Mr kywoo, thanks for sharing your investment decision. Not sure why my earlier comment disappeared. I deleted and reposted after correcting typos. I just found the reposted message missing.

*****

Mr. Kywoo! It’s nice to see you joining. You’re a very knowledgeable and focused investor. It’s a real pleasure to have you sharing your opinion and pointing out where I went wrong. If you don’t mind I'd like to take this opportunity to dwell into those points further details just to clear some doubts.

On point 1, yes I’ve overlooked it. It makes more sense now. Using Loanstreet flat to effective rate calculator, a 4.99% fixed rate over a 10-year tenure works out to have an effective rate of 8.67%.

4.99% fixed rate demands taking a takaful. Without takaful, it is 5.85%, equivalent to an effective rate of 9.99%.

The only fee mentioned is a stamp duty of 0.5% of total financing. The product disclosure sheet states that no collateral is required although a guarantor is needed.
https://www.bankrakyat.com.my/c/personal/financing_i/personal_financin...

So if the above calculation is correct, the effective rate is slightly under 10%. But not reaching 12% as in your experience. It’s still lower than 13% to 14% by RCE that I read somewhere. But that was quite a while back and RCE might have adjusted its rate down too as borrowing cost reduces.

Back to the question that prompts me to raise this example in the first place. Are Bank Rakyat, Bank Islam, BSN etc have the means and incentives to lower pricing and/or lending standards among public sector employees? How could RCE defend its profitability and market share, although it certainly helps that RCE has good management and pride itself for speedy loan approval.

On Point 3, you’ve misquoted me when you wrote “You have said that RCECap has enjoyed a PE of 6.5 in the past years and you are quite happy with that”.

What I wrote was “the past 5 year average PE was only 6.5X”. From the chart I saw, the forward PE over the last 5 years went as high as 9 to 10 times and as low as below 5. The average forward PE is 6.5X. (Median forward PE would tell a better story but I don’t have the data).

As I’ve commented back on Jan 1 and again today, I deemed current forward PE that is close to 9X as fair. Fair means I’m happy to hold, but not topping up or selling. If for no fundamental reason the share price is back to around 6.5X forward PE (which is RM0.33 * 6.5 = RM2.14), I personally will feel it’s undervalued and will top up.

So our difference is at 9X to 10X is undervalued for you and fair for me. But that is our personal opinions. The market price considers factors besides what retail value investors think, such as liquidity. Yes, the market could be “wrong” in the last 5 years. By 2026 we shall see in the new PE chart of the preceding 5 years whether the average PE gets “corrected”.

This brings me to a very practical question. Mr. Kywoo, not sure if you still remember that we’ve once discussed Allianz and HLIND, the two other companies that you’ve viewed as grossly undervalued. I also happen to like both companies, except HLIND management due to its cash hoarding.

Comparing these three companies as of today:
HLIND: share price RM8.15, TTM PE 17X (was 10X pre-Covid), ROE 9% (was 20% pre-Covid), dividend yield 5.2% (42 cents), net cash RM4.27 per share.
Allianz PA: share price RM13.90, TTM PE 9X (after dilution), PB 1.1X (after dilution), ROE 13%, dividend yield 5.0% (69.6 cents)
RCE Capital: share price RM2.78, TTM PE 9X, PB 1.4X, ROE 16%, dividend yield 4.3% (12 cents)

Assuming you have not held these stocks earlier, given a sum of capital, how many percent would you allocate into each of them?

This is a sincere question. I asked because eventually, stock investment is not carried out in isolation without relative comparison. Besides we both like these three companies. The allocation decision will reflect relative preferences.

Thanks for the inputs. This is becoming a lively discussion. I like reading differences in opinion and throwing up challenges so that the forum doesn’t become an echo chamber.

Checking back my records, in the 2013 Chairman’s Statement, Azman Hashim explained revenue dropped almost 30% due to intense competition. In that same year, impairment jumped almost 150% from a year earlier. The BNM’s guideline to lower loan tenure to 10 years was only mentioned in the 2014 Chairman’s Statement.

Actually, the government sector is not small given Malaysia has a bloated civil service with 1.6 million civil servants. In fact, when asked about how could RCE grow by just focusing on the public sector employees, the CEO explained that RCE only has about 5% of the market (his measure is based on headcounts where RCE has about 80,000 users). So other players are active too.

As I’ve read before, Bank Rakyat is the largest share in the personal financing space (in total, i.e. not limited to government servants). You can find the terms offered by Bank Rakyat. Borrowers who opt for a salary deduction scheme can get a fixed-rate at 4.99% for financings of 3 to 10 years tenure. Note 4.99% is within the range of RCE borrowing cost at 3% to 5.8% as reported in the last quarterly report.

https://www.bankrakyat.com.my/c/personal/financing_i/personal_financing_i_public_sector-4/personal

I can’t find RCE loan terms on its website. But I’ve read analyst reports citing it charges as high as 13% to 14%. If that’s true the situation could not sustain. In fact, last quarterly report Note 13 mentions the group benefits from higher early settlement income, which means some customers have refinanced given better terms elsewhere. This is why I’ve raised the possibility of increased competition.

As for RCE and AmBank relations, as revealed in Annual Reports, in some years the related party transactions with the AmBank group of companies measured over 10 million or more. Granted they have to be conducted according to the arm’s length principle. I also have no doubt the transactions are mutually beneficial. In the finance business trust and reputation are crucial. The association with AmBank group benefit RCE when they go to the market to raise fund and potentially lowering the funding cost. Note I raised this point earlier as a plus for RCE.

RCE Capital dividend guidance is 20% to 40% payout ratio. So 40% is actually the upper limit. In FY19 and FY20 they were 33% and 35% respectively. The trend is increasing. I check the consensus EPS for FY21 and FY22 is 33 and 35 cents. Assuming a maximum payout of 40%, 33 cents * 40% = 13.2 cent dividend, and 35 cents * 40% = 14 cents. In the past several years the dividend history is 3+3, 4+4, 5+5 and 6+6. If the pattern continues, the next one could be 7+7 =14 cents by 2022 if not 2021.

As I’ve mentioned before, despite RCE being a good company I would hesitate to extrapolate its good results too far too fast. REC has benefited from several onetime factors. The higher early settlement income is one. Another is borrowing cost has become lower and lower. But the Sukuk funding is determined by the government bond yield + a spread. Can it go lower? After falling so much, 10Y MGS has gone up. It started touching 3% in the last few days.

https://www.bnm.gov.my/government-securities-yield?p_p_id=my_gov_bnm_yield_display_portlet&p_p_lifecycle=0&p_p_state=normal&p_p_mode=view&_my_gov_bnm_yield_display_portlet_tradingDateTxt=2021-02-15

But last let me say this. I'm not here to challenge anyone or prove something. I want to list the concerns as I see and I hope to get answers from people who have thought about them. The better I know about the company (for goods and bad), the more confident I'm in holding on to the shares.

@Learner King. Thanks for taking 2 hours to respond to me!

In summary, your answer is all answers are already in the quarterly reports and google. Thanks for telling me that! Apparently your English is very good despite your repeated claim of otherwise. I’ve read the same quarterly and annual reports every quarter and every year. Yet I’ve missed the answers. Perhaps I lack the intelligence or expertise to read through the obscure risk management policies and processes to translate into simple English on how they work out for the specific risks I care.

But one thing I’m certain of is while RCE and AmBank are two independent companies, they have close connections as I've commented. That is clearly stated in their Annual Report. They share key shareholders and board members and the AmBank group of companies are even listed in the Annual Report related party disclosures. Even though related parties are required to deal at arm's length, at least I know how it works in practice. For that, I can read beyond the English text.

BTW I’m no analyst nor even remotely connected to the finance and stock market industry beyond just a small potato investor. Lastly, I wish you prosperity through this company as that also brings continuous dividends as my pocket money too. Cheers!

@moolala, Aeon Credit 5Y average forward PE is 10-11X. It's during this bad time that its forward PE goes up to 16X as expected earning drops faster than the share price. But forward PE is based on FY21. As earning normalizes post FY21, PE could go lower even as share price recovers.

RCE at 15X forward PE will be RM4.80 or about 2.4 times Price to Book. That is about 40% more valuable than today Public Bank which is1.7X PB. That is possible if more funds start to prefer RCE than the time tested grandfather stock.

@x3mg33, not sure if your good suggestion is partly directed at me. But I ain’t any sifu. However I’m happy to give a prediction since you’ve asked for one. I predict with 99% confidence that by year end the price will be different from today. And I’m not shy to say that my past predictions have outperformed many analysts!

@Learner King. Thanks for your explanation. Since you pointed out, now I got your point.

Just to set the context right, refer to my comment on Jan 1. My view then was at RM2.75 in Jan 1 (quite similar to today price), at a forward PE of 8.7X, the price was fair for me. Just no longer undervalued. But still too early to sell. Just that I stopped topping up after many quarters of accumulation.

