Wednesday, June 03, 2020

Glove - Volatility & Traders' Paradise


What a morning session. Limit down for a few glove and related counters, but the rebound was swift as well. A traders' paradise - you want volatility when you are a trader. 

The brokers already did very well, some did better by giving notice of reduction in margin prices for glove stocks, and would allow clients till end of June to regularise them. Kudos, gentle, firm and ample time. Brokers who just whack reduced limits immediately are assholes. Knowing full well the repercussions, it was a stupid and heartless thing to do.

SC/Bursa needed to tighten this margin capping process, one should not be able to do it willy-nilly with one day's notice. Maybe a two week warning will be better. One may suspect that some brokers may be doing that to "limit losses/max gains" on the related covered warrants issued by the same IBs.



I have avoided writing about glove makers as no point to spoil a party when it doesn't benefit me. Even though I wasn't invited to the party doesn't mean you should call the police on them. Let them be la.

What about over-valuation issues? Well I have been looking at results and much of the froth is justifiable. As the stars align for the glove makers, it is understandable that they will have super premium valuations in a field of destruction.




















Look at the Supermax quarterly, their ability to improve margins just for the 1Q2020 showed that they had pricing power even with minor jumps in revenue.

Hence even at 70-80-90x earnings, a 100% jump would halve that. Then ask yourself if that 100% jump can further improve? Or can that 100% jump be the new normal? Thats up in the air. The balloon would certainly deflate ONCE a vaccine has been discovered. You will have to wait for the next "pandemic" for these lofty valuations to be matched.

Nonetheless, I think there is a new normal now for glove makers. Almost all countries will now start to stock up a lot more of these related products even after a vaccine is discovered.

I would also advise that the need to stick to the top 3 players and not the smaller ones because at the end of the day, pricing power and pricing leadership will rest with the big boys. I do not have to mention the lack of economies of scale for the smaller players.

If you wish to trade or buy, stick to Hartalega, Top Glove and Supermax. The rest will just be wannabes and will highly volatile.

The leaders' advantages, as elucidated by Supermax at its quarterly announcement:


















The near limit downs today was healthy and I expect the parade to continue over the next few days. Maybank Kim Eng did a zooming presentation. If you were to look at the 2020 PER, most of the glove makers are not terribly overvalued with the exception of Hartalega, which might explain why Harta did not recover that well today. The rest seems to be reasonable still. Upside intact.



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