calvintaneng, thank you for your comment.

Thank you for the suggestion, although this might be a topic for another discussion.

bpsiah, dumbdumb123, and Andre Kua, thank you for your comments.

Andre, the underlying logic is surprisingly simple in some cases, like this one. You don't need to sell your kidney, you just need to think rationally about the actual economic impact any action (or inaction) has. In this particular case, inaction might be more beneficial than action to most.

witan and bpsiah thank you for your comments.

Short selling has some useful applications when it comes to hedging positions, especially when that might be necessary. However, I agree that especially in a small market like Bursa, the regulations should be stricter in this regard.

"see2sea sorry to say..no more catalyst..even lockdown..human still need to work and company still running..every country will recover in the presence of covid."

Unfortunately (and I say unfortunately, because this is very bad news for every human being), the case is exactly the opposite. The economies of the world are by now severely scarred. This means that there is very little space for further heavy lockdowns. That is the reason why the lockdowns imposed this winter in Europe were imposed only after a very long deliberation, because these lockdowns will afflict an enormous economic damage on the countries. The economic costs of every single day of lockdown are unimaginably huge.

In other words - yes, people need to work, and the economies need to operate, which would lead to a heavier burden for the healthcare systems in the world over the next 9-12 months. May God (whichever god any of us believes in) help us all.

dawchok, thank you very much for your comment.

I agree that the big boys would generally have no problem absorbing the temporary damage, even if leveraged. I doubt that they were the ones with the knee-jerk reaction, which caused the plunge in price (the RSS was responsible only for the initial drop, thereafter it was knee-jerk reaction from the broader market).

TRYLUCK88, you can find a quick analysis on the available data here: https://klse.i3investor.com/blogs/bursainvestments/2021-01-05-story-h1539174820-The_Big_Gloves_Short.jsp

emsvsi, thank you for your comment.

Margin Call was indeed a good movie, I particularly liked Jeremy Irons' play.

There are indeed many leveraged investors. However, the post's purpose was not to focus on the wide variety of scenarios one could find themselves in, especially if they have taken on a significant amount of risk to begin with. That is why in the disclaimer it is mentioned that one should always "make any decisions based on your personal situation."

For the average retail investor who has taken a standard amount of risk by purchasing stock with their existing liquidity (the vast majority), the situation remains unchanged.

"stevenckheng What is cancel shares? How it affects the share price?"

From an accounting point of view, when treasury shares are retired/canceled, the amount of outstanding shares decreases. This means that the value of each share you hold increases proportionately. Since this cancelation was equivalent to 2.1% of all the outstanding shares of the company, every share you hold of Supermax just increased by 2.1% in value.

Morpheus61 "If the buyback is for listing on another market a substantially higher price, that should be ok right ?"

Yes. Although I think many people misunderstand SBBs. In a nutshell, with other things equal, an SBB is to an existing shareholder pretty much equivalent to bonus dividend. I will write a more detailed post on this in the next few days hopefully.

newkid, that information is incorrect. TG bought a relatively small amount of shares at prices above RM8. Here is the table of purchased shares in September at the highest price up to now:
https://assets.theedgemarkets.com/pictures/20200922_buybacks_by_top_glove_since_the_start_of_the_month.jpg

TG bought more shares in November and December at prices below RM7. Therefore, the average price they've paid for share buybacks this year is below RM7.50. At consensus analyst fair value above RM9 at the time those buybacks took place, I can hardly say that's a bad decision.

Morpheus61, that's a nice graph, thanks for sharing:
https://imgur.com/IbLuY9C

I guess if a sudden dip is observed in May, without any other catalysts, we will know for sure.

"Keyman188 Keyman188 very sincere to advise short term investors..."

That's a very interesting comment for a few reasons:

1) Two of the links you provided are "cut", meaning that you have simply copy-pasted the information from somewhere else.

2) The information you provide on Macquarie's valuation is outdated, and as everything else in your post - out of context. After a complaint to the SC, Macquarie actually raised their target price to RM5.80, without providing any explanation (or at least I haven't seen any + have not been able to find any). If anyone has any information on what might have prompted the revaluation, I would be very happy to read it.

