attacked has moved to Supermax. 1,360,000 shares shorted up to now - the second highest daily short sale volume after "the big short" from last Monday.

BALANCE_VIEW and gongkia, thank you for your comments.

Unfortunately, it is impossible to know if it was done intentionally. Let's hope that as wkc5657 mentioned above, it might have been an oversight on the supervisor's side to approve the report for publication.

NewbieCK, you are welcome to submit it to the media outlets. Unfortunately I don't have any contacts.

I just published a new post on who the potential "mysterious" short seller of gloves might be:
https://klse.i3investor.com/blogs/bursainvestments/2021-01-13-story-h1539320832-Who_Is_the_Mysterious_Gloves_Short_Seller.jsp

GLNT, thank you for your comment.

I will not argue on the definition of "newbie", but in my humble opinion someone with a few years of experience should not be allowed to make this amount of mistakes (if they were indeed mistakes).

SteadyT, thank you for your comment.

I don't want to call out names (although the name is given in the report). I can only say that this analyst is not a newbie. I have seen reports of his dating back a few years.

wkc5657, I would have hoped so, but this is not the case. The same report, with the same inputs, was released in December.

supersaiyan3, thank you for your comment.

This is actually one of the lowest quality analyst reports I have read. There are many problems with it beyond the seemingly random figures for profits they have given, including utilisation rates, exchange rate assumptions, and (what appear to be) ever-rising raw material prices until 2023! Really poor work.

gLOVErs, thank you. But for some reason i3 do not tag my recent posts with the corresponding company labels, so very few people are actually able to find them. I have messaged i3 multiple times about that, and I have been unsuccessful over the last few days.

If anyone else could message the i3 admins to ask them to label my post with the correct labels, that would be truly appreciated. Here is what I send to them usually:

Hi, could you please add the labels TOPGLOV, HARTA, KOSSAN, to my post please: https://klse.i3investor.com/blogs/bursainvestments/2021-01-13-story-h1539318879-Top_Glove_Serious_Material_Inconsistencies_with_AmInvest_s_Report.jsp

I usually message them from here: https://messenger.i3investor.com/m/conversation/admin

My analysis of AmInvest's "analysis":

https://klse.i3investor.com/blogs/bursainvestments/2021-01-13-story-h1539318879-Top_Glove_Serious_Material_Inconsistencies_with_AmInvest_s_Report.jsp