Posted by Andre Kua > 2021-05-29 02:25 | Report Abuse

I can only say you are too optimistic.

1. You're assuming that glove asp will maintain at usd40 in 2023 whereas many are predicting usd25-30.
2. You're assuming that covid is still around and every glove makers would be running at full capacity and sold out all their goods.

For me, I would calculate ASP USD25 with 65% utilisation.

48b x 0.025 x 65% x RM4.15 = RM3.237b revenue

OR

48b x 0.03 x 65% x RM4.14 = RM3.885b revenue

Do you still see Supermax at RM11 now even with 48b capacity? I'm not even assuming the worse yet. Why? Pre covid, even at current capacity, most glove makers are only at 60-70% utilisation. Supermax can double their capacity, but would they be able to sell as much given how many newcomers are going to flood the market with their offerings as well. Price wars is imminent. Things will get ugly very soon.

Posted by LimitUp > 2021-05-29 05:54 | Report Abuse

The question of whether to sell or not would depend on the dividend yield. It is up to us how much we expect to gain from it. Another issue that plagues glove stocks is the RSS that's keeping the price from rising eventhough its making extraordinary profits in 2021. Dividend yields are rising but price are dropping. For someone who is looking for value why should I refuse a stock that pays good dividend that is being sold down almost everyday? It defies logic.

Posted by Jack Khan > 2021-05-29 06:54 | Report Abuse

If covid is here for long time then you should buy vaccine company, right ?
It will be long term vaccination rather than long term wearing rubber glove lol.
Vaccine is to make your life goes normal and normal does not include glove!

Posted by Jack Khan > 2021-05-29 07:00 | Report Abuse

Albukhary Why public invest in Glove Stock when Full Lock Down?
__________________________________________________________________
To answer your question
1. The glove share price keep increasing last MCO 1.0
2. Everyone can buy share online now!
3. Cheap credit available from banks(include personal loan)
4. Repeat No 1. x 1000

Posted by sutp > 2021-05-29 07:17 | Report Abuse

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.

Posted by pjseow > 2021-05-29 07:39 | Report Abuse

Sutp and Andre Kua , the estimations made by both of you are ONLY the supermx manufacturing revenue and earnings . Both of you had omitted supermx's the other income stream which comes from Supermx Distribution Centres . Supermx has 7 own Distribution Centres in the world which are profit Centres and technically a different Entity.Supermx manufacturing sell 40 % of its gloves to Independent Distributors , 58 % to Supermx Distribution Centres and 2 % to OEM customers . Both Independent distributors , Supermx Distributors or OEM will mark up the prices and sell it to FINAL customers . Based on Supermx Briefing Slides dated 9th August 2020 , the final customer prices can be 3x to 4x factory prices of about US 22 to 23 during pre pandemic to 1.5x at the height of pandemic when the factory price reached 110 .
The Supermx Distributors profit are added into Supermx Manufacturing profits in the Quarterly Report .
During the April - June Qtr 2020, Supermx made a drastic change by reorganising its business models. It cut off all the middlemen like agents , dealers and increased the % of OBM cum own distributors from 40 % to 58 % and also increased the % of independent distrition to 40 % by cutting off OEM from 30 % to 2 % . Such drastic re organizzation of its business model enabled its revenue increase more than 2 fold , earning more than 25 x and margin to 43 % . The other 3 glove players during the same period do not have such exponential increase in both revenue and earnings . You can verify the numbers .
If you analyse the QR of April-June 2020 QR , the combined ASP gave you US 40 but the factory ASP was about US 27 which is about 15 % increase compared with pre pandemic of US 22 to US 23 . However , the Nett profit jumped 25 x yoy . This is attributed to the profit from both the second income streams and increase ASPs .
The Earnings from Supermx own distributors should not be omitted in your computations .

Posted by dawchok > 2021-05-29 12:24 | Report Abuse

Dear author: you are right on the facts of glove industry and judgement on the "eng" blogger.

Posted by pjseow > 2021-05-29 14:48 | Report Abuse

Suth , I have a question on your column B estimation. I supposed you use 30 % net margin to come to the PAT of 1170 millions using below calculations

PAT = 40 x 25.99 x 0.9 x 0.3 = 1165 which is very close to your 1170 millions

May I know why you use 30 % margin ?

I suggest you look at the actual margin of April -June 2020 QR . The ASP during this qtr is about US 40 . THis can be derived from the following .

Revenue = 929 million
PAT = 399.62 million
Net Margin = 399.62 /929/399.62 = 43 %

Estimated ASP = 929/ 6 /0.95 / 4.15 = US 39.27

Based on this actual April- June 2020 QR result , the ASP is estimated at US 39.42 which is very close to 40 . At that period the capacity is 24 billion pa or 6 billion per qtr .

