Monday, 8 June 2020


From the Editor-In-Chief of the Pelham Blue Fund

It's a bubble. A feeding frenzy. An impending catastrophe.

In half-open coffeeshops all over the country, it's what everybody's talking about. A seemingly never-ending love for gloves, and any stock with a whiff of healthcare in them.

Suddenly, everybody's opening trading accounts. Everyone wants to try the trading gig, because easy money is here, and if we were to gauge the general sentiment, easy money is here to stay.

I kept hearing all sorts of anecdotal stories. A man throws his life savings into buying SUPERMX warrants. A banker gets distracted all the time during her meetings because she had to check the steady ticks of TOPGLOV stock in her mobile trading app.

And my personal favorite : a WFH friend in the oil and gas industry who goes on Zoom calls for a high-powered business meeting, with his four trading monitors just out of sight on his live video feed.

He has a soft spot for a low-tier glovemaker trading at 100 times earnings. I have a soft spot for calling him a dumbass.

Still, by luck or skill, this historic rally has minted some crazy rich Asians. One estimate pegs the total wealth creation caused by the increase in glove stocks at RM70 billion.

And that's just from the stocks. Some also bought the warrants, and hit jackpot.
Source : NagaWarrants Telegram

I have my own story. I wouldn't exactly say I came of age as a trader in this MCO/gloves market mania, but I have made enough from the rally to talk about this subject with some measure of conviction.

But funnily enough, I don't have much of a technicals viewpoint to offer here because the fundamentals perspective is far more interesting. I believe this hasn't been talked about enough, and it's time that we really pay attention to the numbers. 

So for a moment, let's cease the hyperbole. I'll try to cut through the bullshit for you. 

But why should you listen to me? Because I'll be honest : every day I vacillate between two completely opposite viewpoints: 'this fucking gloves rally is the biggest bubble since Dutch tulips' and 'this fucking gloves rally is a profit opportunity of a lifetime'.

I'm uncertain. I'm indecisive, for sure.

But here's the thing: it does not hinder my trading. I have already made profits in both huge rallies and in precipitous collapses in the sector. As a team, we have traded the sector far before the age of Covid (BC), and during. Mother share, warrants, all of them. All kinds.

Just some selections. Some are my personal victories, some are that of our team members. We are on the lookout for more opportunities like these.

  Our cumulative gains in selected glove stocks, February to June 2020

I have been obsessing over this gloves sector story for a while. Having read a truckload of research reports and their fantastical findings over the past few months, my first gut reaction was to be totally incredulous.

I was dismissive, although as per the norm, the negative attitude comes from a place of anti-learning. I just needed to take the time and think of the situation.

In truth, I couldn't make up my mind. Either it's a bust or a boom of a generation. Reading the financial news does not help in the slightest.

I have studied market manias. I have traded a few of them. But this is new to me.

My thinking about market manias can be summed up as follows:

Speculative manias fizzle out when the fundamentals (or lack thereof) catch up to lofty expectations.

But what was perceived to be speculative manias can suddenly turn into a legitimate value proposition if the fundamentals are actually supportive of the lofty expectations.

So is there such a thing as a fundamentals-driven mania?

As I've said, I'm trying to cut through the bullshit and hyperbole. To do this, I had to forcibly let go of all perceived biases.

I'm giving this mania a chance to make sense, at least on a personal level, to me.


Let's go back in time for an imperfect, but useful, historical analogue.

In 1973, the Organisation of Arab Petroleum Exporting Countries (OAPEC) declared an oil embargo on the United States for its support of Israel during the Yom Kippur War. 

This was economic weaponisation. OAPEC effectively introduced a supply shock into the world by cutting off US access to its oil. There was not much in the way of substitutes at the time. As the dominant oil supplier, the Arabs get to throw their weight around.

The effect? Miles and miles of long lines at US gas stations. Oil prices shot up 400% in six months (this was back when they were trading at the single-digit per barrel range).

So why is the comparison to the oil embargo that happened 47 years ago appropriate to what is happening now?

It's because gloves are a commodity. And commodities respond to supply-demand dynamics. 

Covid-19 has triggered a demand shock for gloves on a truly global scale, the kind of which will be talked about... well, 47 years from now.

Maybank IB report on TOPGLOV, 29 May 2020

Prices are shooting up, and by all accounts, demand for gloves has exploded exponentially.

Economics 101 applies here. Supply rises to catch up with demand. Eventually you will have equilibrum, and then we get more supply than demand. Prices go down. 

