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 SUPERMAX CORP BHD (SUPERMX, 7106) : The Power of OBM (Davidtslim)

First-of all, there are quite many IB reports covering glove counters and many have given their valuation and views. I would like to analyze from my view more on mid-term instead of long term which can be unpredictable.

I will start with a discussion on the possible future headwinds for Glove sector. The possible headwinds include vaccine found and oversupply possibility in 2022.

    Vaccine (which some people think may reduce the glove demand)

As I browse through a few pharma companies in China, I found out that a few companies are really embarking on developing monoclonal antibodies (MAB) to target this virus. MABs are the bazooka in the field of medicine whereby a cure is most possible to achieve but it is as usual going to take some time perhaps longer than coming up with a vaccine. We really need a cure and NOT some drugs by Gilead which only shorten the recovery time. It does nothing to break the chain and eliminate the virus. Vaccine is good but vaccine is NOT a guarantee to prevent this virus. Most of the vaccine in the world are NOT 100% efficacious as well. Some even can be marketed provided it passed 65 to 75% efficacy.

The NEJM did a study on the A flu efficacy Influenza virus. A total of 1952 subjects were enrolled and received study vaccines in the fall of 2007. Influenza activity occurred from January through April 2008, with the circulation of influenza types:

       A (H3N2) (about 90%)
       B (about 9%).

Absolute efficacy against both types of influenza, as measured by isolating the virus in culture, identifying it on real-time polymerase-chain-reaction assay, or both, was 68 percent (95 percent confidence interval [CI], 46 to 81) for the inactivated vaccine and 36 percent (95 percent CI, 0 to 59) for the live attenuated vaccine. In terms of relative efficacy, there was a 50 percent (95 percent CI, 20 to 69) reduction in laboratory-confirmed influenza among subjects who received inactivated vaccine as compared with those given live attenuated vaccine. subjects were placed in a healthy adult population. The efficacy against the influenza A virus was 72 percent and for the inactivated was 29 percent with a relative efficacy of 60 percent. The influenza vaccine is not 100% efficacious in preventing disease, but it is as close to 100% SAFE, and much safer than the disease.[1a]

As far as I know this COVID-19 virus is NOT something like SARS or any other viruses that we may have eliminated before this. We need a very long time to even just to contain it as to make sure our healthcare systems are NOT overly burden by it. Even many countries full lockdown for months, it still fails to just fully contain the virus from spreading in UK, Europe, US and etc. From the highly contagious of COVID-19, it will be something like the frequency of influenza cases over the years. This battle is NOT easy and the journey may be long due to the emergence of mutations over time.  In early April 2020, South China Morning Post reported that geneticists from the UK and Germany have mapped the evolutionary path of the coronavirus that causes COVID-19 and determined there are currently three strains of the virus that are spreading around the world. This indirectly makes the development of vaccine even harder. Actually there are some reported cases where those recovered from COVID-19 can be re-infected.  Even if vaccine is found, we may need reinjection over certain time frame to re-train our immune system like Hepatitis B vaccine which needs multiple injections over 5 years.

Even if vaccine is ready, the distribution will take some time as we have close to 8 billion population in this world. Imagine influenza vaccine has been around for the past 30 years or more and treatment also available to shorten recovery days (eg. oseltamivir phosphate, zanamivir, peramivir, baloxavir and etc ), but did we get rid of influenza?

Let assume a 90% efficacy vaccine can be found. What happen to glove’s demand after vaccine found?

There will be even more explosive demand for glove after vaccine is found. This is because doctors and nurses need to wear gloves to inject vaccine yearly to the world population of approximately 7.8 billion people by looking at the seriousness of covid-19. Maybe everyone will need to be injected yearly or every two years which may create more demand for gloves.

    Oversupply in year 2022 or 2023?

Before we start to discuss oversupply issue, let us have a glance through the glove consumption per capita in the world as Figure below:

 

Figure 1: Glove consumption per capita (Source: MARGMA, Credit Suisse)

What I observe from the above Figure is developed counties like US and Europe has high rate of gloves consumption per capita compared to developing countries (China, India & Indonesia). Due to COVID, the world experiences a structural shift in demand for gloves. Structurally shift means, a persistent habit change for good. This is the variable in the equation where many potential investors failed to identify unlike the business owners who are clearly seeing this and investing on additional capacity. Actually before COVID, glove usage has been mainly consumed by medical industries (over 80%). In addition, there are new users of glove come to market from time to time due to hygiene awareness from hotel, retail, food and aviation and many industries which need to have contact.

