The Rise of Vaccines: Is It the End for Glove Manufacturing?


By Stephanie Kannimmel, BSc PPE Student at King's College London


In August, the craze for glove stocks that took over at the height of the pandemic dwindled as news of a COVID-19 vaccine began to circulate. Now, as glove stocks begin to pick up again and uncertainty about vaccine distributors arises, investors begin to wonder: Is it really over for glove manufacturing?

Performance during COVID-19

Glove manufacturing stocks

The highest-performing glove manufacturing companies are based in Malaysia, a top exporter of rubber. Among these companies are Top Glove, Rubberex Corp Bhd, Kossan Rubber Industries Bhd, and Supermax Corp. Rising glove manufacturing share prices at the height of COVID-19 followed a surge in retail and property stocks. Since March, the market capitalisation of the top four glove companies is up by RM116bil.


However, this sharp increase in the price-earnings (PE) ratio of each glove stock was indicative of overbuying, prompting Top Glove and Supermax to conduct a share split. After the share split, despite record-breaking performance from March onwards, shares in the aforementioned top four glove companies took a hit in late August. Share prices dropped by over 6%, following signs that the Trump administration may fast-track a vaccine and treatments for COVID-19. The impact of this fall in share prices was compounded by equity repositioning in retail, putting glove stocks at an even worse position.

In order to combat the fall in share prices, Top Glove spent approximately RM200mil to buy back shares priced between RM6.12-8.00. This led to a 34% rise in its share in mid-September.

Source: Bloomberg

Top Glove’s share price has since risen, with an open price of RM8.77 as of September 27. Although Top Glove’s share price only went up 1.55% in August, this surge in mid-September by as much as 13% has defied analysts’ downgrades of the stock.

Regarding other glove manufacturing companies’ performance since mid-August, Kossan Rubber’s net profit growth in quarterly earnings was not enough to lift it to another peak, compared to growth in the second quarter. However, Supermax Corp Bhd continued to soar, with a strong rebound after falling share prices in August due to the halting of the vaccine trial by AstraZeneca given the complications and the global surge in COVID-19 cases. The reason for losses in glove manufacturing stock prices in mid-August could also stem from a labour shortage, as the Malaysian Rubber Glove Manufacturers Association (MARGMA) estimated that the industry lost about RM7.6bil ($1.85bil) revenue for Malaysia due to labour shortages.

Vaccine distribution stocks

By the end of August, progress in vaccine development posed a threat to Malaysian glove manufacturers’ strong performance as one of the most successful sectors in APAC amid the pandemic. The constant news flow on a vaccine that would be available to the public increased investor optimism and dampened the buying of glove stocks in August, as this alerted investors on the downsides and risks of continuing to invest in glove manufacturing at its current level.

The shift to pharmaceutical stocks occurred in the end of August as Pfizer and BioNTech confirmed that their jointly-developed vaccine was on track for regulatory review in October, in a deal to supply 100 million doses to the US. The companies released positive news of the vaccine being well tolerated among participants as they continued to analyse data from Phase 1 trials. Around the same time, Moderna announced plans to supply 80 million doses of an experimental vaccine to the EU.

MRNA:US (Moderna Inc)

Source: Bloomberg


PFE:US (Pfizer Inc)

Source: Bloomberg

Despite fluctuations throughout September, both Moderna and Pfizer showed strong performance at the end of August when glove manufacturing stocks dropped (as seen in Top Glove’s performance above). According to the World Health Organization (WHO), there are currently over 160 vaccines being developed and about 30 have entered human trials, promising a positive outlook for vaccine distribution.

Investor opinions

With the rise of vaccine distribution stocks in August and share price increases of leading companies throughout the month, it may seem that a switch from glove manufacturing stocks is universally advised. However, investors have conflicting opinions on the matter.