3) Top Glove is the top holding of JP Morgan in their Malaysia fund. In October, they held 9.4% of their entire portfolio in Top Glove stock: https://am.jpmorgan.com/hk/en/asset-management/per/products/jpmorgan-malaysia-acc-usd-hk0000055720 . This percent has subsequently increased to 9.8%: http://www.aastocks.com/en/funds/quote/quote.aspx?funds=1127 . Note that 10% is the maximum allowable holding in a single stock based on the fund's policy. JP Morgan are the 20th largest shareholder of Top Glove stock. In other words, JP Morgan are, and have been, perfectly fine to pay significantly higher price for Top Glove stock than they claim it is worth. If I were a holder of JPM fund units I would be concerned, because either their portfolio management capabilities, or their stock analysis capabilities (or both) appear to be significantly off.

4) PublicInvest's revaluation, which comes at a price almost RM1 higher than the current market price, is a 20% discounted valuation, based on ESG concerns, which are resolvable. In other words, the revaluation is not based on earnings potential - something which any sensible investors should be particular about. Coincidentally, Public Mutual (the mutual fund management company of Public Bank) is the 19th largest shareholder of Top Glove stock.

I agree that your comment may be relevant to short-term traders (there is no such thing as a short-term investor), but beyond that the information should be taken with a huge teaspoon of salt.

kankung, TG has a policy of giving stock options to employees as part of its remuneration system. This is generally a good practice followed by many matured companies around the world. These options give the right to employees of the company to buy shares of the company at a specified price. The amounts of additional shares that need to be issued when such options are executed are usually negligible. For instance, the 7,500 shares issued as a result of the execution of this ESOS (Employee Stock Options Scheme) position are less than 0.00000001% of all the outstanding shares of the company.

sutp, thank you very much for the detailed analysis. I agree with you that demand will continue to outstrip supply by at least 2023.

One concern that might exist for the investors with longer term investment horizon (more than 3 years) is the entry of two new groups of players:

Group 1: Chinese companies, potentially competing for market share in developing countries with cheap and generally poor quality products. This could have an effect on the profit margins more specifically.

Group 2: Countries recognizing the importance of having at least some home-based production of strategic assets, such as PPEs, might result in at least some of the countries with large per-capita consumption to seek government-subsidized expansion for their home production. For instance, the US, Japan, and Germany have started exploring such options.

I don't necessarily think that this concern should cause any particular worry for the large majority of investors though, especially at the current market valuations.

Targeted, thank you for sharing this resource. I will write my comment under the article.

katsul51, Targeted, sign's uncle, thank you for your comments!

Increased hygiene awareness has definitely been a growth driving factor for a number of years now, but it will become especially so post-pandemic. Unfortunately, it is very hard to get an accurate idea of the extent to which that would be the case and even more difficult - how that would affect the profitability of Top Glove. One thing that appears to be certain is that the general consumption level will likely never return to anywhere near pre-COVID levels.

In case you are interested, I discuss the demand for gloves post-pandemic, as a third factor in a series of articles, here: https://klse.i3investor.com/blogs/bursainvestments/2020-12-20-story-h1538308932-Top_Glove_Stock_Analysis_Factor_3_Beyond_COVID.jsp

Hi Morpheus61, thank you for your comment!

Yes, that is correct based on the explanation given in the company's annual report (and based on GAAP). What I was trying to figure out was more in line with how much that delay in reflecting ASPs in the books is in practice, actual delivery times aside.

I tried to do that, because I wanted to know how long after the major part of the impact of the COVID crisis we could expect to see "crisis" level revenues (and profits) in company's books. As super_newbie mentioned, with other things taken into account, it will likely still be at least 1 quarter into the future, after the crisis level deliveries are cleared.

super_newbie, thank you for your comment!