But there is no contradiction to also warn that the past 5 year average PE was only 6.5X. My personal risk appetite is different from the general market risk appetite. I’m undisturbed even if the price retreats to the previous RM1.5 – RM1.7 range, as long as it’s due to market sentiment reversal not deterioration in fundamentals. But the same cannot be said for people who don’t study the company and are advised to get in at RM2.80.

Besides my “fair PE” can be very different from the collective market “fair PE”. The market price is determined by the collective power of funds willing to take liquidity risk to invest in this small-cap niche business, where the float is only 40% (the Azman family controls the remaining 60%). So the average 6.5X in the last 5 years partly reflects this liquidity discount. If that’s the market verdict I’m happy to stay at 6.5 times for years to come while collecting dividends. But my circumstances may be different from another person.

Not to mention I suspect the break-out since Nov is not due to the RCE factor alone. While the past 2 quarter results are good, they are not spectacular. I notice Nov 2020 coincided with the start of recovery play. Even laggard like CIMB stock price rebounded from below 3 to over 4.X. Looking further say the tech sector. While I might still top up MPI at RM20 in Nov, I would be edgy with a price near RM40 and PE approaching 50X now. People in such a position, who may want to take some chips off the table yet hate to leave the party, may decide to switch some money into good quality and relatively cheaper counters like RCE. In this way in a market euphoria is like water that flows everywhere and lifts all boats. Even Air Asia is currently up 60% from its low in Nov. But has Air Asia fundamentals improved that much in the last 3 months?

Anyway, this is just my view. I’ve been in the market long enough to be proven wrong with enough times that the future is a range of possibilities.

But if you don’t mind, since you’ve been following this company for several years, I would like to get your view on two questions that I’ve come across. One is since earlier years RCE has relied on Yayasan Dewan Perniagaan Melayu Perlis and Yayasan Ihsan Raykay to reach end customers. The dependence has declined over the years, but any idea of the current proportion? More importantly, how does RCE manage the credit risk if these intermediaries were to default?

The other question concerns how to avoid a repeat of the difficult period in 2013-14. Stiff competitions then from Bank Rakyat and the like resulted in lax credit standard and subsequent rise in impairment. It took BNM’s intervention to limit loan tenure to not more than 10 years to prevent the race to the bottom. RCE management has turned conservative after that lesson. But what stops other banks from encroaching into RCE market share as a source of their growth? While RCE may enjoy its connection with the AmBank, other banks could tap into equally or even much lower funding sources.

@ Learner King. Sorry if my writing has taken up too much space on your screen. Unfortunately, this is my way of thinking about stocks. I’m a long term fundamentalist and have no talent for momentum. I stay on what I know best.

Given your emphasis on speed, I suppose you’re a momentum follower. But since you’ve professed to hold it since 2016, I wonder if you started on momentum before turning into fundamentalist and recently back to momentum again? Or your momentum timescale is measured in years? :)

BTW I don’t necessarily own stocks that I comment on, and I haven’t commented on many stocks that I own. But what we have in common is I too like this company. RCE has been a favorite before I even registered an account with this forum. Cheers!

@Xxxting.

If I were you, I wouldn’t rely on buy/sell recommendations by others without doing my own homework. Even if the buy advice is right, I may panic into selling at a loss during a market shakedown if I don’t understand the fundamentals of the company.

I don’t even trust analyst recommendations. But just FYI the current analyst consensus is 1 strong buy, 1 buy and 1 hold.
https://www.bursamarketplace.com/mkt/themarket/stock/REDI/analystconsensus

Actually RCE Capital is one of my favorite stocks. It has good management and good business fundamentals. The question is whether the current price is right. During the past two quarters, the stock price has run up a lot faster than its good results. It may mean the market has “discovered” and re-rated it upwards. Another reason could be with its several quarters of steady performance, there is a chance of higher dividend from current 12 cents to 13 or even 14 cents.

But don't be misled by the seemingly low forward PE of 8 to 9 times. Current forward PE should be compared against the past 5 year average of only 6.5 times.

On another valuation measure Price to Book. At a closing price of RM2.89 today, the PB is 1.4 based on the latest book value per share at RM2.05. This corresponds to a respectable ROE of 16% to 17%. As a comparison, Malaysian largest bank Maybank has a lower PB ratio of 1.1, though an even lower ROE at 8% to 9%.

But RCE should have a discount against Maybank. RCE is in the lucrative but higher risk personal loan business targeting civil servants only. Maybank, on the other hand, is in a safer integrated bank business and a must-have in the portfolios of many fund managers. Besides the small size of RCE means it could experience larger business volatility, such as if a large bank decides to compete aggressively in its niche.

Personally, if I were to discover this stock only by now, I will still buy a small slice first, while further study it in depth to decide whether I should add or exit.

Sorry. Borrow this space to respond to a glove question.

@Bao2Lai. You can find my calculation on the operating profit of Intco vs Harta & Top Glove in my comment to Ben Tan’s blog. Timestamp 07/02/2021 2:58 PM.

https://klse.i3investor.com/blogs/bursainvestments/2021-02-06-story-h1540340424-Top_Glove_Hartalega_Supermax_The_US_Demand_for_Gloves_and_Homeland_Prod.jsp

In summary, for the first three quarters of 2020, the operating margin of Intco was 19%, 59% and 69%. Top Glove 12%, 26%, 46%. Harta 18%, 30%, 51%.

I’ve also worked out the Capex required for new capacity expansion. It takes Top Glove about USD25 for every 1,000 pieces of new capacity. Capex for Intco is only about USD17. See my calculation in another comment in the link below. Timestamp 16/02/2021 11:29 PM

https://klse.i3investor.com/blogs/bursainvestments/2021-02-16-story-h1541112319-Glove_Supply_and_the_Supply_Demand_Disequilibrium_Top_Glove_Supermax_Ha.jsp

The current blended ASP of USD70, if sustainable, means it takes only 4 months to breakeven for new production investment. That explains why Intco is rushing for a second listing in HK to fund its explosive growth. Its capacity by the end of 2019 was 19 billion pieces; end of 2020 36 billion; now already 45 billion. It has announced at least another 190 billion.

I also don’t think Intco needs to worry about US protectionism or even outright ban, despite US being a key market currently. Even though Intco annual capacity has already increased to 45 billion, that is still a fraction of its announced additional capacity of 190 billion. If the management senses the risk of over concentration in US, it could aggressively future capacities to non-US market.

Glove impose little switching cost on customers. I doubt customer loyalty on branded gloves, not to mention many producers are OEM. To prise open new markets outside US, Intco just needs to lower price sufficiently given it’s already a low cost producer.

If I’m in Mr Liu’s shoes, I will be more concerned on how fast I could seize the opportunity to raise the multibillion necessary to support aggressive expansion. Luck will play a role here. One is the sentiment of Hong Kong IPO market, which currently is piping hot. The other is whether ASP can stay high for the next few quarters so that their investment bankers can sell a good story to fetch a lofty valuation. Afterall the IPO market is mostly about sentiment where participants are motivated by quick money.

Therefore, although current consensus is glove ASP will remain elevated at least until end of 2021, it might not be a bad thing if ASP normalize sooner. It will at least pour cold water on Intco’s second listing and deter it from raising the necessary fund to launch a race to the bottom.

Hi Ben! Thanks for your view again.

I agree we can never know fully how the dynamic will develop in the future. What we can however do is to look into past records for guidance.

I too believe the secular growth of gloves far into the future. In the past, the leading Malaysian glove makers have shown remarkable collective restraint in their capacity expansion. They scale back expansion when market demand didn’t grow as fast. Such “cooperation” has ensured all efficient players could maintain profitability. But such implicit understanding might be more difficult when foreign big players like Sri Trang and Chinese start appearing.

Looking back into past financial data, excluding the bumper year of 2020, in the decade since 2010 operating profit margin for Top Glove was 7% to 13%, Supermax 9% to 16%, Kossan 11% to 17%, while Harta was at a different level of 20% to 33%.

Such good, but not excessively high margin, is one reason why Malaysian glove leaders continued to dominate the market until now. The moderate operating margin did not provide adequate incentive for new challengers to take on incumbents that already have the economy of scales.

This also explains why the long-term trend of ASP is actually downward. I’ve tracked Hartalega blended ASP year by year. Until 2019 its annual reports would display a chart showing annual nitrile glove shipment. A rough estimate of its ASP can be derived by dividing annual revenue with shipment quantity and converting it to USD based on the exchange rate at that time.

