THE NEXT PUBLIC BANK IN MAKING - GLOVE COMPANY PROFIT IS SUSTAINABLE , ESPECIALLY TOPGLOVE, HARTA, SUPERMAX AND KOSSAN.
Even though the ASP may reduce in future, but it will never fall back to the pre-covid ASP (it will still be higher than pre-covid ASP) due to structural step up in demand. Heightened hygiene awareness and hygiene standard lead to increase usage of gloves in medical as well as non-medical sectors. Once habit of people using gloves has developed (especially in emerging market) , it will stay for life. This is same as once u develop the habit of exercise, it will stay for the rest of ur life. Thus structural step up in demand is real, It is happening and it will last long. Post pandemic usage of gloves should still be robust because of hygiene awareness and habit has developed. Thus the profit growth will last for a long period of time. Not to forget the profit and cash generated for glove company currently is hard cash. The 1 years profit/cash can equivalent to their 20-30 years of combined profit/cash pre-covid. The cash generated will definitely increase the value of the company as they can invest in automation, build new factory, invest in new business, dividend payout to shareholder and etc. One question to ask ourselves, does the share price increase more than 20-30 times? Thus, it is still very much undervalue now. The current record earning should take into account in valuation of the stock. Some more this is not a one-off profit, profit is sustainable for a longer period (at least for few quarters to come).
Don't forget also the production capacity of the company will increase. So this will mitigate the fall in ASP. Eg If i am a Durian seller. During peak season, 1kg durian can earn RM50 during peak season. But i only have 100 durians to sell. So my profit is RM5000. during low season the profit is RM20. But i am able to get 150 durian (production increase) to sells, thus profit is RM3000. The profit will not goes down to RM5 per durian during long time ago because people already know durian is tasty and demand is continuos robust because people like it. So the profit margin of my durian can maintain at higher level than before due to demand. Although this is not a good example, just a scenario for decription for current situation of gloves. Gloves ASP will never go back to precovid. One more important point is Glove is not like commodity eg oil, steel and palm oil, the ASP of glove is not cyclical anymore(up and down like commodities) when the structural step up in demand occur and glove demand is experiencing secular growth. Thus its profit growth should be sustainable.
The Covid-19 vaccines are being rolled out in an increasing number of countries. This is expected to cause glove demand and consumption to moderate. The Company believes that it will likely be gradual and not drop sharply due to the structural change in consumption, such as new consumption, new customers and greatly heightened healthcare and hygiene awareness. (quoted from Supermax latest quarterly report)
The increase emphasis placed on hygiene and sanitation by COVID-19 has led to an increase in the demand for the Group’s speciality premium gloves that offer superior resistance to viruses and dangerous sanitisation chemicals. Based on discussion and feedback from our partners worldwide, the Group is of the opinion that this will become a new market requirement that will shape all future glove demand globally. The emphasis on hygiene and sanitation will also not be reduced in the event a vaccine becomes generally available. (quoted from Comfort latest quarterly report).
On the global front, demand for medical supplies, such as gloves, remains strong due to the COVID-19 pandemic. With cases continuing to soar in US, UK, Latin America and other countries, the demand for gloves is expected to continue growing in the coming years. In addition, the sector is expected to undergo a structural step-up in demand on the back of increased glove usage from emerging markets with low gloves consumption per capita and heightened hygiene awareness. The overall projected growth in demand is expected to outstrip supply for the next few years. (quoted from Harta latest quarter report)
Once the profit growth is sustainable, the market will give a higher PE for the stock. This is call PE expansion. Eg QL and Nestle is valued at PE of 50-60 and their share price stay at high level consistently. This is due to their consistent great earning. As long as company has good earning consistently and with growth, capital will definitely flow into these stocks. Because big fund need to park their money there for yield. Gloves company will also experience this PE expansion in the coming time, provided the profit is great and sustainable (with consistent growth). This should be achievable.
Holding power is the key to success in fundamental value investing. Buying shares is equivalent to buying ownership of the company. We are part of the shareholder of the company. As long as company earn more and more year by year, the share value will keep on increasing, eventually share price need to be match the share value of the company. Big money is make while waiting. Patience is very crucial in value investing. If you yourself or your parents manage to buy and hold good blue chips stock, eg Public Bank and Genting 20-30 years ago, regardless any price (even at its peak price), everyone has become a millionaire or billionaire. This is the power of compound interest in value investing. But who has this type of patience and investment horizon to sit tight and hold on for 20-30 years? Will TopGlove, Harta, Kossan, Supermax become the next Public Bank? Time will tell. But we need to have the holding power, to see the fruits of your patience and perserverance.
"Price is what you pay; value is what you get."- Quoted from Warren Buffett