Trying to Make Sense Bursa Investments

Author: Ben Tan   |   Latest post: Sun, 7 Mar 2021, 4:53 PM


Biden Presidency Spells Good Times for Malaysian Gloves

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Joe Biden was officially inaugurated as the 46th President of the United States (POTUS). This is extremely good news as far as getting the COVID pandemic in the US under control is concerned.
One of the very first actions the new president took was issue a 200-page National Strategy for the COVID-19 Response and Pandemic Preparedness document. You can find the full text here. That document outlines 7 main goals, and one of them is of particular interest to me, and it should be of particular interest to Malaysia as a whole. Goal Four's focus is to "immediately expand emergency relief and exercise the Defense Production Act." I don't claim to be an expert in the Defense Production Act (DPA) and its provisions, but in broader terms it gives authority to the POTUS and any directly authorized government agencies to direct production and supply chains in the country in a manner seen most suitable in emergency situations. For instance, last year, in the beginning of the pandemic, President Trump was about to use the Act to direct car manufacturers to produce medical ventilators, before General Motors stepped up and volunteered to do it. In this particular case, the Act will be used to "force" manufacturers in the US to start producing pandemic-related supplies, including anything from simple things such as sample collection swabs to laboratory analysis machines for PCR tests. In total there are 12 categories of items outlined, one of which is nitrile gloves (page 69-70 of the report).
As we have previously discussed, the US practically doesn't have its own national production of nitrile gloves, and it sources the vast majority of the country's supplies from Malaysia. Thus, the actual plan of the Biden administration becomes clearer in the outlines of the corresponding "Executive Order on a Sustainable Public Health Supply Chain." You can find the full text of the Executive Order here.
The US will go through the following phases in the shortest period of time:
- Assess the inventory of PPE on hand;
- Work out the pricing for each item on the list, prioritizing the most urgent ones;
- Design a long-term strategy for sustainable supplies, beyond COVID, especially in regards with foreign suppliers;
- Build up the strategic national stockpile.
Note that all of these orders are accompanied by words such as "immediately" and "promptly". Thus, we can expect that work on all of that has already started.
I have mentioned a few times before that the PPE in the shortest supply in the US, is nitrile gloves (see for instance here). Thus, undoubtedly one of the very first things that will be reported during the inventory assessment would be the problem with procuring nitrile gloves. Two companies stand to potentially benefit the most - Top Glove and Supermax.
In July, the US imposed bans on imports from two subsidiaries of Top Glove over alleged forced labor practices. According to the company, the outlined issues have been resolved and they are currently waiting for an independent international consultant's review before the ban gets lifted. Now it is highly likely that the process will be streamlined even further. Three notes on Top Glove you should pay attention to:
- The results for 1QFY21 (ended November 2020) were achieved on flat sales volume q-o-q, and even more amazingly - on a drop of 2% in sales in North America y-o-y (i.e. lower sales in COVID times than in pre-COVID times);
- The delivery time for nitrile gloves orders has decreased from 510 days in November 2020 to 300 days in January 2021; this has happened not because of order cancelations, but because of expanded capacity - both organically, and through conversion of production lines;
- The company keeps 30% of its production for spot orders at present - by far the largest percentage among the Big 4 (~5-10% of capacity kept for spot orders by the rest). Spot order ASPs for nitrile gloves are about twice higher than for regular orders.
See the company's Investor Presentation from 19 January 2021 for reference, here.
In December, Supermax officially incorporated a subsidiary in the United States with Plant #18 being built on US soil in order to produce "Made in USA" nitrile gloves (see here). Supermax already commands incredibly high profit margins (60% PAT, 77.6% PBT for the last quarter), so such a move can only strenghten its position long-term. The total glove production capacity of the company is expected to almost double by 2022 to 48.42 billion pieces per year, more than 2/3rds of which is concentrated in nitrile glove production. Thus, the company will continue producing the highest profit margin product, and it will continue selling it to clients ready to pay top dollar.
Important disclaimer: Any views expressed are for informational and discussion purposes only. None of this information is intended as, and must not be understood as, a source of advice. It is imperative that you always do your own research and that you make any decisions based on your personal situation and your own personal understanding.
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  6 people like this.
AdCool These are what I think too. Top Glove would be the immediate and promptly beneficiaries of this new policy from Biden administration. Why I said so? The ban on Top Glove since July 2020 would mean that Top Glove warehouse in US is currently full of gloves which have been stocked up since then as logistic arrangement and shipping would take weeks to reach US soils. Hence, even after ban, there would be shipment that are OTW as well as shipment that already been shipped out from Top Glove factories.