Over the 2011-19 period (where it was almost a pure nitrile glove producer with 90% to 95%), ASP gradually declined from around USD40 to USD25 per 1,000 pieces, representing a compounded annual decline rate of about -5% to -6%. It’s clear that the law of economy would drive down ASP, even during a period of high demand growth. This is why I’m skeptical that the long-term ASP could settle at a higher level. There seem no convincing economic reasons to support a higher plateau for long term ASP.

In a more likely scenario, if all key players including the Thai and Chinese could “cooperate”, long term ASP should revert to a cost-plus basis where leading players continue to enjoy an operating profit margin of say 10% to 15%, or even 20% for an innovator like Harta. After tax, the net margin may be around 10%, plus or minus a few percent, as achieved by key players in the last decade (again excluding 2020). However, this will imply a reversion to ASP below USD20+, i.e. the bear case scenario in RHB valuation I mentioned in the earlier comment.

Yes, in that case, Intco shareholders who are new to the party will be proven too optimistic. Having said that, Intco forward PE (the only relative valuation measure I can find) is at 11 times, while higher than Top Glove it’s lower than Harta.

But note Intco’s valuation is not solely based on the high ASP assumption. I’ve read those Chinese analyst reports, news articles and investor blogs. The sentiment is clearly based on Intco aggressive expansion for market shares. It seems to prioritize market dominance first and high profitability can wait.

Besides, even if minority shareholders may abhor the idea of destructive competition, the controlling shareholder can have a different calculation. Right now Intco controlling shareholder Mr. Liu merely sits on his paper wealth consisting of 40% company shares. Mr. Liu couldn’t cash out by selling his stake without bringing the price down. From his perspective, therefore, it could be better to exploit the current high valuation to attract more capital. Hence the Hong Kong listing on the premise of rapid expansion and long-term growth. Intco current valuation expects it behaves like a growth company. Rapid market share and revenue growth come first. Lower profitability could be tolerated during the growth period.

Actually, the pursuit of market share at all costs is not new in China. China shareholders should have gotten used to it. Not just solar PV panel and steel coils. During the bike sharing craze a few years ago, Ofo, Mobike and other aspiring unicorns competed to burn cash, rolling out free bikes for users while still figuring out their business models. When the dust settled they already burned more than USD5 billion and 25 million bikes ended up in “bicycle graveyard”. At least the glove sector would have a more benign competition. Players can still make a profit even despite slashing prices.

Hi Ben, thanks again for spending time to explain your thought in detail, which is really insightful.

I agree newcomers are at a disadvantage in expanding capacity. By the time they iron out their start up problems due to their lack of experience, the ASP would have been much lower than today. That’s why some Malaysian producers that you’ve listed acquired existing players. However, the acquisition does not create new capacity in the market and therefore will not impact ASP.

Intco is one of the few current players that are in a lucky position to expand really fast as they have ready setup and know-how in place, and their public listed status lends them the platform to raise funds quickly and more easily. I haven’t checked the other listed player Chinese Bluesail. Until recently Bluesail is about the same size as Intco. In theory, Bluesail could enjoy the same cozy relation with local governments, but the management seems to be more conservative.

Therefore my main focus is on Intco. Not so much as an investment opportunity (not that I can access China market). But given its low breakeven price and sky-high ambition, I want to know if it will play a spoiler role in its pursuit of market share.

Based on its 2020Q3 financial statement, Intco has net cash of CNY3.7 billion. Given its current market cap of around CNY80 billion at Shenzhen ChiNext, if it’s lucky it could potentially raise say another CNY16 billion cash in its second listing in HK assuming a 20% new equity issue at current valuation. With a total of about CNY20 billion (about USD3 billion) cash in its war chest, based on its Capex of USD17 per 1,000 pieces, the back of the envelope calculation shows it could potentially fund 1,000 * 3/17 = 176 billion capacity without even raising debt or using future cashflow.

I’ve thought about geopolitics. Developed countries account for about 70% of global glove demand. The US alone probably accounts for about 30%. In the world of increased Sino-American rivalry, Chinese exporters could face increased barriers into the US market.

However, since the US represents a fraction of the world demand, the trade obstacle imposed on Chinese imports will not have much impact. Like water trade will flow around barriers. Chinese imports will flow to the non-US market while Malaysian products come to dominate the American market. This is the scenario that played out when US Custom banned Top Glove import. In response Top Glove just channeled products to the non-US market, displacing other players that increased their export to the US. The same dynamic happened when India banned Malaysia palm oil in early 2020 where Malaysian export just switched places with Indonesian.

The entire China export industry (not just gloves) will face bigger obstacles if US manages to line up European Union, Japan and other developed countries to form a unified trade wall against China. But I view it as a very low probability scenario as each country has its self-interests to take care of. In fact just in Dec last year EU signed a free trade agreement with China despite the plea by the incoming Biden’s administration to delay it.

To recap my concern is not so much on Chinese players dominating the market. Rather my concern is whether their low-cost advantage (using the example of 3 year ROI even with an ASP as low as USD26) could spoil the market, thereby destroying the case of current glove stock valuation which has assumed a higher long-term ASP.

Allianz PE as reported by some apps is misleading. Alloanz has almost as many ICPS as its outstanding shares. So should divide its basic EPS by 2 to get its diluted EPS, or multiply the PE by 2.

Ben,
I’ve done some back-of-the-envelope calculations for Capex for expanding glove production capacity.

According to Top Glove press release when reporting the Q1FY2021 result, it plans to spend RM10 billion over the next 5 years to add 100 billion pieces capacity. This works out to be RM100 Capex per 1,000 pieces, or USD25 Capex per 1,000 pieces (assume USD1 = RM4).

During the last quarter, Top Gloves probably achieved a blended ASP in the order of USD70. The operating expenses, which include depreciation of earlier Capex, is only about USD20 per 1,000 pieces. This magnitude of profit (before tax) is almost USD50 per 1,000 pieces. Given a Capex of just USD25, it takes only 6 months for investment to breakeven!

Even if we assume ASP eases to USD45 later, still it only takes 12 months for investment to breakeven. This serves as a very powerful incentive for all current and would be glove producers to join the fray.

I performed a similar rough calculation for Intco Medical. In its latest capacity expansion announcement made 2 weeks ago, Intco plans to spend CNY 5 billion for a production facility of 45.75 billion medical glove capacity.
https://vip.stock.finance.sina.com.cn/corp/view/vCB_AllBulletinDetail.php?stockid=300677&id=6894219

This works out to be CNY109 Capex per 1,000 pieces, or about USD17 per 1,000 pieces (assume USD1 = CNY6.5). If the figures quoted by both sides are correct, the Chinese producer has about a 30% cost advantage over Top Glove.

If we assume Intco's operating expense is also around USD20 per 1,000 pieces (as discussed earlier, Intco in fact has a higher operating margin), Into could breakeven investment within 12 months with an ASP of around USD37 (=$17 Capex + $20 operating expenses). The ASP required for a 3-year investment return is about USD 26 (=$6 Capex per year + $20 operating expenses).

Of course, the above calculation assumes 100% capacity utilization, which if lowered to 80% to 90% would raise the ASP bar a bit higher. But on the other hand, the assumed $20 operating expenses are probably on the high side as it includes depreciation, which means it is double-counted in the Capex.

Of course, there could be other constraints like factory construction time (even with China speed), production line installation, and NBR supply where new petrochemical plant capacity only arrives in stages. But I feel that these constraints will ease over a 2 to 3 years horizon.

That brings me to the question of what is the long-term sustainable ASP that can balance the incentive for glove producers to expand really fast. In the Intco case, the above simplistic calculation shows roughly USD26 ASP will sustain a 3-year breakeven timeline.

This could be uncomfortable for the current glove stock valuation. For example, in the RHB report for Top Glove on 18 Jan, RHB TP is based on 3 scenarios of long-term ASP post-2023. The bull/ base/ bear scenario ASP is USD47.5/ USD37.5/ USD 27.5 respectively. In other words, based on the above calculation, Intco could still breakeven within 3 years even with an ASP that is below the RHB’s bear scenario. As long as it can get all the necessary funding (for example through its HK listing), the math is on its side.

My reasoning could be wrong. Otherwise, it seems to point towards a rather low ASP in a few years time.

Supermax might be undervalued. But quoting the Top 30 shareholding is not a proof of that. All KLCI component stocks have big name funds shareholders. They can't all be undervalued.

Vanguard and BlackRock are the largest passive investors in the world. They mostly buy when stocks are included in the index, and sell when stocks are dropped from the index.

Aiya, if you want to discredit the Western Pfizer vaccine, there are more credible sources than Chinese nationalistic Global Times.

While Global Times casts doubt on Pfizer vaccine, it says China vaccines are safe and effective.
https://www.globaltimes.cn/page/202101/1212727.shtml

Don't like Pfizer, then go for Sinovac.

Instead of Par Value, it's better to look at shareholder's equity per share, which captures the company retained earnings over the years.

