Rubber Gloves - CGS-CIMB Research 2020-08-18: More Smoke Than Fire

TOP GLOVE CORPORATION BHD (SGX:BVA)

Rubber Gloves - More Smoke Than Fire

Glovemakers’ share prices have recently retraced due to concerns of a COVID-19 vaccine and a windfall tax being imposed on glove companies.
We understand that further testing of Russia’s COVID-19 vaccine is vital. There is also no official statement on a potential windfall tax on glove makers.
We stay sector Overweight, with Top Glove (SGX:BVA) and Supermax as our top picks.

Share prices of rubber glove companies under our coverage have declined from 20- 30% at a week low (Top Glove Share Price: -21%; Hartalega: -24%; Kossan Rubber Industries: -29%; Supermax Corp: -30%). In our view, this was mainly triggered by:
1. news on the world’s first vaccine that was developed in Russia has been approved by the Russia’s regulator, and
2. market speculation of a windfall tax being imposed on glove makers.

Last week, Russian President Vladimir Putin announced that Russia has granted regulatory approval to a COVID-19 vaccine developed locally after less than two months of human testing. According to media reports, the Russian vaccine has yet to undergo large scale Phase 3 clinical trials while experts are unable to thoroughly analyse data of clinical trials performed by the Russian government due to the lack of detail provided. In addition, the Association of Clinical Trials Organisations (ACTO) has called on Russia’s Ministry of Health to delay the registration of the vaccine until phase 3 studies are completed.
In our view, the development of a COVID-19 vaccine may take longer than expected, with mass production unlikely to commence in the next 3-6 months. This is given the complexity of COVID-19 as there are different strains. Moreover, no COVID-19 vaccine has been proven safe and effective thus far.

Due to the expectations of supernormal profits by rubber glove companies on the back of the spike in glove demand from COVID-19, there has been market speculation on potential implementation of windfall tax on glove makers by the Malaysian government. This is mainly to boost government coffers given the recent economic downturn, in our view.
Based on our channel checks with Malaysian Rubber Glove Manufacturers Association (MARGMA), there have been no conversations of any sort with the government on this matter. On the contrary, MARGMA believes that imposing a windfall tax on glove companies could spur these companies to expand overseas, especially in countries with better tax incentives and sufficient workforce. Hence, the Malaysian government may potentially miss out on more tax payments from these expansions in the long run.

We gather that glove makers’ order book visibility remains strong until 1HCY21F and average selling prices (ASPs) have continued to increase in the near term. We understand that most of the glove makers are still increasing their ASPs on a monthly basis due to favourable demand-supply dynamics. Therefore, we believe the increased demand and ASP hikes should lead to sequentially stronger results for all the glove makers.

We stay sector Overweight. In our view, the current retracement in share prices of glove stocks offers attractive investment opportunities as glove manufacturers are key beneficiaries of strong global glove demand stemming from the COVID-19 pandemic.
Our sector top picks are Top Glove (SGX:BVA) and Supermax. We also have ADDs on Hartalega and Kossan Rubber.
See also recent reports on glove makers:

Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2020-08-18

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