Estimating that with 2% sales drop per quarter to North America and with a 2 weeks turnover of inventory, the current warehouses in US could have roughly 515 millions of gloves. This is provided that Top Gloves no longer stock up the inventory in US after mid August due to the ban.
23/01/2021 5:21 PM
Ben Tan AdCool, thank you for your comment.

Just a couple of quick notes - the 2% sales drop is year-on-year. In other words, it's the difference between 1QFY20 (September-November 2019! long before COVID) and 1QFY21 (September-November 2020). Bear in mind that this is for the entire North America region, which also includes Canada (a large per-capita glove user) and Mexico. The drop quarter-on-quarter between 4QFY20 and 1QFY21 must be substantially bigger than 2%. Thus, the US warehouse stock may actually be quite a lot larger than 500 million pieces.
23/01/2021 5:29 PM
AdCool Just a note that I am using a 85.5 billion production capacity per year. So per quarter is 21.375 billion. Losing a 2% due to North America, that would be 427.5 millions of gloves. With inventory turnover of 2 weeks, that would be a margin of inventory buffer of 427.5/12weeks (3 months) x 2 weeks = 71.25 million. Hence, conservatively, there could be 427.5 mil + 71.25 mil = 498.75 mil of gloves being withhold in US. Plus minus margin of error of 3% that would be roughly 513.7 mil being the upside. Of course there could be factors on warehouses storage limit or there could be more shipment after mid August or Top Glove could have stopped all the shipment immediately after the ban.
23/01/2021 5:31 PM
AdCool Ben Tan, i only give a rough calculation based on the latest production capacity before the 91 billion being achieved in Dec 2020, hence 85.5 bil as the base calculation.
23/01/2021 5:36 PM
Ben Tan Based on my rough calculation, if they have a 2-week inventory ready, they should have about 690 million pieces in the US (assuming 25% of sales/deliveries went to the US pre-ban). That's based on the 85.5 billion pieces yearly production reported in August, and 85% utilization rate.

If they sell them at $150/1,000 pieces spot price, that's a little over RM40,000,000 extra revenue. Not bad :)
23/01/2021 5:50 PM
AdCool Should the DPA is being executed, it would override the ban and US would distribute all these readily available gloves in US soil.
23/01/2021 5:51 PM
Ben Tan Let's hope so!
23/01/2021 5:52 PM
pjseow Ben and Adcool, out of the 36 factories, there are 2 in Thailand , one in China and one in Vietnam. These 4 factories are not banned by US. Topglove can still ship gloves from these 4 factories to US. These 4 factories represent 11 % of Topglove production volume assuming all factories has equal volume.This is the reason why Topglove revenue is not much affected by the ban by US on gloves produced by the Malaysian 32 factories
23/01/2021 6:24 PM
Ben Tan pjseow, thank you for your comment.

Indeed not the full capacity of Top Glove is affected by the ban, and this is the reason why the fall in sales is not sharper.
23/01/2021 6:29 PM
Targeted Nice one.....
23/01/2021 6:34 PM
AdCool The plants in China and Vietnam are producing Vinyl gloves. Thailand plants are producing Latex gloves. Anyway the plan is to build 1 more Nitrile glove plants in Thailand by 1st Quarter 2021.
23/01/2021 6:50 PM
calvin69 I would not be surprised to see the US ban lifted on Top Glove within the next couple of months... Biden does not want a shortage in PPE to hinder America's Covid fight
25/01/2021 10:04 AM
Ben Tan Targeted, AdCool, calvin69, thank you for your comments once again.

AdCool, that is a very valid point. Unfortunately I haven't seen Top Glove break down their revenue by region. That would allow us to understand better the financial impact of the ban.

calvin69, my expectation is that this will be one of the very first things that will happen once Biden gets around to dealing with the PPE situation.
25/01/2021 10:14 AM
calvin69 Agreed, and Top Glove has now resolved the worker accomodation issues, so should be reason for the CBP to remove the ban
25/01/2021 10:33 AM

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