Glove is essential PPE which almost all medical staffs need to have to protect them from all types of virus. Even after price hike, its cost per unit in USD still one of the cheapest PPE available.  Thus, it is expected glove demand can grow at double digit from 2020 to 2021 (strong growth) and maybe sustainable in 2022 if vaccine start to be available in 2H of 2021. Delivery of vaccine take time for the world population and globe consumption maybe even higher from 2H of 2021 to 2022.

Moreover, personally I would expect glove consumption from Asia and Latin America to spike from 2020 to 2022 (where I expect COVID still around) which may create unprecedented demand due to low glove utilization in countries like India, Indonesia, China, Philippines (combined population of 2.8 billion) and Brazil (Asia alone half of the world population) . Just these countries increasing consumption per capita to 50, will raise the global demand by more than 50%.

What are the catalysts of the glove demands from Asia, Europe, US and Latin America countries?

Many countries have to slowly reopen their economy in 2H2020 where gloves demand will in fact soar due to the following applications:

    Ongoing COVID tests are required to be conducted over the coming 2-3 years which every test requires gloves from people swab collection, swab sample delivery to the lab test.
    Higher glove demands from food industries, food delivery, public transports, aviation and hospitals where hospital will be operating at a much higher patients capacity who were hesitant / constrained to visit healthcare centres earlier healthcare earlier due to risk of COVID infections.
    Mass Vaccine trials from various companies on human which require glove from lab staffs research, delivery and injection.

For the supply expansion from various major glove players, the  world’s  5  largest  glove  producers estimated to expand at the  combined effective capacity growth of 16%, 14% and 22% in 2020-2022 respectively, which is still far lag behind demand (50-60% higher). This can be observed from average selling price hike and sales lead time for major glove players extended to unprecedented 8-18 months.

    How about new player from China?

It has often been highlighted is that China can ramp up its own production of gloves but the export market requirements are highly stringent for medical gloves and their poor reputation for the mask’s quality in Europe and US markets may make them to focus more on local market. With the focus on fulfilling the demand of local market, the probability of over-expansion in china is low which in turn see the tight supply over the coming 2-3 years.

Just China increasing per capita consumption to 108 (still lesser than Japan) from 8 (having all the reasons to do so now), will raise global demand by 150 Billion/annum. 50% of global demand. China local manufacturer have a lot to catch up to locally.

We can see the annual demand growth for gloves for the past 10 years has been in the range of 6-10%. Even after COVID has been eliminated,  hygiene awareness and future virus protection may provide continuous support  should  more  countries in Asia and Latin America increase their usage of glove.

Topglove,  the  world’s  largest  glove manufacturer  expects  the  world annual  demand  growth rate after COVID  eliminated (which maybe near impossible to eliminate based on current situation) to  increase  to  at least 12% per annum.

Summary:

    Vaccine development, trial, deployment may create more demand for glove from year 2020 to 2022 which I expect multiple injections are needed over 5 years.
    New users emerge from retails, aviation, food delivery industries etc which further increase the demands over coming 1-2 years.
    Higher Hygiene awareness from developing countries where their population more than half of the world should create more demand than capacity expansion over next 2-3 years (4 billion population’s demand > top 5 major manufacturers which control 70% glove market share). This is still not count extra demand from US, Europe and UK where their COVID daily new cases is still high.
    Much higher margin for glove as many governments in the world increase budget for their healthcare which will be spent on PPE like glove to protect their frontline workers.



4. SUPERMX : King of margin from its OBM model (this section not available for public at this moment)



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Disclaimer:

This writing is based on my own assumptions and estimations. It is strictly for sharing purpose, not a buy or sell call of the company and the contents of this report should not be considered as professional financial investment advises or buy/sell recommendations. I strongly encourage you to do your own research and take independent financial advice from a professional before you proceed to invest.

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