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There’s been some selldown on the gloves, underperforming the KLCI. It could be any one or a combination of these three factors.
1. *Rumours of a windfall tax*
- Its been circulating for awhile now but the recent economic recovery plan on 5th Jun did not unveil any
- Channel check by a corporate with his gov sources says that there is no such proposal in the pipeline so far
- At a +1% marginal windfall tax above the existing corporate tax rate, the government could generate up to RM60m from the Big 3. It could translate to RM100-120m for the whole rubber glove industry assuming if it has similar profitability levels as the Big 3
- Based on UOB Economics, Malaysia’s fiscal deficit is expected to range between 5.8-6.0% of GDP. This translates to close to RM90b, at the upper end of the range.
2. *Allegations of exploitation of foreign labour*
- The british tabloid, Daily Mail alleges Top Glove is exploiting their foreign labour
- Fears of a possible ripple to industry wide demand
- There has been multiple allegations of labour violations against Top Glove in the past (not exclusive). Previous concerns such as confiscated passports, owing of agent fees and overtime were all addressed. Human Resources Minister M. Kulasegaran then, shot down the tabloid hyped allegations.
- These fresh allegations surround overtime and tight living conditions.
- 12-hour shifts are in compliance to local labour laws of a maximum of 4-hours overtime a day. In fact, foreign workers willingly work overtime to generate more pay.
- In terms of tight living conditions, it was previously found in compliance by government officials and regular audit by external auditors.
3. *China’s state run Sinopharm reports positive clinical data for COVID-19 vaccine*
- The touted vaccine triggers a strong neutralizing antibody response in a phase 1/2 study
- It is said to have commanded a 100% antibody response rate
- Sinopharm will still have to conduct a Phase 3 efficacy trial
- It is still not clear whether the neutralizing antibodies are enough to protect a person from COVID-19
*Our take*
The rubber glove industry has seen the broad industry surge to record highs. Therefore, fears sparked by misconceived or unsubstantiated negative newsflow triggers profit taking or a selldown as we have witnessed today.
However, we are convinced it is merely a speed bump or a healthy consolidation to record earnings the in the subsequent quarters ahead.
*Maintain OVERWEIGHT* It is premised on: a) multi-fold valuation gains have yet to fully factor in the impending earnings surge over the quarters ahead; b) sustained glove demand over 2021; and c) scarcity of safe haven earnings growth (2-year earnings CAGR of 123% in 2019-21) as most other sectors face multitude of headwinds. Our top pick for the sector is Top Glove. We also like Supermax as a major beneficiary of the glove ASP surge.