I indeed found the same discrepancy just yesterday (after I published the article). I hadn't seen the full presentation briefing before that so I was relying on outdated data. Just for everyone's reference, the presentation is here: https://www.topglove.com/App_ClientFile/7ff8cb3f-fbf6-42e7-81da-6db6a0ab2ef4/Assets/corporate_calendar/1QFY21%20Briefing%20slides_091220..pdf

The sales volume figure is particularly important and I couldn't find it elsewhere, so I had to derive it from the assumed production capacity. In this case, the production capacity for the quarter came at 19.125 billion pieces based on the announced 85% utilization rate.

In any case, I still believe the company's book revenue and corresponding profits will be running 1 to 2 quarters behind the actual timing of the placements of the orders because of the significant lead times for deliveries.

Re-sharing from yesterday as the post was not tagged with the company tag: https://klse.i3investor.com/blogs/bursainvestments/2020-12-17-story-h1538255304-Top_Glove_Stock_Analysis_Factor_2_ASPs_and_Earnings_Potential.jsp

Three notes on the analysis:

- I use the contract liabilities item on the company's quarterly financial statement to derive the potential future revenue.

- Through calculating the ASPs for the past quarter (1QFY2021), I demonstrate that orders placed at current ASPs will show on the company's books likely 2 quarters later.

- With deliveries for nitrile gloves currently booked up until May 2022 (end of FY2022 for Top Glove), supernormal revenues (and likely profits) will continue to be reported until the end of FY2022, and unless the COVID crisis ends tomorrow - the supernormal performance will flow into FY2023.

My analysis of the earnings potential of Top Glove: https://klse.i3investor.com/blogs/bursainvestments/2020-12-17-story-h1538255304-Top_Glove_Stock_Analysis_Factor_2_ASPs_and_Earnings_Potential.jsp

failurespecialist

"He still not understand. JP Morgan holding topglove and hartalega because that is ETF fund. ETF is passive investment fund traces all fund component based on a pre-set weightage for each constituent. ETF fund manager keep track on each constituent of the fund, upgrade or downgrade when necessary as part of portfolio management."

This is, of course, not true. That is not an ETF fund, and it is not tracking anything. It is an actively managed fund for which you pay 1.5% management fee.

Another thing that deserves to be mentioned is that the only reason why they hold only 9.8% of their portfolio in Top Glove stock (again, this is the number 1 stock in their portfolio) is because according to their prospectus they cannot hold more than 10% of it in the same stock. From the prospectus:

"Investments in, or exposure to, any single entity (other than Government and other public securities) cannot exceed 10% of the Fund’s total net asset value."

observatory, great comment. I sent you a private message if you would like to discuss further.

Hi stockraider, thank you for your comments.

Based on current data, it is unlikely that demand for gloves has peaked yet, or rather - that the supply-demand curve is at its highest equilibrium point, since demand alone is expected to increase in the foreseeable future. On the supply side, capacities are projected to continue to lag significantly behind demand until the end of 2021, before slowly starting to catch up.

Note that the process of building a functioning glove manufacturing facility is not a straightforward one. US and Japanese authorities estimate 3 year average period for a new facility to be ready for production. Additionally, there are constraints on raw material production, which might be even harder to resolve. Thus, no sharp increase in supply is achievable in the short- to mid-term.

I hope this helps.

Hi supersaiyan3, thank you for your comment.

Details about medical-related issues such as immune response and long-term immunity were not discussed in the article as there is insufficient conclusive data (i.e. anybody's guess would be as good).

The amount of gloves used during the vaccination process itself is rather immaterial to the overall demand for gloves. The standard practice is, of course, that gloves get changed after a patient gets checked up (or gets vaccinated in this case), which means a mid-term additional demand of 7+ billion pairs of gloves. This is a small figure compared to the total demand for gloves, so it is not the most important issue. More important may be the establishment of a timeline for the vaccination process and herd immunity achievement, both of which seem rather distant at longer than 1 year in the future for the larger part of the world.

A summary of my post from yesterday:

- Between 4.7 billion and 5.5 billion people will have to get vaccinated for herd immunity to be achieved.

- Excluding the recently delayed Sanofi/GSK vaccine, a total of 7.22 billion doses will be available by the end of 2021 - enough for a little over 3.6 billion people.