By using the 30 % margin in your calculation , you have lost 13 % of the margin which is actually 30 % of the total margin . If you read the QR of April-June 2020 qtr , the ratio of mfg profit vs distribution profit is 70 : 30 . In last qtr report , the ration has changed to 65 : 35 which means the supermx distribution profit has grown in % .

In column 2 , My estimate will be rm 1670 million if ASP were to drop to US 40 using 43 % margin instead of 30 % . Then the earning in column 3 will be 1670 x 2 = rm 3340 per year based on doubling of capacity to 48 billion from 24 billions per year .

The earning per share will be 3340/ 2721 = rm 1.23 . It is up to the market to give whatever PE to this eps .

The above is my input .I welcome your comment .

Posted by ooi8888 > 2021-05-29 17:03 | Report Abuse

What reason is there for prices of glove shares to be so depressed??
------------------------
It id because the pastor from singapore said prices of glove shares are like tomato.

Posted by sutp > 2021-05-29 18:49 | Report Abuse

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.

Posted by pjseow > 2021-05-29 20:13 | Report Abuse

Sutp, thanks for your reply . The assumption of 30 % increase in production cost is a lot . Based on my high volume production experience, the unit cost usually come down when volume increases . The fixed cost will goes down by half when volune double . Any way, I am more optimistic . My assumption is no unit cost increase when volume double. No matter what assumptions, the tgt price of 11.19 give us ample margin of safety.at current price of 4.25.

Posted by stockraider > 2021-05-29 22:23 | Report Abuse

Lets put in proper perspective loh...!!

Who are the biggest gloves users leh ??

It is the western develop countries like EUROPE & USA mah...!!

Their covid infection cases are declining fast mah...!!

That means bad news for glove producers...despite developing countries are increasing dramatically...but these are small users unlike the west loh!

Posted by ks5S > 2021-05-29 23:11 | Report Abuse

the western demand still high as they keep stock to prepare for the winter where the virus will make a come back.

Posted by stockraider > 2021-05-29 23:23 | Report Abuse

THE WESTERN COUNTRIES HAVE OVER STOCKS GLOVES LOH...!!

JUST LOOK AT USA, THEY CONFIDENTLY DARE TO SANCTIONED WORLD BIGGEST GLOVE PRODUCER TOP GLOVES MAH..!!

THAT MEANS SIGN OF OVER STOCKED...THATS WHY THEY ARE CONFIDENT LOH!

Posted by ks5S > May 29, 2021 11:11 PM | Report Abuse

the western demand still high as they keep stock to prepare for the winter where the virus will make a come back.

Posted by observatory > 2021-05-30 00:38 | Report Abuse

Sutp, thank you for your blog which is based on data and analysis. I'm sure any readers will learn something regardless of their position.

The fortune of glove stocks will largely be determined by the ASP trend in coming quarters. The ASP trend is in turn decided by the supply-demand dynamic.

As a rule of thumb, a supernormal profit situation cannot last for long without protection from high entry barriers such as regulation, high IP content, high upfront investment or network effect. Unfortunately the incumbent glove companies do not have such protections. Their key advantage is in efficiency. In other words, through economy of scale and accumulated past knowledge, they can produce at lower unit cost and crush new rivals through competitive pricing.

Therefore it's not a surprise that before the pandemic, Supermax has only modest operating margin of 10% to 13%, and net margin of about 10% for most of the last decade (but last 12 months was about 70% and 50% respectively). Even Hartalega operating margin is in the range of 20% and net margin in mid teens. I expect when ASP fully normalizes, margin will revert to pre-pandemic level, if not lower. Any excess profits would be competed away either by incumbents' own capacity expansion or by new capacity from rivals. The question is how long the process will take.

You mentioned Frost & Sullivan report. Frankly I'm not too convinced with their ASP projection. I note that Frost & Sullivan is not a disinterested party. It was appointed by Top Glove as the industry consultant for Top Glove's Hong Kong listing. I've come across many Frost & Sullivan reports used by other company IPOs in a variety of industries. I have yet to come across one report where its projection has undermined the company IPO attempt.

The said Frost & Sullivan Report can be found in page 96 in the HKEX listing document below. The projected ASP (per 1,000 pieces) for nitrile glove is USD85.1 in 2021, USD53.5 in 2022, USD35.1 in 2023.
https://www1.hkexnews.hk/app/sehk/2021/103230/documents/sehk21022601984.pdf

I agree forecasting beyond a year is difficult. But I have doubt in Frost & Sullivan because their projected ASP decline is too gradual. In their projection, ASP will not even return to the 2015-2019 historical average of USD23 five years from now! Given that glove sector has a low barrier of entry, I will expect excess supply to reach the market much sooner than Frost & Sullivan has thought.

This is the economic principle of free market economy at play. The same pattern has happened many times in other industries like solar panel, oil, steel, and more recently face masks. (Perhaps many Malaysians will also be surprised to learn that global vaccine production capacity was 3 billion pre pandemic, but is projected to reach 11 billion by end of 2021, and over 20 billion by end of 2022!)