That commodity's selling price determines the seller's margins and ultimately profitability. Basic stuff. 

We know that supply and demand dynamics are cyclical. So should we scream 'bubble' every time we are in an upcycle?

The gloves sector is merely at the beginning of this phase, and there is a considerable amount of time until the dynamic balances itself. You can plausibly invest in the sector and exit with massive double digit gains within two years. That would be a big score.

But the really big score actually lies in the Big 4 - TOPGLOV, KOSSAN, HARTA, and SUPERMX. As a collective, they have enough scale, and enough of a protective moat, to dominate the bulk of future revenues in this sector over the next two years.

Even with current valuations, these are the stocks going up that can stay up. Because the fundamental justification for it is there.

Why specifically two years? It's because (no) thanks to Covid-19, tens of billions (of pieces) in future gloves demand has been brought forward into the present, today. Most of this year, and next year, is where we will see the bumper earnings.

If you can plausibly time the upcycle, would you invest in the relevant companies? At what point does the mania gets reclassified as an upcyle?

When in doubt, always go back to the fundamentals.


Maybank IB report on TOPGLOV, 29 May 2020.TP:RM20.

We become truly uncomfortable when a game-changer catalyst upends our established world views, none more so in the subject of stock price valuation.

When prices get ahead of our expectations, and our perception of how much certain stocks should be worth, we tend to retreat into dogma. The typical way to cling on to our own set of values is to denounce, reject, and ridicule all contrary views. 

So let's entertain some of these farfetched notions related to glove counters right now.

Why would you buy a stock that currently trades at 50-100 times their historical earnings multiples?

The headline figures are as described: it's historical. If the world's largest glovemakers - already insanely profitable in normal times - are expected to double their annual profits due to the demand shock, those uncomfortable P/Es would undoubtedly come down. The 'E' catches up with the lofty 'P'.

I don't understand the loopy logic that one can only invest in a stock once the P/E comes down. By this time you would have totally missed out on the price gains, but you still say that's the point where people can come in and invest?

In effect, this explains the seemingly insane (at first glance) target prices for TOPGLOV by Credit Suisse (RM23) and Maybank (RM20), but they are not insane.

Their respective analysts simply imputed future earnings potential into their target prices. And when earnings catch up with the price, the P/E would come down to... well, merely the historical averages for the sector. About 30 times earnings, to be specific.

Again, it's not exactly fairytale stuff. In a world where all major glovemakers are expected to nearly double their earnings, the 'P' would be more than justified at current levels. And as you may have seen from recent target price upgrades for the Big 4, there's some ways to go.

What we have a two-year hypergrowth situation. Or to put it another way, glovemakers are currently  fetching valuations normally reserved for tech companies, most of which will continue to trade at 50 times P/Es for the next 20 years (like dangling a carrot in front of a treadmill... you can chase but you'll never get it).

Another example. IHH Healthcare Bhd rather famously traded at 50 times earnings for more than half a decade since listing. One explanation is that investors are clearly convinced of its growth prospects, and thus bought into the stock at current levels in anticipation of future earnings catching up.

So is anyone calling it out for being a bubble?

IHH Healthcare Bhd financial summary. CIMB Report, March 24 2020

My point is : why should glovemakers treated any differently? They didn't trigger their own ridiculous price rallies. Supply and demand dynamics did.

How about the argument that retail investors are the only ones nutty enough to chase SUPERMX at RM8, when it was trading at RM1.70 in February?

Our industry sources tell us that even in recent weeks, investment banks are still holding regular conference calls with institutional investors and fund managers to discuss... glove stocks as a buying opportunity. 

These folks, with their billions of dollars in deployable cash, can only invest in the Big 4, because these are the only counters big enough to accumulate in size, and big enough to make their money work for them.

Chasing is still chasing, whether you're a retail day trader with a cash upfront account or a billion-dollar international hedge fund. That target of that chase is yields.

The world is in the midst of a painful recession. There is intensifying demand for (bubble-proof) stocks that can deliver on the scarcity premium : the fortunate ones who would deliver world-beating returns in a Covid-19-driven downturn.

Malaysia contribute nearly two thirds of the world's global gloves sales. The world is desperate to get ahold of them.

The Big 4 are offering yield opportunities quite unlike any other non-healthcare stock in the world right now.

Why shouldn't investors be desperate to get ahold of glove stocks?