The share price to per share equity ratio, also known as Price To Book ratio, has a strong correlation with Return on Equity.

Takaful has a higher ROE than Allianz or LPI. But Takaful ROE has weakened in 2020 while the other two have sustained.

Haha which stock market is not "nonsense". The biggest nonsense is the US stock market where within a month GameStop share price could rise from 40 to 400 and back to 40.

If you truly believe the company is undervalued, why the agitation and complaints? Hold for a few years the share price will gyrate towards its true value.

Unless you only wish to quickly pass on a piece of paper to the next person to make a quick buck. That, is speculation, not investing.

Hi Ben, thanks for your great effort in compiling the information. Truly amazing!

The various sources you provide will be very useful. I've bookmarked this page so that I could return later to study the details and dynamics when I have time. Thank you.

Taipan,

The efficacy of Pfizer and other vaccines is only one of the many factors that determine future glove price, and therefore the profitability of glove companies.

We should wish Malaysian glove companies to continue making record profits so that they could contribute to the national economy. At the same time, we should also wish that the vaccines to be successful so that more lives can be saved and the economy could recover faster.

Let’s not create doubt on the vaccines just because we hope bad news is good news for glove company share price. In fact, Singapore’s Straits Times has just reported the latest large-scale study in Israel showing the great success of the Pfizer vaccine.

https://www.straitstimes.com/world/middle-east/israeli-study-shows-pfizer-covid-19-vaccine-is-effective

@ Taipan. Thanks for sharing The Edge article.

https://www.theedgemarkets.com/article/great-gloves-discourse

If you read the article in full, and not just the paragraph where MIDF had a favorable TP on Supermax, you will find a lot more.

In the same article, Pankaj C Kumar made an important observation on analysts’ TPs. He said “What’s happening now is earnings expectations have increased, but surprisingly, target prices have been lowered. This is because some analysts had been caught up in the euphoria of the whole situation and were using one-year forward earnings expectations and trying to use the same price-earnings multiple of 20 to 25 times on supernormal earnings, which is the incorrect thing to do”

In fact today there is another round of TP slashing by the Hong Leong Investment Bank. While they maintain overweight in the glove sector, they have at the same time, in a less noticeable manner, slash their TP on a few glove counters. For example, Top Gloves TP has been reduced from RM10.54 to RM8.06.

https://www.thestar.com.my/business/business-news/2021/02/16/hlib-research-retains-overweight-on-glove-makers

In fact, as late as early last month Hong Leong still gave it a TP at RM11.05.

Have Top Gloves fundamentals changed for the worse by 30% in a matter of just one month, warranting Hong Leong to slash almost 30% TP from RM11.05 to RM8.06 in such a short span of time? Of course not.

The problem lies squarely with Hong Leong analysts (and many other analysts at other houses too). As Pankaj Kumar has observed, analysts made the mistake of using the Price Earning ratio as their valuation tool, thereby wrongly projecting TP based on the earning during the supernormal period, which is one time.

Now, as the share price has trended down, the Hong Leong analyst sheepishly switch to the so called “modified Discounted Cash Flow” method. Miraculously, their new TP ends up just somewhat higher than the current share price, and thereby maintaining the Overweight rating. Guess if the share price were to rebound strongly tomorrow, we will soon as another upward revision in TP.

Read research reports with a critical mind. Read their valuation assumptions. Understand their valuation approach. But never trust analyst TP, be it from JP Morgan or from local houses.

It's funny that some people only want to hear good comments. Frankly, I don’t even check out what are the warrants out there.

Each of us is free to indulge in our own bullish or bearish views in this forum (note I'm neither a bull or bear). However, by the end of the day, it makes no difference to the share price which is dictated by the institution's money in the short term, and the company fundamentals in the long term.

If you're here for a quick profit, BAT is the wrong counter, there are much better choices.

If you're here as a long term investor, better spend some time studying the company fundamentals instead of hoping to talk it up.

There was a 40% run-up in share price in Nov last year after the government announced new measures to curb illicit tobacco. Some people were so carried away as to predict RM20 before the end of 2020.

I wasn’t very popular then when I commented on Dec 5 that “a share price recovery is only sustainable if EPS keeps on increasing in the coming quarters”. The closing price at that time was RM13.38. BAT briefly touched RM15.32 on Dec 7 before retreating back to RM13 level. As a result, the excitement in the forum died out and everyone quietly waited for another 2 months.

2020Q4 results show the decline has been reversed. But is it sustainable?

On QoQ basis,
Revenue at RM660m (RM628m in Q3) increased 5%
Gross margin at 26.5% (25.4% in Q3) up by about 1%
Operating margin 15.8% (14.0% in Q3) up by about 2 %
Profit before tax at RM104m (RM84m in Q3) increased 25%

Margin improvement has allayed concern about margin compression due to emphasis on low margin VFM products. The combined increase in revenue and better margin leads to 14% increase in net profit QoQ.

Despite the good results, BAT still has a long road ahead if we study the past 17 quarters of EPS as shown below.

12/31/2020 25.5
9/30/2020 22.3
6/30/2020 19.1
3/31/2020 17.8
12/31/2019 34.2
9/30/2019 29.1
6/30/2019 26.7
3/31/2019 31.0
12/31/2018 40.8
9/30/2018 51.1
6/30/2018 38.6
3/31/2018 33.7
12/31/2017 28.4
9/30/2017 51.0
6/30/2017 51.6
3/31/2017 41.6
12/31/2016 101.3

Recall in 2018 share price increased from RM23 to RM38. The share price increase in 2018 was backed up by three consecutive quarterly EPS increase from 28.4 cent to 51.1 cent before EPS faltered again. To go above RM20, RM30 or higher, BAT needs to deliver consecutive quarters of EPS leaps. Today result is not convincing enough.

The pledge for tougher enforcement has already been factored into the current share price. But also check out Note B7 which says “The tobacco black market continued to record a high illegal cigarette incidence at 64%”. Apparently, actions are still lacking.

As for investors attracted by the apparently high dividend yield of 9%, please watch out this is based on historical dividends only. Can the dividends sustain?

Refer BAT cash flow statement. For 2020 net cash flow from operation is RM196m, but the total dividend paid is RM254m. The dividend paid by BAT has been partly supported by borrowing. Borrowing has increased from RM421m in end 2019 to RM510m in end 2020. Without better results in coming quarters, dividends will be trimmed.

Another quarter of steady performance. The results can be found here
https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3127859

EPS grows on both QoQ and YoY basis:
QoQ = 9.72/9.27 – 1 = 5%
YoY = 9.72/8.88 – 1 = 9%

Profitability has also returned to pre pandemic level. Quarterly ROE for quarter ended
20201231 is 9.72/205 = 4.7%
20200930 is 9.27/201 = 4.6%
20200630 is 6.50/192 = 3.4%
20200331 is 8.08/192 = 4.2%
20191231 is 8.88/192 = 4.6%

The better profit is partly contributed by lower interest costs. Note 20 explains that “The weighted average interest rate of the Group borrowing categories as at 31 December 2020 ranges from 3.0% to 5.8% (31.12.2019: 4.7% to 5.8%) per annum.”

It is also helped by the fact that allowances for impairment loss remain muted.

Financing and loan receivables have increased, but only very slightly from RM1.68 billion a year ago to RM1.70 billion now. This shows management prudence but may also imply a slower pace of profit growth in the future.

Hi Ben. I’ve searched for Intco company announcement in English on Shenzhen Stock Exchange website, but there are only restricted to a few items with brief descriptions (select ChiNext, stock code 300677)
http://www.szse.cn/English/disclosures/announcements/index.html

Detailed announcement to the stock exchange is still in Chinese:
http://www.szse.cn/disclosure/listed/notice/

In the Chinese development model, the local government governments offer both implicit and explicit subsidies to manufacturers. Local governments provide cheap/ free land, industry park, infrastructure, tax incentives, cheap credits (though state-controlled banks). Since the opening up by Deng, local governments all over China have been fighting over each other to attract investment. GDP growth is a key KPI for local officials’ promotion so they have their self-interests at stake. I won’t comment on whether it’s fair or unfair. After all many American states also fight over each other to attract investments. But for China this has been a very successful development formula.

That explains why all the capacity announcements I shared earlier contain legal agreements between Intco and respective local governments. For example, in the agreement with Jiangxi 彭泽县 county, the government is responsible to deliver 800 acres of land acording to Intco’s specification. The land is priced at only CNY40,000 (RM25,000) per acre. In comparison, last year Hartalega paid RM 263 million for 38 hectares of land at Sepang, or RM2.77 million per acre. So Intco get its land at less than 1% of Harta’s cost!

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

More to that is the county government is also responsible for the electricity, water, wastewater, gas, telecommunication and other infrastructure; and provide a series of incentives. Of course, in return Intco is obliged to start production within 15 months, and to achieve annual export sales exceeding CNY3 billion in 5-year time, among other conditions.