For that reason, in order to understand opportunities of Malaysian glove sector, I watch Chinese producers closely. There are a few listed glove makers there. By now most people will be familiar with Intco Medical.

As of 2019, Intco Medical annual capacity was only 19 billion pieces, of which only 5 billion pieces were in nitrile gloves. By now its capacity has reached 45 billion pieces, of which 21 billion are in nitrile gloves. In has leapfrogged competitors to become the world second largest producer.

Refer to the company response to investor on May 7 below. Intco expects new production lines at Anhui and Jiangxi provinces to double its nitrile glove capacity by end of Q3. It expects annual capacity to reach 120 billion by Q2 of 2022. If the projection is right, Intco could have easily close the global glove shortage gap as projected by MARGMA (I'm also not sure how robust is MARGMA forecast methodology).

http://irm.cninfo.com.cn/ircs/company/companyDetail?stockcode=300677&orgId=9900032727

The NBR capacity constraint is being addressed too. In Aug 2020 Intco invested in a project with 50 million ton NBR capacity to be completed in 15 months. A phase 1 installation of 30 million ton capacity is on going according to its announcement to the stock exchange. The announcement also mentions that currently the NBR shortages situation have been addressed as many domestic NBR producers have expanded production.

http://static.cninfo.com.cn/finalpage/2021-04-19/1209718506.PDF

As a check point, I want to watch whether Intco can deliver the doubling of its nitrile glove capacity by Q3 this year. If t does, the Frost & Sullivan ASP projection will be in serious trouble. The Malaysian glove stock valuation may have to adjust accordingly based on a lower ASP.

Posted by DrLimKH > 2021-05-30 01:14 | Report Abuse

MercadoLibre (MELI) : Chart says game over. disbelieve at our perils. believe then move on

http://www.investing.com/equities/mercadolibre?

Chart says game over. Disbelieve at yr perils. Know and move on

Posted by Karlos > 2021-05-30 12:32 | Report Abuse

observatory, I could not agree more on what you wrote. Well written and argued !

Posted by pjseow > 2021-05-30 13:25 | Report Abuse

Obsevatory , the glove investors have no choice but to rely on MARGMA ,Research houses FROST and SULLIVANS and VITAL FACTOR CONSULTING for input and data . You seems to have done some research yourself . Can you kindly share with us your numbers ? It will be very helpful for retail glove investors have another alternative source of data .

Posted by pjseow > 2021-05-30 13:56 | Report Abuse

Put aside the numbers , I do agree with the Author Suth on the fundamental difference between Tomatoes and Gloves in demand and supply. In the last 20 years , I have heard of oversupply of crops like soya beans , tomatoes , coffees beans , palm oils etc to the extent that the excesses has to be destroyed , burned and turn it into fertilizers . During good seasons , fruits like Durians , Lye Chees ,Mangoes can have oversupply . The price just come down drastically because you can't stop the trees from producing . As for gloves , it is different . if there is oversupply , just shutdown a few lines ,order less raw materials , use less workers , natural gas , electricities , that's it . The manufacturers have to just bear only the overhead . If indeed there is an oversupply with ASP coming down to a certain level, the new comers will be the first to be wiped out because they dont have the economy of scales and they need to borrow heavily to instal new capacities unlike the big 4 which use their huge earnings for expansions . When the new comers are wiped out and the big players turn off the taps partially , supply will be curbed . Demand will exceed supply again and ASP will rise back . Unlike crops and fruits, the farmers have to sell at a loss because you cant keep them because they are perishables . The farmers losses will be even more if they let them rot . Gloves can be kept as inventory , lines can be shutdown , new players can be wiped out . Crops and fruits like palm oils and Durians , the farmers cannot just say , I quit this business by uprooting the trees do other things , that will be more costly . Hope those who suggest gloves are like tomatoes see the difference .

Posted by ks5S > 2021-05-30 16:39 | Report Abuse

Us65 per 1000 pieces is still a good price and make a good profit

Posted by ks5S > 2021-05-30 16:42 | Report Abuse

This blogger is not in the glove line and simply shoot anything to meet his objective,
Not a clean person.

Posted by SejukSam > 2021-05-30 16:48 | Report Abuse

are u ready for tomolo monday.

prepare for an ensuing panic selling to happen for the so called recovery stocks....lol

defensive will be much sought after

fake news will not help, fake ppl will not help, u will be stomped all over as ppl rush for the exits.....

Posted by observatory > 2021-05-30 18:23 | Report Abuse

Pjseow, I’ve put in all I know about glove industry in my many exchanges with Ben Tan earlier, which you also joined occasionally.

I’ve been a believer in glove secular growth long before the pandemic. I must admit that I’m underweight in glove now. I closely follow the development in order to rebalance at the right time.