- Some countries will get a lot more vaccines than others (more than their actual populations); the larger part of the world will have vaccines enough for about 36% of their populations (this excludes China which hasn't announced official numbers).

- In many countries, people are reluctant to get a vaccine, and these are predominantly the countries that will have the largest amount of vaccines available.

- Factors such as efficacy of the vaccines, cost, unforeseen side effects, and capacity push-backs are not taken into account as there is insufficient data on them or because they are not relevant to this analysis.

(You can read the full post here: https://klse.i3investor.com/blogs/bursainvestments/2020-12-12-story-h1537561205-Top_Glove_Stock_Analysis_Factor_1_Vaccine_and_End_of_COVID_19.jsp)

In case you are interested - I will be writing up on some of the factors behind Top Glove's earnings. This is the first part:

https://klse.i3investor.com/blogs/bursainvestments/2020-12-12-story-h1537561205-Top_Glove_Stock_Analysis_Factor_1_Vaccine_and_End_of_COVID_19.jsp

godhand, thank you for your comment.

I should have probably stated the purpose of my article explicitly in the article itself. I realize this mistake in retrospect based on the comments.

Just to confirm - neither RM17.40, nor RM22.62 (mentioned in the article), are my target prices for Top Glove. My mid-term target price is significantly lower than that, but such analysis was not my initial intention with this article. I agree with you that PE 15 for a term beyond FY21 is unattainable.

My main purposes with this article were two:

1) Display via a simple arithmetic calculation what the price would need to be assuming consistent profits for the current FY (and only for the current FY, in other words the assumption is not valid beyond FY2021) and assuming the universally accepted neutral PE at 15x as the determinant of fair value within the time frame (i.e. within FY2021 only).

2) Compare Top Glove's market price to that of its closest peer - Hartalega, based on a similar set of assumptions.

In general, it appears that we are aligned in the belief that Top Glove cannot sustain these earnings indefinitely, or even in the mid-term. Where our opinions differ appears to be that you believe that the profit declared during this past quarter cannot be repeated in the next quarters. I agree with your points that competition in the gloves market will only increase moving forward which would have a negative effect on ASPs (and potentially on profits). It is not easy to estimate with certainty how soon that impact will occur and how significant it would be. In this case it might be best to refer to the analysts covering the stock. The following is the list of net profit expectations for FY21 and FY22 by them up to now:

(All numbers are in RM billion)
CIMB - 10.37 (FY21), 5.29 (FY22)
AmInvest - 7.9 (FY21), 2.34 (FY22)
HLIB - 11.38 (FY21), 5.32 (FY22)
Kenanga - 9.33 (FY21), 4.10 (FY22)
Maybank - 11.2 (FY21), n/a ([increased by 50%])
MIDF - 8.46 (FY21), 3.55 (FY22)
Public Bank - 9.14 (FY21), 4.21 (FY22)

As mentioned, in my article I was looking only at FY21. If we assume consistent profit at 2.38, the net profit for the year would come to 9.52. The average value among the 7 analysts is 9.68, so the assumption might not be significantly unfair.

I hope this helps.

Junichiro, I completely agree. The logic of lower-than-normal PE is clear and undoubtful, having in mind that a drop in profits towards the second quarter of CY2022 is likely inevitable.

That is why I was comparing the valuations of Top Glove to those of Hartalega, potentially viewing the company as the closest thing to comparing apples with apples. As you can see, this is where common sense logic starts to diverge from the market prices.

godhand, the best we can do is rely on officially released data. Data that suggests the next few quarters, at least until the end of FY2021, will be at least as profitable as the current quarter, is found in the following sources:

Top Glove 1QFY2021 Financial Report (9 Dec 2020)

Top Glove 1QFY2021 Briefing (9 Dec 2020)

Hong Leong Investment Bank Briefing & Results Review 1QFY21 (10 Dec 2020)

MIDF Research 1QFY21 Results Review (10 Dec 2020)

US Government Accountability Office Report to Congressional Committees (30 Nov 2020)

Top Glove to resume all Klang factories’ operations in two to three weeks (Bernama article, 10 Dec 2020)

I hope this helps.