Like you, I also suspect these multiple new capacity announcements are rushed out partly with its Hong Kong Stock Exchange listing in mind. Timing is most important. Currently, glove companies have a good story to tell -- raging pandemic; uncertainty in vaccine rollout; demand outstrip supply; secular growth …

If ASP weakens before Intco can list, it will raise a lot less money, thereby constraining its expansion. However, if it's lucky and ASP remains very strong, Intco can easily tap into an abundant amount of hot money. Just for comparison, Kuaishou Technology, the HKEX hot IPO this week attracted CNY1.3 trillion capital and 1,200X oversubscription.

But the ironic thing is, if the history of other Chinese companies is of any guide, an Intco that is flush with new money will soon go on a spending spree. It will build so many new capacities until the market is saturated and enters another round of shakeout.

To add to my previous comment, this is how I see the combination of fundamental + valuation quadrants in investing.

1) Good fundamentals + cheap valuation --> Price will catch up in next few quarters, at most the next 2-3 years. Very comfortable to hold.

2) Good fundamentals + expensive valuation --> Near term upside is limited. May have a hold a lot longer. Risk of disposing at a loss when occasional sell down happens

3) Poor fundamentals + cheap valuation --> Potentially a value trap. Pray for the price to recover fast before company fundamental deteriorates further

4) Poor fundamentals + expensive valuation --> Like buying lottery. Don’t bet your house.

No doubt some market players are not bound by the above rules. Insiders and quant funds are among the exception. But how many retail investors have their advantages (not to mention insider dealing is illegal)?

Hi calvin69. Yes, as mentioned in my comment, each company may have a small non-glove business but the effect is insignificant.

In the Intco case, besides gloves, it also produces wheelchairs, hot/ cold packs among other things. However, as of Jun 2020 gloves (classified under PPE category) already contributes more than 96% revenue and even higher profit contribution. Therefore, if other products are excluded, the operating margin from gloves alone should be even higher, albeit slightly.
http://stockpage.10jqka.com.cn/300677/operate/#analysis

Hi Marketsifu. I salute your risk appetite and perhaps skills. But for most people, I included, won’t have a strong enough heart to trade penny stocks, let alone PN17.

Short term trading is a zero sum game. In fact less than zero sum because Bursa and brokerages take a cut. While I agree that some may have insider info or the ability to read charts, I certainly don’t have the skills to win over other people’s money.

That’s why I always invest for the long term the philosophy is about sharing the fruits of growth. To be successful, company fundamentals and valuation (though PE is not a good indicator here) are equally important. Both Top Gloves and Hartalega have excellent fundamentals and superior management.

My back and forth discussion with Ben concerns only valuation, or more specifically how the future ASP trend will determine future profits (or cash flows discounted to today values), and therefore whether the stock is under/overvalued at the current price.

Ben, thanks again for your view.

China glove makers may not be at a disadvantage as commonly assumed. On the contrary, the financial statements of Intco show its cost structure is as good, if not better than leading Malaysian producers.

A simple way to compare is to look at the operating margin. The operating margin incorporates the factors you’ve cited where Chinese players are assumed to be at a disadvantage. The costs of labor, fuel, transportation, raw material and capital depreciation are already captured in the operating cost. Product quality and distribution network is reflected in the revenue. Poor (good) quality fetches lower (higher) price; hence lower (higher) revenue.

To make the comparison apple to apple (as much as I can), I use the quarterly data from Yahoo Finance website which imposes the same treatment/ definition (this means results differ a bit from company announcements, but not much). Note also each company may have a small non-glove business but the effect is insignificant. While different glove types are sold, a higher operating margin still reflects higher overall product profitability.

I compared Intco against Top Glove and Hartalega (figures in millions of MYR or CNY)

(A) For quarter ending Mar-2020 (Feb-2020 for Top Glove):
Company/ Revenue/ Operating Income/ Operating Margin %
Intco 773 148 19%
Top Glove 1,230 149 12%
Hartalega 778 138 18%

(B) For quarter ending Jun-2020 (or May-2020 for Top Glove):
Company/ Revenue/ Operating Income/ Operating Margin %
Intco 3,676 2,156 59%
Top Glove 1,688 430 26%
Hartalega 920 275 30%

(C) For quarter ending Sep-2020 (or Aug-2020 for Top Glove):
Company/ Revenue/ Operating Income/ Operating Margin %
Intco 4,495 3,087 69%
Top Glove 3,110 1,431 46%
Hartalega 1,346 685 51%

(D) For quarter ending Dec-2020 (or Nov-2020 for Top Glove):
Company/ Revenue/ Operating Income/ Operating Margin %
Intco <results not released yet>
Top Glove 4,759 3,096 65%
Hartalega 2,130 1,347 63%

Source:
https://finance.yahoo.com/quote/300677.SZ/financials?p=300677.SZ
https://finance.yahoo.com/quote/7113.KL/financials?p=7113.KL
https://finance.yahoo.com/quote/5168.KL/financials?p=5168.KL

Note that even by adding another 5% to 10% for Top Glove given its quarterly results lags by one month, Intco's operating margin still outperforms both Top Gloves and Harta. It is this high profitability and superior cost structure that can propel its aggressive capacity expansion.

While it’s possible that Intco’s over 200 billion capacity will only come online much later, the Chinese media expects it to be available by 2023.
https://finance.sina.com.cn/stock/s/2020-12-03/doc-iiznezxs4929762.shtml

My own view is the capacity plan of both Malaysian and Chinese players alike will keep changing. The ASP outlook will determine how much and how fast. If high ASP can be sustained for another 2-3 years, I don’t see what could hold back Intco and in fact other players back from pushing even more capacity as fast as possible to share in the bonanza while it lasts. Ironically this aggressive pursuit of high profit will also plant the seed of price destruction in the future.

Hence my view that Malaysian players should take control and expand aggressively now, even at the expense of sacrificing ASP and margin, so that they don’t lose market domination in the longer term.

Hi Ben, thanks again for your input. I’ve checked again. Apparently, I’ve double-counted some announcements which have in fact superseded earlier announcement with increased capacity. Over the last 12 months, Intco announcements actually focus on these 6 counties:

5-Feb-21 46 billion medical gloves 彭泽县 Anhui
30-Dec-20 13 billion PVC medical 夏邑县 Henan
1-Dec-20 3 billion nitrile medical, 50 billion PVC medical 青州市 Shandong
1-Dec-20 5 billion TPE and 5 billion CPE 沂源县 Shandong
3-Sep-20 40 billion medical 临湘市 Hunan
13-Mar-20 27 billion medical 彭泽县 Jiangxi

The total announced capacity in the 12 month period is therefore 189 billion. Adding its existing capacity of 36 billion, and the 9 billion Vietnam capacity plan announced in 2019, the total is 234 billion. A smaller number, but still very crazy.

The constraint of tools and equipment should be temporary. These things can be produced in non-dedicated facilities that are general purpose, so production ramp-up is easier. Many Chinese vendors also supply latex dipping machines.

I agree there is a real shortage of NBR or Nitrile Butadiene Rubber. As NBR is produced in dedicated petrochemical plants, it will take a while for new capacity to come online. For example, currently LG Chemical has 170,000 ton capacity. Its Ningbo plant in China will add another 100,000 tons in early 2021. But its recently announced cooperation with Petronas Chemical to add another 200,000 ton at Pengerang will only come online in 2023. Market leader Kumho Petrochemical too is adding capacity but also in stages. Nonetheless, if Chinese glove makers were to gain a foothold in the nitrile glove market, more NBR plants might be set up in China. Afterall China already has a thriving petrochemical industry and the necessary infrastructure and technical talents to support new NBR plants.

This is where I believe the glove ASP trend in the next few years will decide whether Chinese producers could steal market share from Malaysians. I agree with you that Malaysian glove makers are lower cost producers. During pre-Covid time, when Malaysian producers have to survive at a net margin of less than 10%, the less efficient Chinese producers will have no chance to get the necessary funding to expand and achieve the scale required to before they can drive down unit production cost.

However, it’s this abnormal time of high ASP that has open up a once in a lifetime opportunity for the Chinese to steal a march on Malaysian. The high ASP is like a rising tide that lifts all boats. As long as ASP does not come crashing down in the next 2-3 years, inefficient players can still make money and survive. This allows Chinese producers like Intco to exploit the rosy ASP picture to aggressively raise funds to expand capacity. Once the Chinese have sufficient scale, the local glove supply chain will naturally emerge there, driving down their cost further and forming a virtuous cycle (for them).

Of course, such reckless expansion could greatly harm glove pricing and is detrimental to all players, the Chinese included. But that’s how the Chinese did it in the past with quite a number of industries, with solar PV being a good example.