Unfortunately, I don’t have a crystal ball either. As I explained before, from the lessons learned from other industries, I’m doubtful of Frost & Sullivan ASP projection. It assumed a gradual ASP decline which remained elevated up to 2025, and that contradicts experiences elsewhere.

You’ve put forward good arguments on why glove is not like agricultural products. When ASP is depressed, incumbent glove producers can restrain capacity expansion plan (they did in the past) or scale back capacity utilization.

Let’s examine the logic in more details. First, unfortunately the relative ease to adjust output level is a double-edged sword. It also means it's relatively easy to expand capacity, for newcomers too. That is why I believe ASP will normalize faster than Frost & Sullivan has projected.

Of course, the ability to restrain output could help putting a floor to the ASP. The nitrile glove ASP level per 1,000 pieces between 2015-19 was around USD23. Incumbent producers made money at this level. Supermax net margin then was 8% to 12%, and Harta was 15% to 18%.

At this level, many smaller new entrants will struggle. But they won’t throw in the towel immediately. Some have actually been in the business for a long time and were acquired by other non-glove listed companies. With access to capital, these “new” players can still survive a price war for considerable time.

I agree the Malaysian Big Four will weather the storm and even prosper after that. However, the same cannot be said of individual shareholders. It depends on their average entry price. Besides, the share price could depress further should ASP ever falls to the low 20s level faster than expected. That will test shareholders’ conviction and emotional strength.

Now bring China into the picture. As mentioned before, previously the Malaysian Big Four had tacit understanding to restrain capacity expansion when demand was weak. Not so easy now with new big players in the form of Intco and Blue Sail. It is just like OPEC + Russia have more challenges maintaining price level when shale producers disrupted the equilibrium.

It would help if Malaysian Big Four are still the most efficient producers. But they may no longer be. Labor related benefits are already rising to fend off sanction threat by CBP and the like. Locally the dire state of government finance does not help as people start clamoring for windfall tax.

On the other hand, Chinese producers like Intco is every bit as efficient as the Malaysian Big Four. In 1Q2021, the operating margin of Supermax, Hartalega and Intco Medical are 68.5%, 68.2% and 65.7% respectively.

https://finance.yahoo.com/quote/7106.KL/financials?p=7106.KL
https://finance.yahoo.com/quote/5168.KL/financials?p=5168.KL
https://finance.yahoo.com/quote/300677.SZ/financials?p=300677.SZ

The Chinese receives strong local government support. I’ve shared this example before. When Intco signed an agreement with Jiangxi 彭泽县 county, the local government was responsible to deliver 800 acres of land priced at only CNY40,000 (RM25,000) per acre. In comparison, last year Harta paid RM 263 million for 38 hectares of land at Sepang, or RM2.77 million per acre. In other words, Harta’s land cost is more than 100 times of Intco.

http://www.szse.cn/disclosure/listed/bulletinDetail/index.html?05bdcdcb-ca2c-4db4-9e07-741fded2df81

I’ve done some calculation comparing the Capex per 1,000 pieces. Intco budgeted CNY5 billion for the Jiangxi 彭泽县 county project, for an annual capacity of 45.75 billion according (refer Feb 2021 announcement). That is equivalent to Capex per 1,000 pieces of CNY109.29 or USD16.81 (at exchange rate of 6.5).

As a comparison, To Gloves announced target of 100 billions capacity with RM10 billion investment, i.e. per 1,000 pieces Capex is at RM100 or USD25 (assume exchange rate of 4), much higher.

Based on the disclosed information, I have to conclude that the currently still high ASP is actually dangerous for Malaysian producers. Say ASP is maintained at USD60 for a while longer. Based on 1Q21 net profit margin of 55%, by selling every 1,000 pieces Into can record a net profit of USD33. It can pay for new capacity of 2,000 pieces per annum! Or sell 1 piece can fund capacity for 2 more pieces!

Intco’s stated aim is to expand fast and grab market share. It will expand like crazy as long as it has the funds. It's a proxy to China's supply threat. While I'm unable to forecast the ASP, the development there could offer hint on the future ASP trend.

Posted by calvintaneng > 2021-05-30 19:34 | Report Abuse

Current ASP will not last

At 1 Sen (Usd) from China very few can compete or survive

https://www.alibaba.com/product-detail/Cheap-price-Disposable-powder-free-black_62445504137.html?spm=a2700.7724857.normal_offer.d_image.6b0460118QzNCH

Posted by calvintaneng > 2021-05-30 19:39 | Report Abuse

1 Usd sen already a terror

See this Latex Surgical Glove

at less then 1/2 Us Cent?

No one on earth could compete

https://www.alibaba.com/product-detail/sterile-latex-surgical-gloves_62269125768.html?spm=a2700.7724857.normal_offer.d_image.43c16011vsLvHo

Posted by calvintaneng > 2021-05-30 19:41 | Report Abuse

This is Horrifying

10% of 1 sen Usd?

