Glove Companies – Malaysia - CGS-CIMB Research 2020-11-04: Concerns Over Potential Windfall Tax


Glove Companies – Malaysia - Concerns Over Potential Windfall Tax

  • Heading into Malaysian government's Budget 2021, there are growing concerns of a potential windfall tax on glove companies.
  • In our view, implementation of a windfall tax of any sort will have negative implications on the sector, particularly its long-term prospects.
  • Maintain Overweight call for now due to its strong earnings growth prospects.

Concerns that glove sector could be hit by some sort of windfall tax

  • With the Malaysian government set to table Budget 2021 on 6 Nov, there are growing concerns that the government would implement some sort of windfall tax on glove companies to shore up its coffers amid the ongoing economic uncertainties. This is in view of the recent ‘supernormal’ profits enjoyed by the glove sector, given the surge in both demand and average selling prices of gloves due to the COVID-19 pandemic.

Execution of windfall tax difficult, expecting one-off contribution

  • In our view, implementation of a windfall tax on the glove sector will be difficult to execute given the lack of standardised pricing for gloves due to the variety in types, specifications and product grades as well as intended target markets.
  • We gather that several smaller glove makers had been posting minimal profits or consistently incurring losses prior to COVID-19. Should a ‘windfall tax’ or of any sort on the glove sector materialise, we believe it would likely be a one-off collection/ payment to the government

Sensitivity analysis based on 5% increase in tax rate

  • For illustration purposes, we conducted a sensitivity analysis on the potential impact of a higher corporate tax rate. We found that a 5% rise in corporate tax rate could cut the sector’s CY20F net profit by 6.5% and allow the government to raise extra RM593m in taxes (CY20F). See the detailed numbers in PDF report attached below.
  • Based on our estimates, glove companies we cover are already slated to pay total corporate income tax of RM2.8bn/RM4.7bn for CY20/21F (+481%/+68.9% y-o-y), based on our forecasts.

Glove makers may move their expansion overseas

  • If a windfall tax materialises, we believe Malaysian glove makers may opt to expand overseas. This is particularly in countries which:
    1. offer better incentives (tax, loan interest subsidy etc.), and
    2. sufficient labour workforce.
  • This could result in potential opportunity loss for the government from the lower future investment by the glove players and its spillover benefit (recurring tax collections, job creation etc). We estimate that the four glove makers under our coverage - Top Glove (SGX:BVA), Hartelega, Supermax and Kossan will invest capex of up to RM15bn locally in the next 5 years.

Retain Overweight, pending updates on this matter

  • We make no changes to our Overweight call on the sector pending the Budget announcement. We continue to like the sector, given the defensive nature of its earnings and that it is a key beneficiary of robust global glove demand owing to COVID-19.
  • Downside risks: implementation of windfall tax on glove companies and sharp decline in ASPs.

Walter AW CGS-CIMB Research | https://www.cgs-cimb.com 2020-11-04
SGX Stock Analyst Report ADD MAINTAIN ADD 10.000 SAME 10.000