That is why I believe it might be in the long term interest of Malaysian glove producers to forgo share buyback and special dividend. Malaysian producers should instead plough back most of their profit to expand capacity even more aggressively and intimidate their Chinese rivals.

This is also the reason that OPEC prefers a stable but not very high oil price. OPEC would forgo short term profit rather than giving their (currently) higher cost competitors (US shale producers) to grow. Malaysian producers could learn from the OPEC lesson -- adopt a long view and flood the market with supplies instead of leaving the initiative to the Chinese!

Hi Ben. Thanks again for your excellent effort in compiling the relevant info. It’s not a surprise that the US government, regardless of under Trump or Biden, wants to recreate the strategic industries and supply chains at home. This was the reason why the Trump administration pushed TSMC to set up wafer fab in the US.

I continue to pay attention to the global supply situation. This is the annual capacity I’ve compiled earlier for the, may be previously, top 5.

Company (billion) 2020 2021 2022 CAGR (from 2020-22)
Top Glove 90 108 129 20%
Hartalega 41 44 49 9%
Kossan 32 36 43 16%
Supermax 26 36 48 36%
Sri Trang 33 38 49 22%
Total 222 262 318 20%

The expansion rate of 20% per annum is reasonable in my view. However, as discussed last week, I’m most concerned about the aggressive expansion by Intco Medical creating a global supply glut and depress ASP.

Since we last discussed Intco, the company has made yet another announcement yesterday of another 46 billion capacity for medical gloves.

https://vip.stock.finance.sina.com.cn/corp/view/vCB_AllBulletinDetail.php?stockid=300677&id=6894219

Based on my records, Intco has announced close to 284 billion new capacity in the last 12 months. If it could materialize in the next few years, the newly added capacity will be almost 30% large than the top 5 producers in 2020.

5 Feb 2021 46 billion medical gloves, Anhui province
30 Dec 2020 13 billion PVC medical, Henan province
30 Dec 2020 13 billion PVC medical, Henan province
1 Dec 2020 3 billion nitrile medical and 50 billion PVC medical, Shandong
1 Dec 2020 5 billion TPE and 5 billion CPE, Shandong
1 Dec 2020 50 billion nitriles and PVC for medical, Shandong
3 Sep 2020 40 billion medical, Hunan
24 Aug 2020 16 billion medical, Hunan
3 Jun 2020 16 billion medical, Anhui
13 Mar 2020 27 billion medical, Jiangxi

(extracted from company announcements in the link below)
https://vip.stock.finance.sina.com.cn/corp/go.php/vCB_AllBulletin/stockid/300677.phtml

I will closely monitor Intco's progress, especially its recent IPO submission in Hong Kong which, if successful, could give it more ammunition to fund its crazy expansion.

Hi Ben, thanks for your reply. Yes, I too enjoy our discussion which stimulates thoughts and further inquiries. As an investor, I always believe in the importance of adequately covering multiple points of view so that I won’t be caught by surprises later.

Just an update on Intco Medical glove production capacity. Recall earlier it’s unclear whether Intco has indeed expanded its capacity by 89.5% from 19 billion in 2019 to 36 billion in 2020. Today I’ve found the company confirmation made by the company Board Secretary or 董秘 in the social media (Note: this is also a unique Chinese feature where the Board Secretary usually functions as Investor Relations. And they interact with investors on social media)

On 14 Jan 2021 the Board Secretary replied to an investor query that by the end of 2020, the company capacity has reached 36 billion pieces, consisting of 24 billion PVC gloves and 12 billion nitrile gloves.

Source:
https://finance.sina.cn/other/relnews/dongmiqa_list.d.html?market=sz&code=300677#/home/sz300677

I've also noted on Jan 27 the Board Secretary has made another reply confirming a certain new production line being operational, adding 4.5 billion pieces of nitrile glove capacity. However, it's unclear whether the 4.5 billion is part of or on top of the 36 billion capacity.

There is an article by 21st Century Business Herald (which is like The Edge of China) reporting on the company situation.

https://m.21jingji.com/article/20210127/ac32eb5d27b1fa81537426232d9a8331.html

The article reports on Intco’s ambition to overtake Malaysian glove makers, especially in the nitrile segment. The journalist has counted the company announcements of an additional 172 billion piece capacity from Mar to Dec last year, which are mostly for medical use. It also says that Chinese analyst has estimated the capacity to reach 74.4 billion by end of 2021, and 110.4 billion by end of 2022. By then Intco could become the world's largest nitrile glove producer.

You might be right that Intco stock price might be elevated. As mentioned in the report, there is currently an intense debate on whether its aggressive capacity expansion will result in a global supply glut.

I’m not sure whether Intco could realize its ambition. But I’m pretty sure its stock price will be on a roller coaster ride from this point onwards.

By the way, Reuters also shows that the forward PE of Top Gloves is at 5.3 times versus Hartalega at 16.8 times.
https://www.reuters.com/companies/TPGC.KL
https://www.reuters.com/companies/HTHB.KL

In short, the valuation ranking is in fact Hartalega (16.8X) > Intco Medical (13.9X) > Bluesail Medical (7.8X) > Top Gloves (5.3X).

Malaysia glove companies can be dearer and cheaper than their Chinese peers at the same time. So probably the question isn’t about why Malaysian glove makers have lower valuation than Chinese. Rather the question may be why among Malaysian glove makers, Top Glove has a much lower valuation than Hartalega!

With due respect, I disagree with some of the comments here.

The question is how could a Chinese glove company enjoy a seemingly much higher valuation than the Malaysian big four, which together control 60% or more of the world market.

First, one needs to understand the peculiar nature of the mainland China stock market. Not only that a comparable company in mainland China may enjoy a higher valuation than its foreign peers, but even the share of the same mainland company could trade at a significant premium inside mainland China compared to say in Hong Kong.

Click on the link below you will find the full list of more than 100 Chinese companies that have a dual listing in the mainland (A share) and Hong Kong (H share). Every single one of these mainland company A share is sold at a premium to its H share which carries the same right and entitlement. In other words, its H share is sold at a discount outside of the mainland.

The discount could be as high as 70 to 80 percent. In other words, the mainland A share for the same company could be 3 times dearer than its Hong Kong H share! And many of them are large-cap stocks. The list includes the top insurance company China Life (62% discount), SMIC the chip maker targeted by US sanction (58% discount), and oil & gas behemoth PetroChina (51% discount).

http://www.aastocks.com/en/stocks/market/ah.aspx?sort=5&order=1&am...=3

Therefore any idea of exploiting the valuation difference by selling Intco Medical and buying Malaysian glove stocks will never fly, at least before those 100+ Chinese companies can close their own valuation gap which has persisted for years!

The next reason might be specific to Intco Medical itself. The company enjoys higher valuation partly to do the current market perception of its tremendous growth prospect. As reported in the links I share earlier, Intco has a capacity expansion plan of over 300 billion pieces. Chinese analysts claim that it could capture 30% world market 2-3 years from now. Rightly or wrongly, its higher valuation reflects the market expectation.

This can also be seen from the valuation disparity between Intco Medical versus the other Chinese glove maker Bluesail Medical. Both actually have comparable capacity right now. However, while the more aggressive Intco is sold at 13.9 times forward PE, the relatively conservative Bluesail is only sold at 7.8 times forward PE (refer data by Reuters in links below).

https://www.reuters.com/companies/300677.SZ
https://www.reuters.com/companies/002382.SZ

Therefore, even within China, comparable glove companies have different valuations. So this is not simply a matter of China has a higher (or Malaysia has a lower) valuation.

The stock market is forward-looking. The valuation reflects the market belief in future earnings growth prospects. As Intco is pursuing a very aggressive capacity expansion plan, right now the market grants a higher valuation. Of course, if it fails to achieve the growth assumed, its valuation will crash in the future.

Hi Ben, you’re welcome. It’s also my interest to understand the foreign situation.

I did some search. Another brokerage report also mentions the capacity of 36 billion by end of 2020. But the keyword here is “expect”. So I suppose the company has not made any official announcement yet.
我们预计2020年底公司总产能已达到360亿只（PVC手套产能240亿只，丁腈手套产能120亿只）

Source: https://xueqiu.com/S/SZ300677/169849357

I found another article that provides more details on the capacity expansion plan. The earlier expansion plan at Anhui and Jiangxi provinces targets 49+40+27 = 116 billion pieces capacity. It recently announced further capacity at Shandong totals 50+3+50+50 = 153 billion pieces.
Source: https://www.sohu.com/a/446766060_120047081

I’ve cross-checked some of the recent official announcements by Intco Medical. The numbers match (you may google translate for details):
http://file.finance.sina.com.cn/211.154.219.97:9494/MRGG/CNSESZ_STOCK/2020/2020-12/2020-12-01/6756908.PDF
http://file.finance.sina.com.cn/211.154.219.97:9494/MRGG/CNSESZ_STOCK/2020/2020-12/2020-12-01/6756907.PDF

Of course, there is still the question of whether the company could successfully execute such an aggressive expansion plan in the next few years. Are these just empty talks not unlike some Malaysian “vaccine players”?