Stockhunter88, there is no basis for such an expectation, at least as far as FY2021 is concerned. Beyond that, it is expected that supply will eventually start outstripping demand (inevitable).

One important thing that needs to be mentioned is that this quarter's sharp increase in profits comes to the exclusion of the US market. In fact, Top Glove report 2% drop Y-o-Y in their sales in North America. Additionally, the US Government Accountability Office issued a report saying that there is a short-term (90-day) shortage of the Department of Defense stockpile of nitrile gloves amounting to up to 2.5 billion pieces. That shortage was caused by someone likely outbidding the DoD for the delivery of the needed stock.

In other words, the chance that the ban on imports to the US would have to be resolved quickly from purely immediate needs perspective, is very significant.

Additionally, the results were delivered with a decreased production volume of nitrile gloves (highest profit margins right now) of -8% due to shortages of NRB and the factory closures everyone is familiar with. The company has been moving towards switching to production of more nitrile gloves, and the factories are starting to get reopened.

Based on that, my expectations are that profits will increase over the next two quarters, before slowing down slightly in the 4QFY2021, but probably even then they will be at a level (significantly) higher than the one observe during 1QFY2021. In any case, my simple calculations are based on assuming no increase in profits.

https://www.gao.gov/reports/GAO-21-191/

Some key statistics:

- The strategic national stockpile of nitrile gloves of the United States has dropped from 16 billion pieces to 2 billion pieces from Dec 2019 to Oct 2020.

- The planned 90-day inventory is 4.5 billion pieces. This is the only strategic piece of PPE the Assistant Secretary for Preparedness and Response hasn't been able to award enough contracts for.

- Out of the 47 states and territories in the US that have responded to the survey, 15 are not confident they would be able to procure enough nitrile gloves in the short run.

- 11 states have not been able to complete request by organizations to supply nitrile gloves.

- Only 25 states reported they have sufficient 30-day stockpiles of nitrile gloves.

Hunter70, thank you for your comment.

You seem to be missing the point entirely. When the difference between the market price and the fair value is as divergent as it is with the stock of this company right now, conducting an overly complicated expectations analysis would be harder to justify. The post's sole purpose is to illustrate this very significant discrepancy, not to plead accuracy in estimating future earnings in any way. That would have to be the topic of a much longer (and potentially more expensive) analysis.

By the way one of the things that might have been overlooked in regards with TG is that they have gotten these profits, even though their sales in North America have DROPPED y-o-y!

If interested in the calculations: https://klse.i3investor.com/blogs/bursainvestments/2020-12-09-story-h1537503578-Top_Glove_Fair_Value_Analysis_9_December_2020.jsp

ChaseBros, there seem to be some problems with your calculations.

2.4 billion net profit on 8.1 billion shares is approximately RM0.30 EPS. If you assume stagnant profits for each of the following 3 quarters, that's RM1.20 EPS for the whole FY.

Let's say PE of 15 is fair value, so target price would be RM18.

But I agree with you - Harta currently trades at about 20 forward PE, so if we assume the market evaluates Top Glove in the same way, then it's share price should be RM24.

GLNT, I didn't find information on the strike price of the warrants that have been disposed. Where do you get this information from?

GLNT, I am not sure what's the difference if it's warrants though?

So the CEO disposed of a large amount of shares before a material announcement. Doesn't this require at least an inquiry?

"lindenstar 7th Dec"
7 Dec is quarterly report?

It's not necessarily a great idea to benchmark your trade decisions against what EPF is doing. To give you an example, just yesterday EPF disposed of TG stock (appx. forward P/E = 6), but bought Harta (appx. forward P/E = 20). They also bought Dialog (appx. forward P/E = 30+), instead of, say, Serba (appx. forward P/E = 9). Their investment strategies and policies they have to adhere to might be (or rather most certainly are) very different from yours.

"lindenstar supermax not included into KLCI"
Source?