TOP GLOVE (BVA.SGX): The Netflix of Gloves & the Cyclical Opportunity of the Next "Industrial Revolution"
An EM alternative to China Industrials priced at death's door - TOPG's founder has *singlehandedly* bought nearly 1% of its TOTAL outstanding shares YTD
TOPG’s shares are currently trading at a normalized PE of just 11.6x. Their founder and executive chairman Mr. Lim Wee Chai has bought almost 1% of TOPG’s total outstanding shares from the open market this year alone.
Global industry TAM is forecasted to grow at 10% CAGR, on par with that of the global semiconductor sector - due to an aging global population, in large part contributed by China’s expected population decline by 2025.
TOPG has a Net D/E of 0% today from an FY19 Net D/E of 88%; however, their normalized FY22 ROE is only slightly lower than FY19 ROE. There appears to be plenty of incremental ROE headroom going forward should management decide to employ financial leverage.
The present market environment is almost certainly a downcycle for glove stocks. If there’s one thing that we can be certain about, it’s that cycles always recycle.
Investors looking for an alternative to China Industrials amidst growing geopolitical tensions will find a home in this EM Industrial - which is perfectly positioned to capture opportunities from the upcoming “industrial revolution” of the coming decade.
When I wrote about NFLX in May 2022, famed investor Bill Ackman of Pershing Square had just unloaded his stake - after the streaming company announced that they would be pivoting from a purely subscription-based business model to an ad-supported one. This surprising turn of events suggested that Netflix was on the verge of losing its leading industry position, and had already lost its moat - and that it was about to enter into a hostile competitive regime of price wars with challenger Disney+ and other new streaming entrants in a gradually commoditized industry characterized by dramatic oversupply.
However, my contrarian argument at the time was that even if the worst-case scenario should materialize, NFLX would still be either the No. 2 or No. 3 player in the global streaming sector - in a commoditized industry where the competitive bottleneck boils down to economies of scale. While their moat was certainly lost, their valuations had traded down to just 17x PE at the time - which in my view had more than justified the incremental fundamental risk. NFLX’s shares are now +60% higher from that point.
Here’s the thing - almost exactly the same narrative can be written for Top Glove’s (TOPG) valuations today. It is also one of the largest players in a globally commoditized industry, where the competitive bottleneck boils down to economies of scale. As the global healthcare sector pivots away from latex gloves to nitrile gloves (due to allergy concerns), they’ve lost most of their moat owing to their close proximity to rubber trees in Malaysia. And while TOPG is still the largest glove manufacturer in the world today, it’s likely to lose its spot to Chinese competitors Intco (300677:CH) and Blue Sail (002382:CH) in the near future. Coupled with dramatic overcapacity present in the global glove sector today, investors have punished its valuation to the point where it trades at a normalized PE of just 11.6x today.
Earlier this year, the popular value investing blogger Macro Ops published a stock report about Top Glove. Shares of the current largest glove manufacturer in the world are listed in Malaysia under the ticker 7113.KL; but were also dual-listed on the Singaporean stock exchange in 2016 under the ticker SGX:BVA for those who prefer that currency’s exposure.
Macro Ops’ analysis of Top Glove (TOPG) was great, and I agree with most of his fundamental analysis. However, markets can remain irrational longer than you can remain solvent - and TOPG’s share price has declined by -70% since then, as the world recovered from the pandemic amidst recession fears. This was after it had already declined by -70% from its peak in Oct 2020 just before the first COVID-19 vaccines were announced. Investor sentiment was so strong at one point that a a local investment bank once suggested the possibility of a pre- 1:4 bonus issue target price of RM 25.00 (current share price: RM 0.73) [click here for full report]. Since its peak in Oct 2020, TOPG’s share price has cratered by >90%.
Naturally, investors in TOPG have run for the hills following the business’s precipitous decline - with many local investment banks currently publishing target prices of around RM 0.50. However, there is one notable exception amongst this crowd - Mr. Lim Wee Chai, the executive chairman and founder of TOPG himself, who is currently estimated to have a net worth of USD 1B by Forbes. Quite the contrarian, he has been going on a buying spree of TOPG’s shares in the open market over the past year as shown in the charts below:
The top chart shows his daily share buying activity YTD, while the bottom chart aggregates his daily transactions by quarter. The % labels in the bottom chart represent the volume as a % of TOPG’s total outstanding shares. As we can see, Mr. Lim has been regularly buying shares from the open market beginning from May 2022, despite TOPG’s share price having fallen by >50% since then. What’s even more impressive is that he has managed to *singlehandedly* acquire 0.9% of the company’s total outstanding shares in the past 10 months alone (i.e. YTD) - he currently owns just over 36% of the company’s total outstanding shares:
So what in the world does Mr. Lim Wee Chai see that the rest of the market doesn’t? Quite interestingly, there is some compelling information that is readily observable in TOPG’s public financial statements which directly contradicts the prevailing narrative in market consensus. We’ll discuss this and more in this TOPG report.
Before we go into the deep-dive, here are some facts about TOPG:
TOPG has a market cap of >USD 2B and a daily trading volume of 3.5M shares - making it accessible to most global institutional fund managers who might have a minimum market cap criteria for liquidity reasons.
It is currently in the Malaysian Top 30 index (i.e. KLCI) - although that could potentially change soon if domestic glove stocks continue their downward slide.
Valuations in the glove sector have become so depressed that some industry commentators have called them a ‘rotational play’ into safe haven stocks as the US recession approaches.
Cycles Always Recycle! TOPG’s valuations today would earn it a spot in Edward Chancellor’s bestselling book about market cycles, Capital Returns.
TOPG has been something that I’ve wanted to do a valuation of for awhile, as I’ve been surprised by the interest that a 3x smaller competitor of TOPG’s named Supermax has received when I wrote about it earlier this month.
Click on the images below to check out my previous discussions about TOPG’s close competitor - Supermax!
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Executive Summary (450 words)
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