Nonetheless, this company did have a track record of growing its capacity. It grew from 7-8 billion pieces in 2017 to a few times more by 2020. Funding should not be an issue as favored Chinese exporters typically enjoy cheap or even free land and easy access to credit by local governments. This company also plans for HK listing.

I would keep an eye on the Chinese players. There have been many examples of how their aggressive expansion spoilt the market, for example in steel and solar panels.

The other Chinese players beside Intco Medical are Bluesail Medical (蓝帆医疗), Hongray (石家庄鸿锐), Zhonghong Medical (中红医疗).

Ben，
The latest production capacity of Intco Medical mentioned by super_newbie is mentioned in a Chinese brokerage report. Capacity increased 89.5% annually from 19 billion in 2019 to 36 billion in 2020.
"同时2020 年公司产能大幅提升，从2019 年底190 亿只增加到2020 年底360 亿只，同比增速89.5%"

The Chinese analyst is equally bullish about future demand.

Interestingly, the Chinese analyst also expects Intco Medical to rapidly expand capacity and capture 30% world market share in 2-3 years.
"..未来2-3 年公司产能持续快速扩张，保守预计占到全球30%市场份额。"

Source:
https://xueqiu.com/S/SZ300677/169960193

Hi Ben. Thanks for your very informative reply.

Yes, I got your point. The data you’ve outlined would have provided a lot more insight. However, it might be difficult for outsiders to get such info as it’s probably commercially sensitive.

I believe JPM and you are looking into two different aspects. JPM uses the ballpark 4.7% deposit to projected FY21 revenue as their supporting evidence that the 2 year or longer order backlog does not lock in future revenue. The backlog is a good news, but not a guarantee for future (say FY22, FY23) high revenue. On that point, I tend to agree with them.

However, you’ve provided a very good input which I have never considered. If RM880 million in contract liabilities with ~600 day order backlog indeed represents the peak deposit, the excess amount of contract liabilities can be mostly attributed to spot orders. As we know spot orders enjoy much higher ASP, the excess contract liabilities amount may serve as another leading indicator to ASP trend, while ASP itself is the key determinant of margin and profit.

This will be an important metric to watch in the next quarterly results!

Ben,
Towards the end of your analysis, you brought up the issue of the percentage of deposit paid. I’ve read The Edge report. Let me first quote the relevant section of the report here:

***quote***
Investors argue that the revenue growth is secured as most glove producers claim to have two or more years of order backlog, but JP Morgan begs to differ.

"It is crucial to understand order backlog and secured revenue. Orders are merely an agreement to buy a certain volume with prices determined or undecided. Buyers can walk away from it,” it wrote, noting that secured revenue is when customers have paid fully or partially for future delivery.

"As shown in Top Glove's quarterly results, we have indeed seen a sharp spike in deposits collected, from RM60 million a year ago to the latest quarter’s RM1 billion.

"However, the deposit paid is merely 4.7% of projected revenue for the financial year ending Aug 31, 2021 (FY21). It is not even equal to a month’s worth of glove sales," said JP Morgan.
***unquote***
Source: https://www.theedgemarkets.com/article/glove-bear-jp-morgan-tells-clients-gloves-aint-needed-during-vaccinations

Rightly or wrongly, JPM has suggested that the order backlog does not translate into secured revenue since the order price is not finalized. In other words, they have suggested that while the volume is secured, the price (and therefore revenue) is still undetermined. Future revenue will drop if ASP reverts downward. The supporting evidence put forward by JPM is the relatively low amount of deposit paid by customers (RM1 billion as of last quarter or 4.7%) versus their projected revenue for FY21.

Both of us have actually discussed this point earlier. You’ve highlighted the balance sheet item “contract liabilities” of RM 1,089.404 million the Top Glove’s latest quarterly report ending 30-Nov 2020. I believe “the latest quarter’s RM1 billion” referred to by JPM points to the same number.

Given that the last quarter revenue was already RM4,759 million, and the FY21 whole year revenue may be around or exceed RM20 billion, the RM 1,089.404 million contract liabilities are indeed just about 5% of the annual projected revenue. If the deposit is spread over a period of 2 years of order backlog, the deposit percentage is even lower.

This in fact is my concern too.

It’s good to read that Top Glove has provided you with the info on the percentage deposit collected from orders. Hopefully you can get the green light from Top Glove to share the info and thereby addressing this doubt. Or better still, I think Top Glove should release a statement providing the same info to all investors based on Q&A they have with individual investors.

@kywoo, @x3mg33,

By past practice, I doubt Allianz will announce a special dividend separately just a few weeks later.

Previously the company actually announced the interim and special dividend together in a single announcement on 31 Dec 2019.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3013154

RCE Capital share price was range-bound between RM1.5 to RM1.7 for most of 2017 to 2019. This translated into a Price to Book ratio of 0.9X to 1.2X for an ROE of about 17% to 18%. I felt it was undervalued then.

Lately, the share price has gained a lot, especially after its FY21Q2 result announcement in Nov where the company has recorded YoY growth in EPS and dividend despite a difficult time.

On a trailing twelve-month basis, the ROE has trended slightly downward to 16%, as higher net profit in the numerator has been weighed down by an even higher shareholder fund of RM2.01 per share. At a closing price of RM2.75 on Dec 31, the Price to Book ratio has crept up to about 1.4X.

In my view the current price is fair, but it is no longer undervalued.

First, profit growth has slowed. The EPS growth in the past few years has correlated with the growth of its net loan book
FY Diluted EPS (sen) Net Loan Book (RM'b)
2015 9 sen RM1.07b
2016 12 sen RM1.26b
2017 24 sen RM1.41b
2018 26 sen RM1.53b
2019 28 sen RM1.60b
2020 32 sen RM1.69b

However, management has turned cautious a few quarters ago (although being conservative is good in my view), resulting in a slight decline in its net loan book to RM1.67b in FY21Q2. Profit cannot keep increasing when the size of the business stops expanding, at least for the time being.

The second reason is the profit growth in the past few quarters have also been supported by a decline in funding cost as interest rate has trended lower. But this is a one-time boost that has come to an end and cannot be repeated.

Why can’t the stock be traded at a higher valuation? A relatively small market cap (about RM 1b now) is one reason as large institutional funds cannot easily buy a sizeable holding without driving up the price (probably this is going on right now).

The other reason is despite the salary reduction scheme, RCE personal loan business is inherently risky relative to say mortgages or hire purchase loans. Looking back into history, the company once got into serious trouble in 2013-14.

I think the share price has gone up very fast lately not due to any change in fundamentals. Instead, it is due to the general market sentiment where investors/ speculators are chasing yields. RCE Capital starts to attract attention as not many companies could register increasing profit under the current economic situation. When analysts start to adjust TPs upward and some investment “gurus” urging followers to buy, its share price has been chased up.

Personally, I’ve stopped topping the share. But it’s probably too early to sell. So I’m just holding on, contented with collecting dividends at a present yield of above 4%.

TG is a Mercedes. The challenge is to determine whether it's currently sold at the price of a Kancil, a Mercedes or a Ferrari.

A common valuation mistake I read here is to assume the TG's record quarterly profit of RM2.4 billion, which is a spectacular 20-time YoY increase, would automatically translate into a higher share price.

Record profit or not, we first need to work out how much TG is worth.

Most will probably agree that TG will make higher and higher profits in the coming few quarters. The controversy over workers’ treatment will probably have only a minimal impact on the short-term profit outlook.

TG management has also guided that ASP for 2QFY21 will be 30% higher than 1Q. So despite the lower shipment due to factory closure, it’s still reasonable to assume 2Q EPS to be 20% higher QoQ.

I would even assume that EPS can increase 20% QoQ for the remaining 3 quarters of FY21, which means coming quarters EPS would be 36, 43 and 51 cents. But note my assumption is more bullish as it means FY21 full-year net profit is at RM12.9 billion. This is way higher than the analyst consensus at RM8.6 billion.

The intrinsic value of TG share is made up of future cashflows. It is RM0.36/1.02 + RM0.43/1.04 + RM0.51/1.06 + future cashflows, or RM1.25 + cashflows from FY22 and beyond (assume 8% discount rate).

TG closing price today is RM6.30. In other words, only RM1.25 or about 20% of today's share price is contributed by remaining FY21 profits. The remaining 80% has to come from future years.

The key is for how long can TG book record profit before it starts to decline. The law of economics dictates that ever-increasing profit is impossible. We also should not forget that only a year ago TG quarterly profit is in the range of 2, 3 or 4 cents.

