May 2020 was kind of a D-Day for the glove making sector. The KLSE (Kuala Lumpur Stock Exchange), where the world's largest producers congregate, had one of those light bulb moments where investors pulled into all the glove makers. The run was exceptional as you can see in Figure 1.
Figure 1. Share price charts for the biggest four glove manufacturers in the KLSE (source: Investing.com).
The glove sector has been doing exceptionally well in the last decade but this May, it took a turn for the stratosphere. If anyone ever doubts the seriousness of COVID-19, think again.
Speaking to punters from Malaysia, the run was short of spectacular. Just so that readers get an appreciation of the run, these companies are not your penny stocks, they are companies with a market capitalisation in the billions. Figure 3, taken from a research note by CGSCIMB on July 15, gives a good summary of the nature of these companies.
As you can see from the charts, those investors were making up to 10 baggers depending on when you got on the train. Supermax Corporation Berhad (SUPM) was the best performer with punters getting in at RM1-RM2 and it's now RM17.70 on Friday (July 17). This is also after the sector correcting up to 10%. The price is now higher than before the correction.
Figure 3. Sector Comparison of the major glove manufacturers in KLSE and SGX (Singapore Stock Exchange) dated July 15, 2020 (source: CGSCIMB).
When you compare that to the previous Research Note by the same company on June 23, 2020, the number has changed significantly. Remember that we are talking about a one-month difference. Hartalega Holdings added USD4B to its market capitalisation, and Top Glove Corporation has added nearly USD5B to its value.
Figure 4. Sector Comparison of the major glove manufacturers in KLSE and SGX (Singapore Stock Exchange) dated June 23, 2020 (source: CGSCIMB).
Where we think demand is coming from?
It is obvious that COVID-19 is a major cause of this run, aided by the global uncertainty of when this will come to an end. There is a school of thought that this will become a virus that the world has to live with for a long time. If this is the case, Figure 5 below will not end the way it is drawn. Year-on-year growth of 10% for the next three years may actually be severely underestimated.
Figure 5. Year on Year growth of global glove demand (source: CGSCIMB).
As you can see in Figure 5, the previous virus incidents created spikes but they were followed with a decline in growth however, the general curve is one that is rising. When you look at what happened in the past with SARS, MERS, H1N1 and EBOLA, the world did not stop. The world did not stop in unison with any veracity.
The next three-year projection in Figure 5 is theoretical in nature hence if you look at what the virus is doing around the world, one would have to re-evaluate the potential growth of these companies.
Robustness of the sector
In the week beginning July 13, 2020, the heavyweights of the glove industry in Malaysia took a hiding of 5% to 8%. A total of USD2B was wiped out collectively. This would be a big number except that these giants of glove-making have made 100s of percentage growth and significantly more billions in growth. Companies like Supermax have not only recovered but also increased their share price from the previous high.
Whatever the sceptics may want to say, investors are voting with their money and supporting these companies every discount they get. Even Top Glove, who had a detention notice from the US Customs at the end of the week, could do no wrong. Time will tell how Top Glove gets over this bump on the road but what is wrong for Top Glove will only mean a supply shortage. And a shortage in supply will be great news for the rest of the sector.
For those that understand the concept of inelastic demand, this sector is the king of that economic term. Buyers of gloves are telling me that they are paying 50% deposits and every new order is being met with a new higher price. Who would not want a business like this?
Secret component of the glove sector
Nitrile gloves which are the higher value of the gloves are made from synthetic materials. No need for rubber trees. The main component is Nitrile Butadiene Rubber (NBR). NBR is a copolymer - a polymer made from several species of monomer. NBR is made by a process of copolymerisation which binds butadiene and acrylonitrile.
Acrylonitrile enhances the chemical resistance, while butadiene creates flexibility and tear resistance of nitrile gloves.
Looking at Figure 6, I believe that the glove makers are enjoying a healthy margin. I read an article that the price of NBR was supposed to go up in 2019. As you can see, that was not the case and the combination of a steep decline in raw material cost and a rising selling price is a recipe for many happy investors.
The greatest asset these nitrile glove manufacturers have is that their raw materials are synthetic. Hence, that means they are grown in a "lab" and there is little motivation to be costly, at this stage anyway.
Figure 6. Raw material latex and NBR prices (source: Maybank IB Research).
Is this a COVID-19 boom story?
There is no doubt that the onset of COVID-19 has been a catalyst. However, the 'rubber gloves' industry has been doing well for a long time. Many investors forget that the use of gloves has been increasing and not just in the medical sector.
The increasing number of industries using gloves have been increasing as well. It is also noted that the use of PPE (Personal Protective Equipment) has been increasing as well, especially in the use of masks.
What is interesting in all this rush for better hygiene is that the average person in the ASX (Australian Stock Exchange) does not even know which company is getting rewarded for the market demand. Most investors don't even know how to get a part of this journey.
When you look at the share price charts in Figure 1, there is no doubt that the magnitude of COVID-19 is a major catalyst for the demand. What punters will need to decide is how long is this 'New World' going to be finished. Will this be a permanent New World Order? If so, will the demand for PPEs such as gloves be ongoing?
For Malaysian investors, the glove-making industry is well known. Malaysian companies have been in this industry for a very long time.
My understanding of this industry, by comparison, is still very fresh. However, looking at numerous research reports and talking to industry experts over the last few months have definitely opened my eyes and ears to what makes this sector click.
When I looked over the charts in Figure 1, I was amazed and disturbed that there has been so much growth in such a short time. The word 'Bubble' comes to mind.
This is even more enhanced when I looked at the charts closer at the previous bullish trends over the last eight years. Figure 7 and Figure 8 show this journey and you can see the ups and downs over time and then the high lift in May this year. This period is not related to SARS nor H1N1.
Figure 7. The Top Glove Corporation Berhad share price journey since 2012.
The sharp drop looks like it was dividend paid. The Financial Report dated March 2014 seems to indicate that its dividend paid. If this geologist has read the report correctly, this makes for interesting thoughts.
Figure 8. Hartalega Holdings Berhad share price journey since 2012.
The two charts showing a run and paying dividends has put my fears aside about the 'Bubble'. This was all during so-called 'normal' trading situations. The COVID situation has stopped the world and this is by no means a 'normal' situation.
Hence the large rise could be argued to be 'normal'. What will power this further will be dependent on how long this 'New World Order' takes to settle. In my opinion, I believe that the world we live in from here onwards will look nothing like what was pre-COVID.
COVID-19 and the potential next COVID-19 will mean that the expectancy of hygiene will be reflected in the increase and sustained use of basic PPE. We are not going to walk around in 'sperm suits' but I think the wider use and the wide common availability of masks and gloves will be here to stay.
As for glove manufacturers, the continued money-making habits are not going away anytime soon.