Glove manufacturing stocks

Some investors, such as Danny Wong, CEO of Malaysia-based Areca Capital Sdn., say that it is advisable to keep money in glove stocks, citing that the pandemic will push permanent demand to higher levels. They project demand to grow at 15% for the next five years. In the long term, these investors project that glove counters’ fundamentals are expected to continue to deliver good earnings in the coming quarters. However, others say that while fundamentals may still be intact, they may not be as good as people expect, citing the fall in share prices of Top Glove, Supermax, and Rubberex in early September. Despite this, Top Glove still holds a majority rating of buy from 16/22 analysts as of mid-September, according to Bloomberg.

Others say that due to their large trading volume and volatility, investors need to be cautious about putting money into glove stocks. Although growth is still occurring as of now in glove manufacturing, these investors say that the opportunity is still far less attractive than in March for glove manufacturers and investors. They also cite concerns of an oversupply of gloves once vaccine distribution goes forth. Furthermore, investors pessimistic about the performance of glove stocks say that it is a better idea to put money into industries such as property to curb the effects of inflationary pressures that will set in when the economy recovers, due to money being cheap and more money being printed in the US economy.

Vaccine distribution stocks

Unlike glove manufacturing stocks, investment in vaccine distribution stocks depends much more on the distributor. Cowen analyst, Yaron Werber, states that analysts are still trying to decipher which distributors will be winners, and which may be left behind. As of late August, Pfizer data indicates that they may have a slight lead, while Johnson & Johnson are trying to catch up. Despite this uncertainty in distributors, swings in the market mean that vaccine prospects may be a more reliable investment regarding valuations. However, Nirgunan Tiruchelvam, head of consumer equity research at Tellimer, warns that investors need to check if they are forecasting too far into the future regarding which vaccine distributor will win the race.

Projections of future performance

Glove manufacturing stocks

As of August 2020, glove manufacturing stocks are projected to be optimistic for at least a year. Although glove stocks have a very high PE ratio, the price to book valuations of glove companies were 25 times as of August 2020, making risk not as high as at first glance. Production is expected to be up 18% in the next 18 months in top-performing companies. Supply is projected to increase in the next year, possibly even by 50%, although not all manufacturers are expected to fetch good values. Top Glove’s net income in particular is expected to new records in each of the next four quarters, ending in May 2021.


Banks have conflicting projections for the performance of glove stocks in the coming year. Citi anticipates that the surge in glove manufacturing stocks will continue, as demand for gloves stocks are on the rise as a correction to initial overselling in the market. Glove stocks continue to outperform many stocks, such as gold and even those of Tesla Inc. Citi is not concerned about the news flow regarding vaccine distribution stocks, citing a lead time on orders from glove manufacturing companies being lengthened from pre-Covid levels of 1-2 months to 12 months currently. They project that even with the vaccine, a step-up in glove usage is likely as the pandemic may accelerate the narrowing of the gap between emerging-market and developed-market glove consumption. Furthermore, health and safety procedures, rising concern of a second wave, steady demand, and positive financial results are all cited by Citi as indicative of future stability.

Southeast Asia-based Maybank and CIMB agree with Citi, stating that the outlook for the glove sector remains bright and dismissing declining average selling price (ASP) concerns. They predict that ASPs will hike up to at least the first quarter of 2021 due to the increase in raw material prices and global shortage of gloves, and could rise by 10-45% sequentially in the next quarter. Their PE forecast ratio for 2021 is 16.7 times.

Macquarie disagrees, addressing that while growth remains strong now, Top Glove’s earnings are likely to peak by the second half of 2021. Macquarie advises investors to take profit when an upturn on price occurs, stating that Top Glove’s strong performance is unlikely to repeat once an equilibrium in demand-supply is normalised once a vaccine is found. They also cite the exposure of inhumane working conditions at Top Glove and the resulting stopping of Top Glove imports by the US and Ebos, the largest PPE supplier in New Zealand. However, other analysts do not expect this to have a significant effect on demand.