Selling below production cost?

https://www.alibaba.com/product-detail/medical-powder-free-nitrile-gloves-Disposable_1600194683093.html?spm=a2700.7724857.normal_offer.d_image.6eab6011AjRu8w

Posted by pjseow > 2021-05-30 19:48 | Report Abuse

Observatory , thanks for your sharing . There is no doubt competition will be intensified in the coming years or months .

On the cost of capacity expansion per thousand , the Topglove quoted cost of 100 billions pa for RM 10 billions is too high . I am not sure this is just a rough number as I know Topglove has grown its capacity from 73 billions in 2019 and will grow to 205 billions in 2024. Supermx is more explicit . It stated that it will add 22.8 billions by spending RM 1.39 billions . This is rm 60.96 million per billions pa or US 14.69 per 1000 pcs .This is still cheaper than China US 16.81 as calculated by you . I remembered reading an article in The Star the cost of installing a billion per year capacity is about RM 65 millions .

China is strengthening is currency against US Dollar . Recently it hit the strongest with a 3 year record .With the QEs in US , China currency will continue to strengthen .That means the cost of mfg in China will increase further .Besides , China has an inherent weakness in cost due to cost of natural gas where Malaysian glove makers has an advantage .

On supermx , I do not know if you are aware that Supermx has dual incomes from both mfg and Distribution . Supermx had reorganised its business models since March 2020 . I had commented also in this forum . The combined ASP of these two businesses are higher than the mfg ASP s which all of us refer to .
The US 40 ASP for Supermax is actually the combined ASP with the equivalent mfg ASP of US 25 on Nitrile and 19 on Latexx . RHB projected long term stabilised combined ASP of US 37 for supermx . THis is equivalent to mfg ASP of US 24 for Nitrile and US 19 for Latex at a ratio of 90% to 10 % when its capacity increase to 48 billions pa . I think this is a reasonable projection as US 24 for Nitrile and 19 for Latexx are almost at pre pandemic prices .
I would think this is the worst case scenario . IF we take the April--June 2020 QR as a guide where the combined ASP was about US 40 and its margin about 43 % , I can have a conservative estimate of Supermx value with an ASP of US 37 and a 40 % margin as follows

PAT = 37 x 48.42 x 0.65 x 4.15 x 0.40 = RM 1933 millions

assuming utilization of 65 % and capacity of 48.42 billions .

EPS = 1933 / 2721 = RM 0.71

With a PE of 15 , tgt price will be RM 10.65 which give very good margin of safety at last Friday closing of RM 4.25

Posted by calvintaneng > 2021-05-30 19:50 | Report Abuse

This one 1/2 Us cent

Looks like China Exam/Medical/Surgical Gloves fiercely compete among themselves for US Market at only

10% of 1 sen

35% of 1 sen

1/2 sen

1 Us Sen

These are Real Cut Throat Prices

All competing Gloves will get slaughtered world wide

No Wonder USA giving no second thought to offend Top Glove, Harta & Supermax

Posted by calvintaneng > 2021-05-30 19:52 | Report Abuse

See Half Us cent only

https://www.alibaba.com/product-detail/For-Sales-High-Quality-Factory-Vinyl_1600163657073.html?spm=a2700.7724857.normal_offer.d_image.6b046011e0VXjL

Posted by calvintaneng > 2021-05-30 20:00 | Report Abuse

Current lowest price is

USD 0.1 cent or in Malaysia Currency

0.1 x 4.15 =

0.45 sen (Less than half sen in Malaysia currency)

Per 100 will be only Rm4.15 at box (that is below Malaysia Cost of production)

https://www.alibaba.com/product-detail/medical-powder-free-nitrile-gloves-Disposable_1600194683093.html?spm=a2700.7724857.normal_offer.d_image.6eab6011AjRu8w

Will price War gets worst later?

Posted by ks5S > 2021-05-30 20:03 | Report Abuse

Sure cheap lah. The china glove so ugly.
No colour one. No one want to buy such an ugly glove

Posted by calvintaneng > 2021-05-30 20:05 | Report Abuse

Oh

It was 0.045 sen (Malaysia)

Per 100 Pieces only 41.5 sen???

Am I seeing things?

Less than 50 sen per 100 Gloves (Box)

That is game over for everyone!

Posted by calvintaneng > 2021-05-30 20:09 | Report Abuse

see China High Speed Rail

https://en.wikipedia.org/wiki/High-speed_rail_in_China

Posted by calvintaneng > 2021-05-30 20:13 | Report Abuse

China built hospital in 10 days

https://www.youtube.com/watch?v=7VvV10S4QSw

Glove barrier to entry for China is so simple to cross

Posted by Investoz88 > 2021-05-30 21:17 | Report Abuse

Healthcare institutions and professionals would not risk life for lower costs medical consumables. They would not anyhow buy from sellers online. Covid is definitely not over. Stay safe.