If high profit can sustain for several more years before a gradual decline, then at RM6.30 today the share is indeed a bargain. Believers should be happy instead of cursing others for selling low. You should be happy as this is your opportunity to collect more and patiently wait for a few more years to harvest the investment. Why curse? Unless you have no confidence in the company too, and your intention is to pass the share on at a higher price? Profit for you but loss for the next person?!

However, if you think the high profit cannot sustain beyond the near term, instead of cursing you should plan for exit soon.

Either way, keep your cool. Being emotional is bad for the wallet.

Good to hear that the Sinopharm vaccine is effective. So are the good news flowing from other vaccines, Chinese or not.

This is one more step towards recovery. IOIPG can look forward to increased footfalls in its malls and recovery of its hotel occupancy next year. So are Aeon and various other retail and hospitality REITs.

But IOIPG as a direct vaccine play?

Even if the rumor turns out to be true, please consider these before jumping into the so-called vaccine trade:

(1)
Khairy said the government deals directly with Pfizer and COVAX, “without the use of any middleman or third party”

https://www.theedgemarkets.com/article/khairy-govts-covid19-vaccine-deal-only-pfizer-and-covax-others-are-private-arrangements

(2)
Granted Khairy doesn’t rule out the private deals, provided they can get Malaysian regulators’ approvals.

A few Chinese firms are at the advanced stage, including the much-cited Sinopharm, which is an established pharmaceutical company in China.

The only problem is rumor mill has linked Sinopharm to multiple Malaysian companies, where IOIPG is just one of them.

Yes, property firm IOIPG with an RM2 billion revenue seems to be a more reliable vaccine partner than say Kanger International that sells bamboo products (2019 revenue RM65 million).

But what can IOIPG bring to the table as a vaccine partner?

Pharmaceutical bottling expertise? That’s the domain of Duopharma and Pharmaniaga.
https://www.bernama.com/en/general/news_covid-19.php?id=1860534

Cold chain logistics? That’s the domain of Tasco, Tiong Nam, and perhaps Apex Health.
https://www.theedgemarkets.com/article/tasco-stock-rides-covid19-vaccine-wave

Frontline expertise to provide vaccine services? But IOIPG does not own hospitals and nurses as IHH and KPJ do.

The only connection I have in mind is for IOIPG to convert some empty lots in its mall into vaccination centers!

(3)
Besides, is the vaccine business profitable?

I suspect it’s going to be a “national service” in China. Look at Sinopharm share price. YTD it has dropped 33% from $28.40 to $19.40

https://finance.yahoo.com/quote/1099.HK?p=1099.HK&.tsrc=fin-srch

But could Malaysia be different? Well, even those supposed Malaysian beneficiaries I mentioned above have cautioned that the financial benefit is limited

(4)
What if IOIPG is so clever that it finds a way to makes lots of money from the speculated vaccine deal?

So clever that it can justify the share price hike from RM0.85 a month ago to the recent high of RM1.75?

Multiply by its share base of 5,506 million, this is a sum of 5,506m x (RM1.75 – RM0.85) = RM,4,955 million.

Let's do the maths. By now the Malaysian government has secured supplies to cover at least 30% population. We can expect government procurement to expand further. That leaves the speculated private vaccine with a much smaller pool of takers who is willing to fork out their own money for vaccination.

Say it is 10% of the Malaysian population, i.e. the half of the T20 population that does not immediately qualify for government vaccine. 10% population is about 3.3 million.

Now, to justify IOIPG's share price appreciation of almost RM5 billion, it needs to make at least the following profit per person = RM4,955 million/ 3.3 million population = about RM1,500 per person!

Is this possible?

May be. But I can also hear politicians clamoring for actions against the profiteer, whose boss happens to be the husband of a DAP ex-minister!

(5)
Well, you may still argue it doesn’t matter even if this is just a rumor, even a very poor rumor, as long as you can sell your share at a higher price to the next greater fool.

Then good luck to you.

Remember the syndicate would like more of you to think in this way.

Are there any material developments that justify the current price at RM1.7?

If you have an interest in the stock, it is better for you to read the Board's reply yourself. Decide for yourself rather than relying on other's interpretation.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3111913

Different readers may interpret it differently. However, I will just read the reply at its face value. I'm particularly drawn to this sentence in Point 2:

"IOIPG has not to its knowledge embarked upon any corporate development which we can say with reasonable conviction may account for the trading activity under reference."

I just disposed off all shares. I accumulated this year because I thought the company is undervalued. I plan to hold for several years until the property market recovers. The recent good quarterly result was a nice surprise. But I never thought the price of such a multi-billion cap stock could double in just a few weeks.

Good luck to anyone who continues to hold on. Will revisit this company in the future when valuation is more appealing.

Let's recap BAT results in the past 16 quarters:

Quarter EPS DPS
9/30/2020 22.3 21
6/30/2020 19.1 18
3/31/2020 17.8 17
12/31/2019 34.2 33
9/30/2019 29.1 29
6/30/2019 26.7 26
3/31/2019 31.0 30
12/31/2018 40.8 47
9/30/2018 51.1 40
6/30/2018 38.6 35
3/31/2018 33.7 33
12/31/2017 28.4 43
9/30/2017 51.0 43
6/30/2017 51.6 43
3/31/2017 41.6 40
12/31/2016 101.3 77

Trailing 12-month EPS declined 62% from 245.5 sen to 93.4 sen. DPS declined 56% from 203 sen to 89 sen.

The share price declined 65% from RM37.86 three years ago (4 Dec 2017) to RM13.38 today.

BAT has been trading at a low price earlier for a very good reason.

Now the market sentiment has reversed after the government has vowed to raise revenue by cracking down on illicit cigarettes.

However, a share price recovery is only sustainable if EPS keeps on increasing in the coming quarters. It happened in 2018 when the share price rose 65% from RM23 to RM38, backed up by 3 consecutive quarters of EPS increase. But when EPS growth faltered after 2018, the share price collapsed again.

Whoever believes that BAT share price could grow back to RM30+ (last reached in 2018), let alone the all-time high of RM70+ (reached in 2014), needs to have a plausible story on how BAT EPS could keep on growing quarter after quarter.

Why illicit tobacco market share could be successfully rolled back this time whereas the effort failed in 2018?

Why is this time different?

Insider info may or may not be true.

Even if the info is true, the timing could be wrong. Good news may coincide with a market crash.

Even if both info and timing are right, it could still be difficult to judge how much of the good news has already been priced in. We often see a good quarterly result being followed by sell down.

Only after reading fairplay's comment that I realize that Board Chairman Datuk Ng Peng Hay has resigned. Datuk Ng's resignation was announced on Nov 24, merely 4 days before the coming AGM. No reason was cited.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3107685

To recap, this is the third board member resignations this year. The first was announced on Feb 24 this year by Madam Leong So Seh, citing personal and health issues. In fact, Mdm Leong was only re-elected just 5 months earlier in Sep 2019.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3026283

The second resignation was by Datin Siah Li Mei on Aug 3 this year, citing health issue. Datin Siah only joined the board in July 2019.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3074128

Could it be a coincidence? I note the dual listing project expenses of RM6.68 million first came to light in the quarterly report of Feb 29, 2020, in a one-line mention on page 14.

https://www.bursamalaysia.com/market_information/announcements/company_announcement/announcement_details?ann_id=3057502

@cnman53, from the self-interest of board and management perspective, I see no reason for iCap to seek media publicity unless they want to raise new capital (won't fly), or defend against another attempt by CoL to unseat the board.

Otherwise, the less publicity the better. Lack of outsiders' interest will not affect the management fee or board remuneration.

How about writing an email to the Minority Shareholders Watch Group (MSWG), highlighting questionable practices, back up with evidences?

Now we know why the CCM share price has moved up from RM1.23 in Oct2 to RM2.79 today. It was just announced that Batu Kawan would buy PNB's 56% stake of CCM at RM3.10. This would trigger a mandatory general offer.

https://www.thestar.com.my/business/business-news/2020/11/17/batu-kawa...

What is interesting is that the CEO of CCM, Encik Mukri bin Harun, who used to own zero shares in his company, announced the intention to deal in CCM shares on 3 Nov.

https://www.bursamalaysia.com/market_information/announcements/company...

The CEO then bought 120,00 shares on Nov 9 and 10 at an average price of RM2.28. What a coincidence!

https://www.bursamalaysia.com/market_information/announcements/company...

Is the CEO going to cash out at RM3.10, which would have netted him a 36% profit or close to RM100k?

Perhaps Encik Mukri bin Harun has merely expressed his strong confidence in the company's future under his stewardship? In that case, he should forgo the MGO. He should hold his shares for the long term, casting a vote of confidence in his own leadership!

You can find info on unsold inventory in the Annual Report. It's reported in the note for Inventories, being part of the "completed development properties"