The Big 4's performance in May 2020 up to the early days of June


Let's talk a bit about the alternative choices.

My preference for the Big 4, instead of the second tier players like COMFORT, RUBEREX, and CAREPLS, comes down to several factors.

1) The investor base is primarily retail driven, hence they are much more vulnerable to sharp price swings.

2) There has been tremendous hype and chatter over these counters when they were 100% up in April. After another 100%+ increase in the stock prices, that chatter has not just died down, it has in fact intensified.

3) Their profit growth prospects are admittedly tremendous, but mainly due to the fact that all of them are starting from a very low base. They are nowhere near in terms of the Big 4's sheer scale of operations.

There are other risks inherent in the second-tier players, namely that if they command 100 times earnings multiples right now, it is less certain that their earnings growth will bring back those P/Es to more reasonable levels.

Some have just established new production lines. Some have just raised cash. Some have just begun being hyped by rich uncles. Emphasis on 'just', because in the game of gloves, timing is everything.

From a purely economies of scale basis, the second tier players will always be second best to the Big 4. They will always be playing catch up. Their overall production volumes will remain tiny, compared to say, what HARTA alone produces in any given month.

Making gloves is not that hard, but there are certain nuances in the business that will get the dominant players farther ahead.The little things do add up.

The Big 4 specifically possesses inherent advantages that will ensure the bulk of the business (glove orders) flow to them. It's a kind of protective moat that I would put a premium on.

What are they? Let me take a deep breath here...

You need really solid QCs. You can't run afoul of the US FDA standards, otherwise you'll end up with 100 containers of unusable gloves. You need an established global sales network. You should ideally have loyal and repeat customers who have kept coming back. You need to be experienced and credible enough to have done direct negotiations with foreign governments and their health ministries. You simply cannot deliver a batch of shoddy gloves when frontliners around the world need them to protect their lives. Your history of success supplements your reputation. Trust, quality of product, and delivery, are not expected to be an issue.

I don't mean to knock off the non-Big 4 names. It's just that their share of the spoils, even on a cumulative basis, will be much smaller compared to say, what SUPERMX will be getting in the coming years.

The overheating and speculative elements are far more acute in the non-Big 4 healthcare stocks, because there is slightly less assurance that their bumper earnings will materialise as hoped.

 This is NOT an issue for the big fellas.


Another piece of the puzzle : how do we account for these future sales and ensure that they actually translate to real orders, and real earnings?

Two words : spot orders. 

The Big 4's protective moat is evidenced by the customers' intent to acquire their product, no matter the price. Customers know that these guys can deliver; they just need to pay up.

For the first time, glovemakers have real leeway to adjust pricing, in a business that is notoriously thin in margins. Average selling prices are shooting up, again justified by the demand shock.

In a real demonstration of the extent of this demand shock, the sellers are dictating not only the prices, but also the terms. 

To lock in their orders, customers are now required to pay advance deposits.

In other words, the Big 4 are actualising part of future sales, today. In real money. That earnings bump is assured.

Based on one estimate, spot prices have gone up from $25 in pre-Covid times to $100 presently. That's a 300% increase. Exponential.

TOPGLOV sales orders and spot prices, from Credit Suisse's report on 3 June 2020. TP: RM23.

Lead times have quadrupled. Instead of 35-40 days to wait for your bulk order, it now takes up to a year!

40 days to 365? That's an 800% increase. Exponential.

TOPGLOV has an annual production capacity of 78.7 billion pieces, from 700 production lines. And you say that their backlog runs up to a whole year?

Or how about new orders doubling within months? 100% growth, you say?

And of course, the Big 4 have the capacity to take the billions in additional orders, and even then the demand shock does not let up.

 SUPERMX order book increase, from CGS-CIMB's report on June 2 2020. TP: RM9.80

 Net profits can rise 79% within a year and it would still be cheap relative to the sector average?

From the same CGS-CIMB report

As a trader, I'm not dogmatic in my views. I get things wrong every single day.

But pervasive skepticism - in the face of actual, solid fundamentals - could be a big buy signal. The real question is : what price are you willing to pay for exponential growth?

I would be slightly more surprised if a stock like say, SUPERMX, collapses to RM2 at any point over the next two years. Less surprised if it hits RM11.50, for the reasons described above.

My personal view : the biggest profit opportunities are in companies that you can both trade and invest in.

The fundamental justification is there. I'm neither worried nor confused. You shouldn't be, too.