Posted by observatory > 2021-05-30 21:34 | Report Abuse

Pjseow, thank you for sharing your calculation.

I agree Supermax should command a higher ASP because of its ODM model. However, the ODM model also incurs higher sales & distribution cost. Note that pre-pandemic Supermax has lower operating margin and net margin when compared to Harta.

My RM10b for 100b piece capex estimate for Top Glove is a rough number. But it’s based on Top Glove own press release during the latest quarter. In page 2 it states that
“To this end, the Group has earmarked RM10 billion for CAPEX over the next 5 years from FY2021 to FY2025, which will increase its current production capacity by about 100 billion pieces of gloves to a total production capacity of over 200 billion pieces of gloves.”

https://www.topglove.com/App_ClientFile/7ff8cb3f-fbf6-42e7-81da-6db6a0ab2ef4/Assets/Quarterly%20report/Top%20Glove%202QFY2021%20Press%20Release.pdf

Chinese Yuan has strengthened since May 2020. But US QE lifts all boats, Malaysian Ringgit included. While Malaysian mishandling of pandemic (which also impacts our glove producers vis-à-vis the Chinese) and poor fiscal health could weaken the Ringgit, a USD60-70 crude oil price provides good support.

Having said that, I think exchange rate doesn’t play a big role in this context. We are talking about the difference between current operating margin of close to 70% versus pre-pandemic level of 10+%. Forex could at most make only a few percent differences. Besides there is capital control in China, and government intervenes to prevent sharp appreciation/ depreciation. Four years of Trump’s actions have not succeeded in pushing up the currency beyond what the Chinese policy maker has allowed it to go.

On gas price. I know Malaysian glove producers use natural gas in the manufacturing heating process. But cheapness is actually relative. Recall in 2019 glove makers actually complained sudden increase in gas price by Gas Malaysia.

Actually this is not the first time I read about Malaysian advantage in cheap gas as compared to the Chinese. However, do Chinese glove producers used gas like their Malaysian counterparts? I actually doubt so.

Refer to Intco annual report. It mentions
能源方面，公司所需的主要能源为煤炭，已为所有营运中的生产基地取得了能耗指标，并在安庆（安徽）及岳阳（湖南）生产基地投资热电联产项目，加强公司在能源消耗方面的成本控制。

http://vip.stock.finance.sina.com.cn/corp/view/vCB_AllBulletinDetail.php?stockid=300677&id=6954106

In other words, the main energy usage by Intco is coal. It also has energy production JV to control costs. While coal is dirty, it is much cheaper than gas. That is also true in Malaysia, which is why we still commissioned the last coal-fired power plant this year, and coal plants will only start phasing out by 2030. Yes, China will also phase out coal under its net zero policy. But China is a leader in renewable energy, where production cost keeps plummeting.

Anyway, like exchange rate, I don’t see the energy cost plays a big factor in the ASP/ production competitiveness in the next few years.


(to continue next)

Posted by observatory > 2021-05-30 21:35 | Report Abuse

(... continued)

I’ve read the ASP projection by RHB analyst. I think it is based on dubious logic. Let me quote its latest report on Supermax (same logic also applies to its other glove reports):

“We expect USD40.00 to be the long-term ASP for nitrile gloves. As the US plans to build its own gloves manufacturing plants, we estimate cost of production to be USD40.00. This should set the long-term global nitrile gloves price. When ASPs drop below USD40.00, US producers will stop producing and, in the long term, ASPs should revert back to USD40.00.”

It makes little sense that if US production cost is USD40, the global ASP should then be sold at USD40 or higher. In an equilibrium state, the price floor should be set by the lowest cost producers. Before the equilibrium state is reached, price could well fall under the production cost. A good example is last year WTI price fell far below the US shale producer cost (at one point spot price was negative!), driving many to bankruptcy.

Granted gloves are now considered strategic in US. The US government would support local glove producers. But the support can be in the form where federal agencies are mandated to buy supplies from US producers at a higher price than the market, which is actually supported under current federal laws. But for the large majority of private sector users, they will still buy at the market price, the lower the better. US private sectors will revolt if they are forced to pay foreign supplied gloves at a high price say USD40 set artificially by the cost price of US inefficient producers.

This is why I can be skeptical of analyst projection. Too many are engaged in backward engineering of their calls and then pick convenient excuses as supporting facts.

Last, I don't mean to discourage the glove investment thesis by you or anyone else. I just hope that by arguing for the opposite, just like you arguing for the positive side of the thesis, we help one another reduce confirmation bias and make a better decision. This discussion has been a pleasure!

Posted by Investoz88 > 2021-05-30 23:37 | Report Abuse

Its good to have different views and thesis.. Tks guys!