In mid-September, Top Glove itself expects “very strong” growth ahead in its earnings report, and revealed plans for a third listing in Hong Kong, in addition to its established presence in Singaporean and Malaysian markets. Top Glove expects 20-30% additional growth next year, and 15-20% growth in 2022. They address the possible effects of stockpiling, but reveals that they sell out before containers even arrive at their warehouses. This addresses stockpiling concerns by showing that there is genuine demand for gloves, and that stockpiling is not occurring.

Vaccine distribution stocks

Since performance varies between companies, projections for each are slightly different. Gilead Sciences is gaining less, compared to leading Moderna, Pfizer, and BioNTech stocks, but share prices could be boosted if testing of its inhaled version of remdesivir proves to be successful. However, the main reason to invest in Gilead is not COVID-related, but for its progress in treating HIV, hepatitis C, and cancer.

Moderna is currently in late-stage testing, as well as Pfizer and BioNTech, and could have preliminary results for mRNA-1273 by November. Moderna’s vaccine stands to make a lot of money quickly if a green light is received from regulators. Moderna has signed agreements with the US and Canada, and is in discussions with the EU and Japan, proving to be a significant player. Moderna, along with Pfizer and BioNTech, have a higher risk level than Gilead, but investors project a higher reward.

One Malaysia-based company, MSCM Holdings Bhd, is venturing into both glove manufacturing and vaccine distribution. MSCM Holdings recently announced its venture into glove manufacturing, and now has a plan to get involved in distributing vaccines and test kits. This will be undertaken by a subsidiary, which will source medical products from distributors approved by the Ministry of Health. Its share price has been flat for a long time, but this changed in mid-July. The first glove is expected to be produced by April 2021 with capacity of 1.45 billion pieces per annum. However, the success of this company depends greatly on the performance of glove stocks and how long this will last.

Conclusion

All in all, it seems as though concerns on a decline in the average selling prices of glove manufacturing stocks are largely unjustified. Significant global demand for gloves is still evident, and will exist for as long as the pandemic continues. Even as a vaccine is found and administered, which is likely to be well into 2021, demand is likely to increase as masses rush to be vaccinated. An oversupply of gloves once vaccines are distributed is unlikely to be the case, taking phase distribution and health and safety regulations during the vaccine administration into consideration. The surge in demand and resulting shortage indicates an increase in prices, which is likely to continue as global COVID-19 cases show no signs of slowing down. Equity analysts predict that the pandemic will create a new normal, leaving demand for gloves steady, which seems very likely to be the case.

Despite the positive outlook for glove manufacturing performance, Macquarie and investors pessimistic about glove stocks have valid concerns about further surges in demand for glove manufacturing. It is fairly certain that there will not be a second surge in demand to match the drastic increase in share prices in March, and more stabilized performance at a consistently high level of demand is to be expected. Vaccine stocks are definitely of higher risk than glove stocks, as they are still in testing stages. Some companies, such as Moderna, do not have any other products on the market currently, meaning that performance depends virtually entirely on the success of the vaccine with no history of successful drug or vaccine development. Furthermore, no vaccine of this kind has ever been made before.

Ultimately, investing in either sector will bring about different results for investors. Although vaccine distribution stocks are of high risk, investing in companies with a history of successful drug and vaccine development as well as promising and frequent updates regarding the vaccine is very likely to spell high reward. However, this does not spell the end for glove stocks, which are likely to decrease slightly, but will likely still lead to high and stable returns for investors in the next several quarters.

Sources:

https://www.thestar.com.my/business/business-news/2020/09/19/malaysia039s-medical-glove-makers-struggle-to-meet-demand-due-to-labour-shortage


https://www.nst.com.my/business/2020/08/616016/eye-popping-rally-asian-glove-maker-stocks-will-continue-citi-says


https://www.bloomberg.com/news/articles/2020-08-21/pfizer-virus-vaccine-on-track-for-regulatory-review-in-october


https://www.bnnbloomberg.ca/moderna-plans-to-supply-80-million-doses-of-covid-vaccine-to-eu-1.1484177


https://www.cnbc.com/2020/09/18/top-glove-sees-strong-growth-ahead-covid-19-sparks-global-demand-surge.html


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