Supermax has committed RM1.39 billion for new plants in Malaysia and USD350 million in the US. That's almost RM3 billion. So the company's cash is gone. These plants may not operate at full capacity because of the oversupply situaton and the additional overheads will further depress Supermax's earnings.

Your analysis is quite compelling. But what if the analysts are wrong and Supermax goes into the red like Careplus and other glove companies?

@ observatory. Intco D/E ratio of 2.2x based on mrq
https://finance.yahoo.com/quote/300677.SZ/key-statistics/

Price of nitrile gloves on Alibaba:
https://www.alibaba.com/trade/search?fsb=y&IndexArea=product_en&CatId=100009315&SearchText=nitrile+gloves&selectedTab=product_en

@ observatory. Good valid comments. My views below:

1. Glove prices will not go down to pre-covid level of USD23 because raw material costs have increased.
2. Like face masks and solar panels, the price of glove will drop to a level that enables the most efficient companies to still make a after tax profit of 15% to 20%. According to my calculation, the lowest it can possibly go to, at today’s NBR price, is USD30. Below that price all the new entrants will lose money or won’t be able to get an adequate ROI. Right now Glove companies are making PAT of more than 50%.
3. With ASP dropping now, and it has declined as much as 13% from January this year to May, companies that have not committed funds for new plants may shelf their expansion plans beyond 2022. That includes Intco, which is quite highly geared with debt to equity ratio of 2.2x.
4. But drop in ASP will not be precipitous because covid19 is now endemic. Threat of 4th, 5th, 6th waves will mean that people will still use gloves and more gloves will be used when the economy opens up. Countries that do not have enough gloves will continue to stock up. That is why I think ASP will stabilise at USD40 from 2023 on.
5. Based on the current glove share prices, the market has already discounted the price of glove stocks based on ASP of USD30, which is ridiculous! Therefore glove share price cannot go much lower.
6. BTW, Mahsing only invested RM150 million for 3.68 billion capacity. This works out to be RM41 per 1000. Top Glove investing RM100 for 1000 seems too high.

https://www.theedgemarkets.com/article/dissecting-mah-sings-rubber-glove-ambition

Hi pjseow, thanks for your questions.
For Column B, I assumed 25.99 to be the actual production for the TTM to 31/3/2021. You have assumed actual production to be 90% of 25.99 billion.

I did not apply a straight 30% to the revenue figure to obtain the PAT. After obtaining the revenue based on ASP of USD40, the right way to arrive at the PAT is to subtract from the revenue, the actual expenses of the trailing twelve months. The PAT should be RM1263 million (I have amended the PAT in my article).

I use the same approach to compute the PAT in Column C. However, I assumed that the Operating Expenses (or production cost) in 2023 have increased by 31% compared to the June 2020 Quarter.

Hi Andre, good questions. Anyone who has managed a business knows that forecasting beyond one year is like pie in the sky. With the mutating virus and the pandemic becoming endemic, and 3rd and 4th waves engulfing many countries, to predict that glove prices will be USD25–30 in 2025 is just guess work. My assumption of USD40 in 2023 is just as likely if not more likely to come true. As you can see from my article, even if I apply an ASP of USD40 to Supermax’s TTM earnings as at 31/3/2021 (compared to the actual spot price of USD87), Supermax’s shares at RM4.24, as at 28/5/2021, is still way undervalued.
To your question about capacity expansion, with ASP declining, would any potential new entrant charge headlong into building new plants now? Given projected shortage of 80 billion pieces in 2021 and 86 billion pieces in 2022, a total of 186 million pieces representing almost 40% of current world production(based on MARGMA's projections), and which will cost USD20 billion to build, it is quite likely that supply will exceed demand.

TG has to be very careful how it responds the latest US CBP actions. If the EU takes up the forced labour issue, things can get worse. The US sanctions countries arbitrarily, TG is nothing to them. The actions against TG may be part of US' grand scheme to support it's fake claims of forced labour in Xinjiang and to boost its domestic manufacturing. TG should hire the best Democratic lobbyist to handle this issue and to invest in a glove plant the US like Supermax.

Excellent research. Really valuable insights. You must have spent a lot of time writing it up. Thanks a million bro.
A recent article in Bloomberg, titled "When will life return to normal", calculated that it may take up to 7 years. All glove companies will be making hay for a long time!

Thanks for sharing your well researched and insightful post. The anti-glove vaccine story has lost its bite as can be seen from the headlines and expert opinions in the press. Covid cases may come down, but new, maybe more virulent variants, will surface and this will bring new waves and keep demand for glove high. In 3 years, supply may catch up with demand and that's more than enough time for glove investors to make good money.

Regarding short sellers targeting glove counters, it does not necessarily portend doom for glove stocks. I think these players just want to get in at a lower price given how profitable the glove business is. The glove fundamentals are so strong that a bull run may not be too far away.

Well written, out-of-the-box insights! Painted scenario looks very plausible.

Well-reasoned, factually supported article.

Well researched and well reasoned and well presented.

Hello KYY Sir, you have plagiarised large sections of my article (Debunking JP Morgan’s alarmist report on Top Glove and the Glove Sector published on 12/12/2020) and you claim in your blog description that “All materials published here are prepared by Mr. Koon Yew Yin”. It is good that you are sharing what I wrote with the readers of this site, but please have the courtesy to credit the writer from whom you filch materials the next time.