Posted by calvintaneng > 2021-05-30 23:49 | Report Abuse

All so clever

All trying to trade for the last ringgit

Later put in a pocket full of holes

When Hengyuan rose from Rm2.00 to Rm19.00 so many talked and talked about profit of crack spread

But From The Peak Cycle the Ferris wheel must go down

So a Cyclical will always go up & come down while we talk

See

https://www.youtube.com/watch?v=-6YJmFm3lhE

Posted by sutp > 2021-05-31 03:29 | Report Abuse

@ 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

Posted by sutp > 2021-05-31 03:39 | Report Abuse

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

Posted by observatory > 2021-05-31 13:24 | Report Abuse

Sutp,
Thanks for pointing out Mahsing investment cost is only RM41 (~USD10) per 1,000 piece capacity.

This is actually my point. If ASP remains just USD10 (for Mahsing) or USD 16.8 (for Intco) above their production cost, they recoup their investment in 12 months. Profits can be ploughed back for further expansion.

Given the rather low investment cost and ease of expansion, there are two possibilities. First is ASP comes down a lot faster than predicted by Frost & Sullivan and many analysts. This will discourage further capacity expansion as you’ve mentioned.

The second possibility is ASP remains sufficiently high in the near term. The resulting profit will cover investment cost in months rather than years. The supernormal profits provide bullets to aggressive producers like Intco to continue expansion. The end result is even more capacity comes online by 2022. That could bring down ASP even more, albeit one year later

In either scenarios ASP will still normalize faster than the five year projected by Frost & Sullivan.

I don’t think Intco’s debt to equity ratio is 2.2x. Different financial websites may quote different figures which can be misleading. I check Into’s submitted annual report for 2020.

http://vip.stock.finance.sina.com.cn/corp/view/vCB_AllBulletinDetail.php?stockid=300677&id=6954106

归属于母公司所有者权益合计 (Shareholders’ equity) = CNY 9,344 million

短期借款 (short term borrowing) = CNY 22 million
长期借款 (long term borrowing) = CNY 109 million
应付债券 (bonds) = CNY 121 million
Total debt = 22+109+121 = CNY252 million

Debt to shareholder equity = 252/ 9,344 = 2.7%

Other measures for financial health:
利息保障倍数 (interest coverage ratio) = 299.33
EBITDA全部债务比 (EBITDA to total debt) = 243.65%.

In other words, with debt to EBITDA ratio of 0.41X, it only takes 5 months of 2020 EBITA to fully repay total debt. So I think it has a very strong balance sheet, at least up to recent moment.

Posted by gladiator > 2021-05-31 13:49 | Report Abuse

If glove over supply right now why Mahsing healthcare got order until Sep 2021? and ASP around US90? Yes ASP already drop from the highest due to reduce in covid case and distributor delay in restock waiting for the glove price to come down. But glove shares price also drop a lot already. Those so call new entry into glove where is the factory? I saw AT and Mahsing healthcare others?

Posted by gladiator > 2021-05-31 13:58 | Report Abuse

I believe nothing to do with glove ASP or demand & supply just that the blogger want those of you that holding on into glove to switch your funds into their promoted useless loss making plantation stock like wtk fgv etc

Posted by sutp > 2021-05-31 14:31 | Report Abuse

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

Posted by observatory > 2021-05-31 15:40 | Report Abuse

Sutp, I see your point.

Note under the same page
Total Debt (mrq) = 292.58M
Total Cash (mrq) = 7.79B, or 7,790 million

Under the tab Financials -> Balance Sheet -> Quarterly,
Shareholders’ equity (‘000) = 13,113,604, or 13,114 million

Therefore, MRQ D/E = 293/13114 = 2.2%. The website display is misleading.

In fact the company has a net cash of 7,790 – 293 = CNY7,497 million.

Posted by Investoz88 > 2021-06-03 07:10 | Report Abuse

@ observatory
Intco mgtm selling out...
Dont put your trust on china companies such as Intco Medical too much. Their projections and numbers may not be real.
Support the locals gloves players.
Stock price pressed by shorts and angmoh houses to kill the companies. Many related companies n our livelihood can be at stake.
Think about it

Posted by pjseow > 2021-06-03 09:59 | Report Abuse

The recent record Yuan appreciation , Oil prices going up further to US 70 which will make nitrile raw material butadiene and natural gas more expensive . Malaysia has great advantages over China in this areas . Intco is a new comer on Nitrile . Intco cannot compete with Malaysia glove companies which has been dominating the world markets with 65 to 68 % market shares in the last 20 over years . Even the cost of new capacity per 1000 is also more expensive in China . The equipment manufacturer also do not have the economy of scale in China compared with Malaysia which can supply not only to Malaysia but Thailand too .
THe fear of CHina glove makers are over blown .

