As reported by The Edge, on April 15, JP Morgan reconfirmed their price targets for the 3 glove companies under their coverage since December 2020. A reminder that the infamous price targets are: Top Glove: RM3.50; Hartalega: RM8.50; Kossan: RM3.80.
The timing of this "reconfirmation" is surprising, because it comes at a moment when nothing of particular significance is happening in regards with the business of these companies. We did not see a reconfirmation when the quarterly results of any of the companies were released, and we did not see a reconfirmation when the CBP ban on Top Glove's US imports was confirmed - arguably the most important business events for the industry in the last couple of months. The only event that correlates with this sudden spurt in action by Jeffrey Ng and Y Y Cheah, CFA is the uptrend in stock prices for these companies. Purely coincidentally, the uptrend doesn't bode well with another infamous market player - the "mysterious" glove short seller.
Last week, the amount of money thrown at the "big gloves" short position since its opening on January 4, crossed the RM3 billion mark. The total value of short positions opened since the beginning of the year on any stock on Bursa is a little over RM4.3 billion, so the short positions on Top Glove, Hartalega, Kossan, and Supermax represent 71% of the entire value of short positions on Bursa. Of this, 59% is the portion of the short position dedicated specifically to Top Glove, i.e. the value of the Top Glove short position alone represents 41.7% of the total value of short positions opened on Bursa this year.
Short Seller Paper Profit Dwindling
As the short seller had open short positions at dividend ex-dates, the short seller is obliged to pay out the corresponding dividends to the original owners of the shares (i.e. the lenders of shares). This therefore lowers the breakeven price at which the short seller might make profits from covering their short positions (i.e. buying back the shares). According to my calculations, and excluding factors that are unquantifiable due to lack of public data (such as borrowing fees, brokerage fees, management and administrative fees, changes due to partial closing of positions, third-party participants' share in the short selling), the breakeven price for the short seller for each of the 4 counters is as per below:
|Stock||Short Seller Breakeven Price||Friday Closing Price||Mark-to-Market Profit/Loss|
Note that at the bottom of the market prices of these 4 glove companies, the theoretical paper profit of the short seller was in excess of RM200 million. This value has dropped, as of yesterday, to RM20 million. In the whole equation, the price movement of Top Glove is key as the short position on that company's stock is by far the largest. Once again coincidentally, JP Morgan's "reiteration" note was released at a time when Top Glove's share price closed at RM5.44 - curiously near to the calculated theoretical breakeven price for the short seller. All of this is of course likely purely coincidental.
To add to that, information trickling down from channels has it that brokerage houses are searching vigorously for Top Glove and Supermax shares to borrow. The offered interest rates are considerably higher than those for other stocks, signifying urgent need and scarcity.
JP Morgan Financial Year ASP Estimate
I have previously commented on the logic-wise very poorly constructed JP Morgan report. You can read my post on that here. Fortunately, even the most poorly constructed analyst report requires quantitative inputs on which we can comment and which we can compare to inputs of others. The only new piece of data JP Morgan have shared is their estimates on forward blended ASPs for the corresponding FY2022 (note - financial years differ in terms of calendar time period) for each of the 3 companies under their coverage. I will share them with you without further commentary:
|Company||JPM Estimate||Consensus Estimate*||JPM to Consensus Difference|
*NOTE: The "consensus" is based on what is provided in JP Morgan's report. They have not provided extra details on how they have calculated this consensus estimate.
JP Morgan Calendar Year ASP Estimate
Additionally, JP Morgan have provided their blended ASP estimates for calendar year 2022. Interestingly, they believe that all 3 companies are going to have the exact same blended ASP, even though they manufacture a very different mix of products, they have very different target markets and main clients. Nevertheless, their estimate for all 3 companies for CY2022 is for a blended ASP of US$30. According to Frost & Sullivan, the ASP for nitrile gloves in CY2022 is going to be US$53.50, and for latex gloves it is going to be US$26.50 (see here).
As mentioned, each of the 3 companies produces a very different mix of glove products. Top Glove have previously confirmed that their production lines allow them to change between production of nitrile gloves and latex gloves, depending on what product is in higher demand and offers a better profit margin. However, I calculate the CY2022 blended ASP for Top Glove based on their official production capacity per type of glove, and it comes to a little over US$40 (I take into account their vinyl glove capacity, too). Hartalega produces almost entirely nitrile gloves, so their ASP would be approximately equal to the F&S estimate - US$53.50. Kossan produces approximately 80% nitrile and 20% latex gloves, so their blended ASP would be US$48. Thus, let's call these estimates the Frost & Sullivan estimates and compare them to JP Morgan's:
|Company||JPM Estimate||Frost & Sullivan Estimate||JPM to F&S Difference|
Instead of a Conclusion
A famous fable about a boy repeadly scaring the villagers that a wolf is attacking their sheep flock comes to mind. This is, of course, purely unrelated to my post above. It comes to mind coincidentally.
Important disclaimer: Any views expressed are for informational and
discussion purposes only. None of this information is intended as, and
must not be understood as, a source of advice. It is imperative that you
always do your own research and that you make any decisions based on
your personal situation and your own personal understanding.