Posted by observatory > 2021-06-03 15:10 | Report Abuse

@Investoz88,
You’ve misunderstood my position. My only exposure to Chinese A-shares is through a CSI300 ETF. Intco Medical is not even part of the index. I’ve always wished Malaysian companies and the country well. I’m not here to cheer nor talk down companies just because I own/ don’t own certain shares.

However, the love for the country doesn’t mean we need to support specific Malaysian stocks. In fact, looking more closely, I believe most people become cheer leaders for the sake of their pockets rather than being patriotic (this is just a general statement not intend to anyone specifically).

Anyway, all attempt of cheering/ talking down glove stocks in this forum is just time wasting. The major Malaysian glove stock shares in circulations are into billions. To impact market price there must be transactions up to millions or dozens of millions of shares a day. And even could be futile. Recall Top Glove attempt to shore up its share price through SBB? The point is money managers who buys and sells in millions have no interest nor time to investment advice from forum users like you and I.

So why do I write long comments? It’s just a way for me to organize and put forward my investment thoughts. I’m not here to seek anyone's agreement. Instead I enjoy reading dissenting which could reveal flaws in my thinking. That is value to me.

I want to say again I'm a believer in Malaysian glove industry. There are quite a few well run local companies. This is also a growth industry. However, good companies bought at unattractive price isn’t a good investment. I monitor Intco only because it could affect supply, and therefore ASP, and in turn the Malaysian glove stock valuation.

Into as a share is not a good investment. But one has to differentiate between the share price and the company. The crash in Intco share price has no impact to the company itself in the near term. Not until it has to raise new capital.

But Intco company is in good financial health. Consider two factors
(1) It holds net cash of ~CNY7.5 billion, or ~RM4.9 billion. This is more than Top Glove net cash at RM2.8 billion, or Hartalega at RM2.3 billion. Assume CNY109 for capex of 1,000 piece, a net cash of CNY7.5 billion can pay for close ~70 billion piece new capacity.

2) Its current capacity of 45 billion piece p.a. will continue to churn out gloves in coming months, when ASP is still relatively high, and when Malaysian producers experience setback due to reduced workforce size during FMCO. The new cash earned at high margin provide more ammunition for further expansion.

Could their numbers be fake? Well, I’ve watched Chinese companies long enough to know multiple past scandals (though the same also happen in Malaysia). But I will consider the following factors in Intco's favor:

(a) It’s easy for companies to fake earning, but not so easy to fake cash.

(b) The last 12 months free cash flow of Intco = CNY11,390 million (operating cash flow) – CNY4,864 million (investment) = CNY6,526 million.
So, unlike say Serba Dinamik which have consistent negative FCF, this company is currently a cash cow (other Malaysian glove makers too)

(c) Frost & Sullivan confirmed it’s now the second largest glove producers in the world. While I’m skeptical of Frost’s future ASP projection, I think they would do a good job in reporting historical matter.

Down the road Into may trip due to its overly aggressive expansion. But until ASP normalizes, Intco will continue to be a spoiler for other players through more supplies and lower prices. Like it or not, that’s how the market economy functions.

Glove stocks may be attractive at current price. But one can only come to the conclusion after cool headed considerations of all factors, including competition.

Posted by observatory > 2021-06-03 15:20 | Report Abuse

@Pjseow,
You’ve mentioned in earlier comments that CNY appreciation, supposedly cheaper NBR and gas price in Malaysia etc will favor Malaysian producers.

As mentioned before, when ASP is high, when even new entrants could recoup investment within 12 months, not to mention profit margin at 50%, the impacts from all the above factors are at the margin at best.

CNY doesn’t meaningfully dent profit unless it strengthens by 20%-30% this year. If one truly believes in this possibility, should quit gloves and trade in forex instead.

Yes, Malaysia has an established NBR supply chain. But note the key producers are international firms like Korea Kumho, LG Chemical. They can have plants in Malaysia and also elsewhere. LG has a plant in Ningbo China. Intco’s own 500,000 metric ton NBR plant is under construction. It's not clear to me who will eventually has the upper hand. While China may be disadvantaged in natural rubber, it is not lack of expertise in the petrochemical industry.

Yes, Malaysia is a net exporter in oil & gas, if that is your point. But it doesn’t mean local glove makers get subsidized raw materials or energy. Besides per its annual report, Intco’s main power source is actually coal, which is a cheaper source of energy.

But as mentioned, all these factors are quite insignificant in the current context of high ASP. When everyone makes easy money, they have the cash to continue expansion.

Yes, these factors are more relevant in the long term. However, by the time when they start to bite Chinese competitors (assuming they do), the ASP would have already normalized to a level that hurt many producers, Malaysian included. When that day comes, I have no doubt Malaysian Big Four will still survive. But the super normal profits would have long gone.

The key argument in all my comments above is, an investment into glove stock doesn't just buy into next 12 months profits, but also 2nd, 3rd and years beyond that.

Question is have these been considered in the valuation?